Dual economic shocks are underway simultaneously. There are shortages of some things and lack of demand for others.
Rare Supply-Demand Shocks
Bloomberg has an excellent article on how the Global Economy Is Gripped by Rare Twin Supply-Demand Shock.
The coronavirus is delivering a one-two punch to the world economy, laying it low for months to come and forcing investors to reprice equities and bonds to account for lower company earnings.
From one side, the epidemic is hammering the capacity to produce goods as swathes of Chinese factories remain shuttered and workers housebound. That’s stopping production of goods there and depriving companies elsewhere of the materials they need for their own businesses.
With the virus no longer contained to China, increasingly worried consumers everywhere are reluctant to shop, travel or eat out. As a result, companies are likely not only to send workers home, but to cease hiring or investing -- worsening the hit to spending.
How the two shocks will reverberate has sparked some debate among economists, with Harvard University Professor Kenneth Rogoff writing this week that a 1970s style supply-shortage-induced inflation jolt can’t be ruled out. Others contend another round of weakening inflation is pending.
Some economists argue that what’s happened is mostly a supply side shock, others have highlighted the wallop to demand as well, to the degree that the distinction matters.
Slowest Since the Financial Crisis
Inflationary or Deflationary?
In terms of prices it's a bit of both but mostly the latter.
There's a run on sanitizers, face masks, toilet paper ect. Prices on face masks, if you can find them, have gone up.
But that is dwarfed by the demand shock coming from lack of wages for not working, not traveling, not eating out etc.
The lost wages for 60 million people in China locked in will be a staggering hit alone.
That has also hit Italy. It will soon hit the US.
Next add in the fear from falling markets. People, especially boomers proud of their accounts (and buying cars like mad) will stop doing so It will be sudden.
Bad Timing
Stockpiling
Deflation Risk Rising
Another Reason to Avoid Stores - Deflationary
Hugely Deflationary - Weak Demand
This was the subject of a Twitter thread last week. I agreed with Robin Brooks' take and di so in advance but I cannot find the thread.
I did find this.
Deflation is not really about prices. It's about the value of debt on the books of banks that cannot be paid back by zombie corporations and individuals.
That is what the Fed fears. It takes lower and lower yields to prevent a debt crash. But it is entirely counterproductive and it does not help the consumer, only the asset holders. Fed (global central bank) policy is to blame.
These are the important point all the inflationistas miss.
Mike "Mish" Shedlock
This material is based upon information that Sitka Pacific Capital Management considers reliable and endeavors to keep current, Sitka Pacific Capital Management does not assure that this material is accurate, current or complete, and it should not be relied upon as such.
Recommended Content
Editors’ Picks
EUR/USD retakes 1.0700 as US Dollar upside stalls
![EUR/USD retakes 1.0700 as US Dollar upside stalls](https://editorial.fxstreet.com/images/Markets/Currencies/Majors/EURUSD/MoneyEURUSD_3_XtraSmall.jpg)
EUR/USD is trading back above 1.0700, recovering ground in the European session on Monday. European political uncertainty continues to undermine the Euro and cap the pair's upside while the US Dollar consolidates recent gains amid a tepid market mood.
GBP/USD remains pressured below 1.2700 amid cautious mood
![GBP/USD remains pressured below 1.2700 amid cautious mood](https://editorial.fxstreet.com/images/Markets/Currencies/Majors/GBPUSD/iStock-472155766_XtraSmall.jpg)
GBP/USD is holding losses below 1.2700 in the European trading hours on Monday. The hawkish Fed expectations and a softer risk tone keep the US Dollar afloat, exerting downward pressure on the pair. Fedspeak remains next in focus.
Gold price attracts some sellers on hawkish Fed-inspired USD strength
![Gold price attracts some sellers on hawkish Fed-inspired USD strength](https://editorial.fxstreet.com/images/Markets/Commodities/Metals/Gold/safe-investment-gm147311616-17537479_XtraSmall.jpg)
Gold price (XAU/USD) meets with a fresh supply during the early European trading hours and erodes a part of Friday's positive move in the wake of the Federal Reserve's (Fed) hawkish surprise.
XRP stuck below $0.50 as Ripple CLO says SEC has abandoned demand for $2 billion fine
![XRP stuck below $0.50 as Ripple CLO says SEC has abandoned demand for $2 billion fine](https://editorial.fxstreet.com/images/Markets/Currencies/Cryptocurrencies/Coins/Ripple/ripple_XtraSmall.jpg)
XRP struggles to make a comeback above sticky resistance at $0.50 on Monday as traders continue to assess the legal skirmishes between blockchain firm Ripple and the US Securities and Exchange Commission (SEC).
Weekend digest and a quiet start to the week
![Weekend digest and a quiet start to the week](https://editorial.fxstreet.com/images/TechnicalAnalysis/ChartPatterns/Chartism/financial-graph-19311174_XtraSmall.jpg)
It will be a quiet start to the week on the data front. From Sweden, we get the Riksbank's Business Survey. Overnight, the RBA is widely expected to leave monetary policy unchanged.