Guess who’s back, back again

Global growth

The IMF released its latest economic forecast earlier this week. While this year’s recession is expected to be less severe than their forecast released in June, they are also lowering expected global economic growth for 2021. Past that, global economic growth is expected to moderate significantly. The IMF, like central banks, also stressed the importance of fiscal support during the pandemic.

Moral of the story: This recession is going to cause the incidence of extreme poverty to increase for the first time in two decades, which is a huge setback from a global humanitarian perspective. In terms of the impact on the global financial system, the IMF warned the pandemic is likely to test its resiliency. Even though massive fiscal and monetary support has helped avoid a total financial meltdown, there are still risks out there. Financial conditions could become less stable if we see a meaningful second wave of COVID-19 cases across the world (already happening in Europe), governments and central banks make policy missteps, or literally any of the seemingly endless external risks out there. 

Earnings season is back 

Believe it or not, earnings season is back and started with reports from the banks as per usual. About 10% of the S&P 500 companies reported earnings this week, of which 86% reported earnings ahead of Wall Street’s expectations. One of the big hits to banks’ earnings last quarter was driven by credit losses being taken in 2Q during the peak of the COVID-19 shutdowns. A lot of that pressure came off in 3Q though it still remains a risk given the uncertainty of the labor market and economy overall. 

Moral of the story: In the midst of rising COVID-19 cases in Europe leading to shut-downs and the diminishing hope of federal stimulus, earnings seemed a little ignored by the market. Given how low expectations are for earnings, this quarter should be full of results that exceed Wall Street’s estimates. Given everything else going on right now, I’d expect this week’s negligence toward earnings season continue unless we start to hear meaningfully negative (or positive) commentary from management teams about what they’re expecting through the rest of the year and going forward into next year. 

Friday’s retail sales rally 

Y’all the market was really not happy all week but Friday’s retail sales report really turned things around in a big way. Retail sales increased by 1.9% in September, well above Wall Street’s expectations. For the fifth month in a row, Americans spent more and have officially brought retail sales back to pre-COVID levels. Spending on clothes increased 11%, boosted by the start of the new school year and cooler weather. Sales at restaurants and bars increased 2.1% last month but still remains about 14% lower than last year.

Moral of the story: The recovery seems to still be slowly chugging along but there are questions about how much longer it can be sustained given initial jobless claims shot up to the highest level seen since August last week. Major rounds of layoffs are coming from travel and entertainment companies. COVID-19 cases are back on the rise and could result in a second round of shut-downs. And cooler weather is likely to limit the outdoor business activity that has been a saving grace for so many businesses. 

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