US Stimulus deal overshadowed by new covid-19 strain

Risk-off sentiment kicked off the shortened Christmas trading week as news came in of a new and more infectious covid-19 strain in the UK. Against this development, the UK announced stricter lockdown measures and major European countries introduced temporary travel bans to the UK, aiming to isolate and limit the spread of the new strain. This news pushed safe havens higher and risky assets lower. Unfortunately, the new covid-19 strain also overshadowed the long overdue agreement of a US stimulus package.

Over the weekend, the US Congress reached an agreement on a $900 billion stimulus bill to support the US economy during the covid-19 pandemic. As expected, Congress voted in favour, and President Trump will sign it into law. The fiscal support, which amounts to 4% of Gross Domestic Product, is the second largest in history, following the $2.2 trillion worth of stimulus in the Cares Act, injected at the start of the pandemic.

The primary beneficiaries from this round of stimulus are individuals and small businesses. Among the financial aid announced, the fiscal package includes an additional round of cheque payments of $600 per person to adults and children, subject to income restrictions. Given the rapid distribution of payments for the first round of cheques, the boost in disposable income is expected to be reflected at the start of the new year. Additionally, Congress agreed on a $300 per week of extra unemployment supplement and an extension of the eligibility and duration of benefits.

Relief to small businesses, on the other hand, primarily comes in the form of a second round of Paycheck Protrection Program loans for small businesses which have lost significant revenue due to the pandemic. This implies that more relief will be targeted to specific covid hit sectors. In fact, the transportation sector will receive $45 billion in assistance, including $15 for airline payroll assistance, contingent on airlines calling back more than 32,000 furloughed workers. This round of stimulus to airlines is in addition to the $25 billion payrolls support received last March. In total, $325 billion are set to fund small business support, out of which $284 billion will fund the Paycheck Protection Program small business loans.

The bill also allows for $30 billion to fund the vaccination process within the US, $82 billion to be distributed to schools and colleges, and $25 billion funds will be directed through rental assistance.

Discussions for the stimulus deal have been in the pipeline for months, and gained more focus recently, with the imminent expiration of several supportive policies. Despite that President-elect Biden supports further fiscal support, the possibility of another major pandemic package is largely dependent on the Congress result next year. A divided Congress limits President-elect Biden’s capacity to push to implement his policies into action. Therefore, the Georgia Senate election on January 5th plays an important factor to determine the expectations going forward.

Moreover, the accelerating spread of the pandemic during the winter months and re-introduction of economic restrictions further supported the need to extend the fiscal support. Despite the rebound in the US economy from the start of the pandemic, key economic indicators were already showing signs of weakness. Retail sales reported last weeks sank by 1.1% in November and were reported below expectations, during a month usually buoyant from holiday shopping. Similarly, albeit the IHS US Markit Composite stood at 55.7 and at an expansionary number, the rate of growth was the slowest in three months, indicating that the additional covid-19 restrictions were already impacting the consumer-facing services sector.

In a nutshell, the US fiscal package, despite overshadowed by the covid-19 strain development, is a key step forward to bridge the economic impact from the covid-19 restrictions, until the vaccination program is more fully underway and the economic momentum solidifies.

Disclaimer:

This article was written by Rachel Meilak, CFA, Equity Analyst at Calamatta Cuschieri. The article is issued by Calamatta Cuschieri Investment Services Ltd which is licensed to conduct investment services business under the Investments Services Act by the MFSA and is also registered as a Tied Insurance Intermediary under the Insurance Distribution Act 2018.

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