Economists still not certain how recovery will go

Bonds

The COVID-19 pandemic led to a shutdown of all non-essential businesses and forced many people to stay at home. Although conditions have eased, the pandemic is not over and restrictions remain in place.

Given the uncertainty of the path forward and the unpredictable next steps, not to mention other factors, including an election, that make the future outlook murky economists continue to debate the path of recovery.

Calling it “one of the biggest recessions” but also “one of the briefest,” Priya Misra, managing director, rates at TD Bank, said in a keynote at The Bond Buyer’s California Public Finance conference, she is “heartened by the improvement.”

After the elections, Misra expects, fiscal support will come through, although it could vary depending on who wins, which will result in a “continued,” but “slow recovery.

The economy won’t reach pre-COVID level until 2024, she estimated, because even when a vaccine is approved and available widely, “it won’t be like flicking a switch” and everything will return to normal.

The Fed, she noted, has a more optimistic view, as it sees things returning to February levels a year earlier than she does.

Priya Misra, managing director, rates at TD Bank

Bloomberg News.

Bryce Doty, senior vice president and senior portfolio manager at Sit Investment Associates, said it’s unusual to be able to “confidently predict… such a huge rebound economically” for a year ahead.

“So huge, it’s historic,” he said. “And the rebound will happen regardless of who gets elected, because the path of the pandemic has dictated everything from the trillions the Fed has shoved into financial markets to deciding to risk going to a restaurant or even having your kids go trick or treating.”

Investors, he believes, are underestimating the rebound, since it appears almost all of the data have been better than predicted.

And the pandemic is “disinflationary,” Misra said, “as the capacity is there but we just aren’t using it.” The shutdown cause “a demand shock, rather than a supply shock.”

Robert Williams, principal and managing director at Sage Advisory Services, agreed COVID is a deflationary shock because it forced an economic shutdown and recession. Monetary and fiscal stimulus, however has “turned into a reflationary environment.”

“To me when people use phrase ‘inflation shock’ it takes negative connotation as ‘bad inflation,’ inflation that has moved above long-term average,” he said. “We’ve been below average for a long time, so the trillions of dollars of liquidity injected through monetary and fiscal policy stimulus is reflating prices back toward longer-term average (or trying).”

Williams believes the recovery is beginning to appear a more traditional post-recession one.

“Assets that traditionally do well in this environment are starting to see flows (small caps, value), versus being held back by shutdown conditions that favored large growth with tech and other specific sectors,” he said. “As far as what this outlook means for Fed. They had no choice to get aggressive and will stay.”

Yohay Elam, currency analyst at FXStreet, said the coronavirus is a significant deflationary shock.

“Over-generous government stimulus funded by the Federal Reserve’s bond-buying could cause inflationary pressures down the line, but the chances are slim,” Elam said. “The Fed’s strategic review prioritizes full employment at the expense of letting inflation overheat. It saw the impact of considerably low jobless rates in bringing more Americans into the workforce in the pre-pandemic, and it will likely want to encourage a similar outcome now.”

He noted the recent increase in coronavirus cases will likely push the bank to increase its bond buying plans and push rate hikes even further into the future.

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