Moving From Mostly Empty to Half Full

Fixed Income Views explores macro and sector outlooks as the debate on when and how we should return to normal economic activity continues.

Franklin Templeton Fixed Income


When we last published our views back in May, still in the early stages of the COVID-19 crisis, we advocated that restarting economic activity while preventing a new wave of contagion strong enough to overwhelm health care systems should be a crucial priority for policymakers. A lot has happened since then. Widespread shutdowns sharply reduced contagion; state and local governments started reopening their economies, but with very different speeds and modalities; July saw a rebound in new cases, but with a much more moderate impact on hospitalizations and deaths; and new cases declined again in August and September. The debate on when and how we should return to normal economic activity continues.

Meanwhile, the global economy has shown it maintains the potential for a robust rebound, especially in the United States, but also in the rest of the world. In the United States, government intervention has effectively supported household income, while the US Federal Reserve (Fed) has ensured the smooth functioning of financial and credit markets. As states reopened, employment began to recover convincingly, though it remains well below February levels; retail expenditure showed the strength of pent-up demand. The second wave of rising new virus cases in July brought a new challenge to the recovery. However, the second pulse of our Franklin Templeton–Gallup Economics of Recovery study brought some encouraging indications: first, Americans’ willingness to engage in economic activity such as shopping, eating out and going back to work proved resilient in the face of the second wave of contagion; and second, the majority of Americans indicated they intend to keep increasing savings in the coming months, but not to pay down debt, suggesting that additional spending power is being set aside to be deployed once the health uncertainty abates.1

We therefore maintain a constructive view, and believe the economy still has the potential to stage a healthy rebound, depending, of course, on the pace at which policymakers will manage to safely reopen economic activity. In this paper, we detail the economic impact of the crisis on gross domestic product (GDP), employment, consumer health, industrial supply and manufacturing, and we update our growth forecasts and outlook.

While we maintain a constructive view on the potential for a healthy economic recovery, we are also cognizant that this pandemic-triggered economic crisis might have prolonged and deep consequences, the extent and magnitude of which will probably depend on the length of the shutdowns. Some of these consequences are linked to the differential impact that the shutdowns have on different segments of the population, including the disproportionate impact on low-income workers, the different incidence of job losses across racial groups, and the adverse consequences of prolonged school closures on female employment and the gender pay gap. These disparities are already showing measurable consequences.

The COVID-19 pandemic recession has disproportionately hit lower-wage and hourly workers due to both the pay differential of industries most impacted by the pandemic but also the nature of which jobs could become remote. Lower-paying, public-facing service jobs cannot be performed from home, and these were some of the first and most impacted jobs hit by the recession. Many of these industries have yet to recover as they remain under limited operating capacity due to state and local ordinances. In addition, the strong performance of the US stock market has had a greater beneficial impact on wealthier households,2 compounding the impact of the crisis on income and wealth inequality.

The disparity between black and white unemployment had been trending lower in recent years, bottoming in 2019.3 The 2020 economic shutdowns have pushed the gap back to the widest it has been in the past five years.4 This can be partially attributed to the fact that black Americans disproportionately make up service sector jobs at restaurants, cinemas, hotels and airports,5 industries the recession has hit hardest.

Over the past several decades, female employment has steadily increased and in February 2020 recorded the highest level in history, when women outnumbered men on nonfarm payrolls.6 However, following the shutdowns, female unemployment has spiked disproportionately.7 While some jobs have come back from early temporary layoffs in majority female industries like education and health services, other industries that also overwhelmingly employ women, such as leisure and hospitality and childcare, are suffering a continued slump.8 Moreover, the prolonged closure of schools across the country is also having a disproportionately adverse effect on women’s work opportunities.

These major adverse consequences of the economic shutdown on the more vulnerable sectors of the population, which are setting back and reversing many years of hard-earned progress, underscore the importance of developing a strategy to safely reopen the US economy at a sustained pace.

After a record contraction in the second quarter of 2020, the euro area has also experienced a significant recovery in purchasing managers’ indexes (PMIs) and confidence indicators in recent months, but employment is showing different dynamics than in the United States: the initial contraction in employment levels has been limited, thanks to the widespread launch of furlough schemes, but job losses are expected to rise as some of these schemes expire. Europe has also begun to suffer a second wave of contagion, but similar to the United States, with a more benign impact in terms of hospitalizations and deaths. This should allow European governments to try and contain the pandemic with more targeted measures rather than reverting to full lockdowns, allowing the economy to continue to recover.

Important support to the European recovery comes from the momentous agreement on European Union (EU)-level borrowing to help the hardest-hit member countries through a combination of grants and loans. This represents an important step forward toward greater fiscal integration and should therefore help contain yield spreads at both the sovereign and corporate level, besides providing additional financial resources for the recovery. Meanwhile, the European Central Bank (ECB) continues to do its part with substantial monetary accommodation.

Global central banks have signaled a strong commitment to support the recovery, keeping interest rates at or near zero, together in some cases with ongoing asset purchase programs. In August, the Fed shifted to a form of average inflation targeting, indicating that it will aim to let inflation run “moderately” above 2% for some time to make up for the prolonged period of sub-2% inflation. Accommodative monetary policies are likely to keep yield curves anchored, with long-term yields rangebound for the next three to six months. Then, as the recovery picks up some steam, the zero-rate policy, together with quantitative easing (QE) and loose fiscal policies, should give some more life to inflation, creating potential for yield curves to steepen. The differential pace of economic recoveries and adjustments in monetary policies will play a determinant role in foreign exchange (FX) markets, as we discuss in the US dollar market-recap section.



All investments involve risks, including possible loss of principal. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds in an investment portfolio adjust to a rise in interest rates, the value of the portfolio may decline. The price and yield of a MBS will be affected by interest rate movements and mortgage prepayments. During periods of declining interest rates, principal prepayments tend to increase as borrowers refinance their mortgages at lower rates; therefore MBS investors may be forced to reinvest returned principal at lower interest rates, reducing income. A MBS may be affected by borrowers that fail to make interest payments and repay principal when due. Changes in the financial strength of a MBS or in a MBS’s credit rating may affect its value. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments. Investments in emerging markets involve heightened risks related to the same factors, in addition to those associated with these markets’ smaller size and lesser liquidity. Investments in fast-growing industries like the technology sector (which historically has been volatile) could result in increased price fluctuation, especially over the short term, due to the rapid pace of product change and development and changes in government regulation of companies emphasizing scientific or technological advancement. Changes in the financial strength of a bond issuer or in a bond’s credit rating may affect its value. High yields reflect the higher credit risks associated with certain lower-rated securities held in the portfolio. Floating-rate loans and high-yield corporate bonds are rated below investment grade and are subject to greater risk of default, which could result in loss of principal—a risk that may be heightened in a slowing economy.


  1. Source: Franklin Templeton-Gallup Economics of Recovery Study. Results from this study are based on self-administered web surveys from an opt-in sample provided by Dynata of 5,000 US adults, aged 18 or older. For details about how Dynata recruits respondents in the United States, please see Dynata_Panel%20Book_2.19.pdf. The survey was conducted between August 3 and August 11, 2020.

  2. Source: Institute for Policy Studies, “US Billionaire Wealth Surges to $584 Billion, or 20 Percent, Since the Beginning of the Pandemic”, June 18, 2020.

  3. Sources: Bureau of Labor Statistics, Federal Reserve Bank of St. Louis Economic Research.

  4. Ibid.

  5. Source: US Bureau of Labor Statistics, Labor Force Statistics from the Current Population Survey.

  6. Sources: Bureau of Labor Statistics, Federal Reserve Bank of St. Louis Economic Research, Current Population Survey.

  7. Ibid.

  8. Source: US Bureau of Labor Statistics, Household Data, Annual Averages.