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The U.S. Economy: From Positive To Negative Surprises – July 27, 2020

The reacceleration of COVID-19 infections in large parts of the U.S. during the past month has started to show up in weaker U.S. economic data. The downtrend in new unemployment insurance claims reversed last week. Other high-frequency economic data confirm that the rebound in economic activity since April has now given way to some disappointments.

We do not expect the cyclical economic recovery to derail in the U.S., but a period of disappointments is underway and the U.S. economy will lag global trends, at least compared to countries that have kept their infection rates under control. As discussed in a recent report, there are a number of implications:

• There is a mounting risk of a short-term setback in equities, particularly in the U.S.
• Government bond yields will remain depressed, but will generate little return.
• After some further wrangling, U.S. politicians will agree on another substantial fiscal package.
• Recent U.S. dollar weakness will persist, increasing the risk that U.S. equities will lag non-U.S. bourses.
• Depressed bond yields, including negative real yields, and a soggy U.S. dollar herald new highs in gold prices.