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Testing the Depths of the COVID-19 Recession


As the number of COVID-19 cases approached 5 million worldwide on Tuesday, Brian Belski, Chief Investment Strategist at BMO Capital Markets, moderated a roundtable discussion with BMO experts to discuss the latest developments in the outbreak. Joining him on the call were Michael Gregory, Deputy Chief Economist at BMO Capital Markets and Ben Jeffery, US Rates Strategist, Fixed Income Strategy, BMO Capital Markets. Special guest Dr. John Whyte, Chief Medical Officer of WebMD, joined the call to discuss the week’s most recent medical developments.


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As geographies around the world move to an economic reopening and healthcare restrictions start to be lifted, Dr. Whyte said the light at the end of the tunnel is getting brighter, but said the process will be iterative, marked by new challenges that include quarantine fatigue and a looming mental health crisis.

As of Tuesday, global infection rates neared 4.9 million, with more than 320,000 deaths reported. In Canada, there had been 78,000 cases and around 5,800 deaths, most of those in long-term care facilities. In the United States the number of infected rose to more than 1.5 million, with 91,000 deaths on record. More than 60 percent of US infections, and about half of all COVID-related deaths, have occurred in the five states of New York, New Jersey, Illinois, Massachusetts and California.

Vaccine Development

Over the past week Moderna announced a Phase I study for a vaccine that, while only tested on a very small sample group, has shown promise, including increased immune responses and boosting certain antibodies. The US FDA has cleared the company to begin Phase II trials, which typically involve several hundred people, and Moderna expects to begin a Phase III study in July.

“So this is progress, and this is an accelerated timeline,” Dr. Whyte said. “But remember, many drug trials don’t proceed to fruition, there are challenges… This is all still hypothetical. I think we'll continue to learn more over the next few weeks.”

Weakest Links

At the same time, around the world, restrictions are starting to be relaxed.

In North America, stay-at-home or shelter-in-place orders have been lifted in almost every state in the United States, and some provinces in Canada are starting to ease restrictions.

Dr. Whyte said the numbers will continue to rise, and that as government and healthcare authorities reopen economies they will have to change the way they look at data, focusing on specific geographies and even specific clusters like social events, rather than just national or state level figures. As an example, he pointed to states like Texas that have seen large numbers of new cases that are localized to events and certain businesses, such as meat-packing facilities.

“We're only as strong as our weakest link in terms of infection control,” he said.

As a next step, he said, if they are to understand the current reach of the pandemic, authorities must amend the focus of testing to go beyond just those individuals who are showing symptoms of COVID-19.

“We’re really just beginning to dip our toes in the reopening,” said Dr. Whyte, noting it was likely still too early to evaluate how much rates of infection have been contained – in the United States, Canada or the world – because the disease has an incubation period of 10 to 14 days.

Quarantine Fatigue and the Next Normal

As the stresses of social distancing continue to wear on businesses and society at large, Dr. Whyte said a new challenge for healthcare systems will be quarantine fatigue and a looming mental health crisis.

“The issues of social distancing, loneliness, and food insecurity uncertainty are exacerbating the mental health of folks who already have certain conditions, perhaps even creating a PTSD,” he said.

“In closing, I'd say, despite all of this, we're really seeing some light at the end of the tunnel,” he said. “It doesn't mean that all of a sudden we have a bright light, but what we're starting to see is that we're having a reopening … We have a pathway to move to the ‘next normal’.”

Economic Data Point to Deeper Recession

Michael Gregory, Deputy Chief Economist at BMO Capital Markets, opened his commentary with a look at data that may point to an even deeper than expected recession on both sides of the border.

“Economic indicators have continued to reveal just how deep this recession is in the US,” he said.

While the data has been worse than expected, with retail sales and food services along with housing nearly doubling declines between March and April, he said the impact on industrial production was especially telling. That sector’s decline more than doubled from March to April, resulting in the worst month since the Federal Reserve began producing industrial production data in 1921. 

“What we saw in April was worse than any single month during the Great Depression,” Gregory said.

The month of May will probably continue to contract, Gregory said, but likely not as much as in April. “We'll continue to see job losses on both sides of the border, and the unemployment rates will continue to rise,” he continued.

Growth in the Second Half

Gregory said he expects the economy to pick up as openings continue, with 25 to 35 percent annualized growth in the second half of the year in both countries. 

The absence of a vaccine, however, will continue to weigh heavily as some segments of the population continue to avoid places and events out of fear of contagion.

“A segment of the population will shy away from crowds, they won't go to restaurants, they won't take public transit, they won't go to sporting events, even if they were allowed to go,” Gregory said. “That suggests that those parts of the economy are not going to rebound as robustly.”

He said job losses that are not fully recovered as economies open, coupled with heightened private sector debt burdens, will also color the economic outlook going forward, forming headwinds against an even rapid rebound.

“So, when you add everything up, it does seem that the economy is not going to be as robust as we thought it was going to be previously,” he said, predicting that the economy won’t get completely back to its pre-pandemic level of activity until the fourth quarter of next year.

“We will get some strong growth rates, but the hole is pretty deep.”

Trading on a Reopening

Ben Jeffery, US Rates Strategist, Fixed Income Strategy at BMO Capital Markets, noted that as the world eyes a reopening, the investor focus is shifting.

“From the markets perspective, it seems that, whether it be treasuries, equities, or other asset classes, that really investors have moved on from trading the depths of the recession, and all the attention is now squarely on the reopening process,” he said.

Even as investors weigh how quickly a recovery can occur, Jeffery noted how the range in Treasury yields has shown remarkable durability over recent weeks and months, “despite some of the worst economic data we've seen in a generation.”

In the equity market, the same resiliency can be seen, he said.

“What that's a function of is the fact that the Fed has acted in a nearly unprecedented manner to deliver as much monetary policy accommodation as possible,” Jeffery said. “And we've also seen a great deal of stimulus from the fiscal side as well.”

He said he expects strong demand for US treasuries to continue for as long as the dollar remains the global reserve currency.

“And so while rising supply is bearish for treasuries on the margin, we generally are more reliant on longer-term trends in terms of growth and inflation to set the outright level of yields,” he said. 

Negative Rates

Finally, Jeffery addressed the question of negative rates, which are currently priced into futures markets, despite Federal Reserve chair Jerome Powell and most other members of the Federal Open Market Committee (FOMC) coming out against negative rates. 

The dichotomy “really speaks to the anticipation that there may be further downside to growth in the future” Jeffery said.

And, while Jeffery was skeptical that negative rates will come to pass, a second wave of COVID-19 in the fall would change that viewpoint.

North American Market Magnet

Chief Investment Strategist Brian Belski expects North American markets, including Canada, to attract an increasing amount of investment as the pandemic and reopening concerns weigh, and much of that will come from emerging markets. 

“We think that a major theme going forward through this is the whole notion of dollar-denominated assets,” Belski said, pointing at supply chain threats in markets like China and other emerging market issues that are driving investors to North America, and to a lesser extent Europe.

Canada Outperforms

Canadian markets have consistently outperformed their neighbors to the south since March 23 lows stemming from COVID-19, and Belski said the trend will likely continue in the shorter term, buoyed by a rebounding energy sector and as continued earnings reports come in over coming weeks for financials, the nation’s biggest sector. 

“We continue to find it very interesting that most clients around the world are quite frankly missing the point that Canada, up until the end of last week, actually outperformed not only the NASDAQ but the S&P 500 from the lows that occurred on March 23, and I think that speaks to a broader theme.”

Over the longer term, he said, that trend will reverse somewhat.

“We still prefer United States over Canada from a longer-term perspective, especially given the more diversified nature of the sector,” he said. 

“We do believe in continued strength with respect to technology, not just because they've been leading into, during and out of COVID, but given the fact that we're seeing the strongest earnings growth and the most diversified earnings growth with respect to healthcare and industrial, with respect to artificial intelligence and of course, all the technological advances within healthcare.”

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Brian Belski Chief Investment Strategist
Michael Gregory, CFA Managing Director, Deputy Chief Economist and Head of U.S. Economics
Ben Jeffery US Rates Strategist, Fixed Income Strategy



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