By Matthew J. Bartolini, Head of SPDR Americas Research, State Street Global Advisors.
Apart from the human tragedy of COVID-19, the pandemic has created a new trend line for our society by disrupting every aspect of our daily routines, from how we make purchases and consume energy to how we stay connected.
Some of these trends were in place before the pandemic. But now, they are likely to be amplified as we transition to a new world order.
Identifying true opportunities during a tectonic shift of this magnitude requires using specialized, industry-specific knowledge to capitalize on an evolving market regime.
We see three potential opportunities where we believe investors may benefit from targeted sector-based strategies – both for right now as the economy starts to recover and as the post-pandemic world continues to evolve and impact future generations.
Software: Solutions to support a new way of life
Remote access, cloud storage, and internet-based solutions were strong secular trends before COVID-19. Today’s more digitally-connected world will require more software to function. And as we said in our mid-year outlook, we see software as the backbone of our new society. As a result, software and service firms may benefit from this seismic shift in corporate and consumer behavior across a variety of dimensions: video conferencing, e-learning, telehealth, project and document management, closed system social communication tools, cloud technologies, digital payments, and cybersecurity.
This generation-defining shift is one reason why earnings for software firms is expected to grow at 16% per annum over the next three to five years – compared to 10% for the broader market – and not see double-digit declines throughout the rest of 2020 and into 2021. In fact, as shown below, while the S&P 500 is projected to have negative sales growth over the remaining three quarters of this year, software and services firms are projected to continue to grow their top line each quarter. Valuations are a bit above their long-term average for the industry, but with a lack of growth in our current environment, the premium for a growth industry with the potential to reshape society is warranted.
To position portfolios for a more digitally connected but physically separated world, consider an allocation to software and software service firms with the SPDR S&P Software & Services ETF (XSW US).
Clean energy: Powering a rebuild
The production of solar and wind energy was estimated to grow at significant pace this year, but as economies reopen, a spike in industrial activity and energy demand will likely accelerate the trend of seeking cheaper and more renewable sources of energy. In fact, as of June, the US is on track to produce more electricity this year from renewable power than from coal for the first time on record.
If the past is any guide, the potential for future global fiscal stimulus with specific carve-outs for green energy may further support the conversion to more renewable forms of energy consumption. After the 2008 financial crisis, South Korea put almost 80% of its stimulus spending toward climate-friendly policies and the International Monetary Fund dubbed the country’s recovery one of the swiftest and most successful in the world. Today, nations have already directed $40 billion to support green initiatives. With early polls indicating a change in leadership in the US, greener forms of power generation may also be pushed to the forefront of any US legislative agenda – providing the economic growth that could spur new employment opportunities as the nation seeks to rebuild. Private funding has also accelerated during the pandemic; Amazon has committed $2 billion for a new Climate Pledge Fund and reported it is on track to source 100% renewable power by 2025.
As the world turns to cleaner sources of energy, there may be no turning back. As shown below, as the great transition to greener forms of energy supply has occurred, firms focused on more sustainable forms of power generation have outperformed the broader market year-to-date (+10%), since the market’s bottom on March 23rd (+14%), and over the past year (+26%). Plus, they have outperformed traditional energy firms by even much wider margins.
To position portfolios for the great transition to greener energy sources, consider an allocation to firms focused on innovating and driving the adoption of sustainable renewables with the SPDR S&P Kensho Clean Power ETF (CNRG US).
Homebuilders: Ready to build to meet demand
As many states continue to ease their COVID-19 safety restrictions, both previously-and newly-interested homebuyers have emerged in droves, sending mortgage applications to their highest level in 11 years. And while concerns for the greater economy ebb and flow, consumer sentiment has begun to rebound – rising 10% at the end of June off the March lows. Additionally, near-zero rates for the foreseeable future and an increase in the savings rate – which skyrocketed to 33%, up from 12.7% the previous month due to untouched stimulus checks and decreased recreational spending – are likely to make refinancing, purchasing, building, and remodeling homes more attractive as the economy begins to recover.
The congruent rise in mortgage applications may show that many are reconsidering their housing options after spending months indoors under stay-at-home orders. Notably, the sea change in corporate culture, where employees may no longer need to work in a physical office, also could be driving new interest in home buying outside of urban areas. As shown below, the rise in mortgage applications has coincided with a rise in new home sales. And we already have seen starter home activity (homes under $200,000), increase back to 2018 levels.
Of course, an increased housing demand brings the need to furnish or remodel. Therefore, investors also should consider consumer-related businesses involved in home improvement, as the deployment of the elevated savings in consumer pockets on home goods may get discretional spending back to normal levels.
To position portfolios for a housing market that may be at the forefront of a COVID-19 recovery, consider a diversified exposure to firms engaged in building new homes, providing construction materials, as well as those involved in home improvement and furnishing/appliance retail business lines with the SPDR S&P Homebuilders ETF (XHB US).
(The views expressed here are those of the author and do not necessarily reflect those of ETF Strategy.)
Gonorrhea became more drug resistant while attention was on COVID-19 – a molecular biologist explains the sexually transmitted superbug
The US currently has only one antibiotic available to treat gonorrhea – and it’s becoming less effective.
COVID-19 has rightfully dominated infectious disease news since 2020. However, that doesn’t mean other infectious diseases took a break. In fact, U.S. rates of infection by gonorrhea have risen during the pandemic.
Unlike COVID-19, which is a new virus, gonorrhea is an ancient disease. The first known reports of gonorrhea date from China in 2600 BC, and the disease has plagued humans ever since. Gonorrhea has long been one of the most commonly reported bacterial infections in the U.S.. It is caused by the bacterium Neisseria gonorrhoeae, which can infect mucous membranes in the genitals, rectum, throat and eyes.
Gonorrhea is typically transmitted by sexual contact. It is sometimes referred to as “the clap.”
Prior to the pandemic, there were around 1.6 million new gonorrhea infections each year. Over 50% of those cases involved strains of gonorrhea that had become unresponsive to treatment with at least one antibiotic.
In 2020, gonorrhea infections initially went down 30%, most likely due to pandemic lockdowns and social distancing. However, by the end of 2020 – the last year for which data from the Centers for Disease Control and Prevention is available – reported infections were up 10% from 2019.
It is unclear why infections went up even though some social distancing measures were still in place. But the CDC notes that reduced access to health care may have led to longer infections and more opportunity to spread the disease, and sexual activity may have increased when initial shelter-in-place orders were lifted.
As a molecular biologist, I have been studying bacteria and working to develop new antibiotics to treat drug-resistant infections for 20 years. Over that time, I’ve seen the problem of antibiotic resistance take on new urgency.
Gonorrhea, in particular, is a major public health concern, but there are concrete steps that people can take to prevent it from getting worse, and new antibiotics and vaccines may improve care in the future.
How to recognize gonorrhea
Around half of gonorrhea infections are asymptomatic and can only be detected through screening. Infected people without symptoms can unknowingly spread gonorrhea to others.
Typical early signs of symptomatic gonorrhea include a painful or burning sensation when peeing, vaginal or penal discharge, or anal itching, bleeding or discharge. Left untreated, gonorrhea can cause blindness and infertility. Antibiotic treatment can cure most cases of gonorrhea as long as the infection is susceptible to at least one antibiotic.
There is currently only one recommended treatment for gonorrhea in the U.S. – an antibiotic called ceftriaxone – because the bacteria have become resistant to other antibiotics that were formerly effective against it. Seven different families of antibiotics have been used to treat gonorrhea in the past, but many strains are now resistant to one or more of these drugs.
Why gonorrhea is on the rise
A few factors have contributed to the increase in infections during the COVID-19 pandemic.
Early in the pandemic, most U.S. labs capable of testing for gonorrhea switched to testing for COVID-19. These labs have also been contending with the same shortages of staff and supplies that affect medical facilities across the country.
Many people have avoided clinics and hospitals during the pandemic, which has decreased opportunities to identify and treat gonorrhea infections before they spread. In fact, because of decreased screening over the past two and a half years, health care experts don’t know exactly how much antibiotic-resistant gonorrhea has spread.
Also, early in the pandemic, many doctors prescribed antibiotics to COVID-19 patients even though antibiotics do not work on viruses like SARS-CoV-2, the virus that causes COVID-19. Improper use of antibiotics can contribute to greater drug resistance, so it is reasonable to suspect that this has happened with gonorrhea.
Overuse of antibiotics
Even prior to the pandemic, resistance to antibiotic treatment for bacterial infections was a growing problem. In the U.S., antibiotic-resistant gonorrhea infections increased by over 70% from 2017-2019.
Neisseria gonorrhoeae is a specialist at picking up new genes from other pathogens and from “commensal,” or helpful, bacteria. These helpful bacteria can also become antibiotic-resistant, providing more opportunities for the gonorrhea bacterium to acquire resistant genes.
Strains resistant to ceftriaxone have been observed in other countries, including Japan, Thailand, Australia and the U.K., raising the possibility that some gonorrhea infections may soon be completely untreatable.
Steps toward prevention
Currently, changes in behavior are among the best ways to limit overall gonorrhea infections – particularly safer sexual behavior and condom use.
However, additional efforts are needed to delay or prevent an era of untreatable gonorrhea.
Scientists can create new antibiotics that are effective against resistant strains; however, decreased investment in this research and development over the past 30 years has slowed the introduction of new antibiotics to a trickle. No new drugs to treat gonorrhea have been introduced since 2019, although two are in the final stage of clinical trials.
Vaccination against gonorrhea isn’t possible presently, but it could be in the future. Vaccines effective against the meningitis bacterium, a close relative of gonorrhea, can sometimes also provide protection against gonorrhea. This suggests that a gonorrhea vaccine should be achievable.
The World Health Organization has begun an initiative to reduce gonorrhea worldwide by 90% before 2030. This initiative aims to promote safe sexual practices, increase access to high-quality health care for sexually transmitted diseases and expand testing so that asymptomatic infections can be treated before they spread. The initiative is also advocating for increased research into vaccines and new antibiotics to treat gonorrhea.
Setbacks in fighting drug-resistant gonorrhea during the COVID-19 pandemic make these actions even more urgent.
Kenneth Keiler receives funding from NIH.cdc disease control pandemic covid-19 vaccine treatment testing clinical trials spread social distancing japan bc china world health organization
Measuring the Ampleness of Reserves
Over the past fifteen years, reserves in the banking system have grown from tens of billions of dollars to several trillion dollars. This extraordinary…
Over the past fifteen years, reserves in the banking system have grown from tens of billions of dollars to several trillion dollars. This extraordinary rise poses a natural question: Are the rates paid in the market for reserves still sensitive to changes in the quantity of reserves when aggregate reserve holdings are so large? In today’s post, we answer this question by estimating the slope of the reserve demand curve from 2010 to 2022, when reserves ranged from $1 trillion to $4 trillion.
What Are Reserves? And Why Do They Matter?
Banks hold accounts at the Federal Reserve where they keep cash balances called “reserves.” Reserves meet banks’ various needs, including making payments to other financial institutions and meeting regulatory requirements. Over the past fifteen years, reserves have grown enormously, from tens of billions of dollars in 2007 to $3 trillion today. The chart below shows the evolution of reserves in the U.S. banking system as a share of banks’ total assets from January 2010 through September 2022. The supply of reserves depends importantly on the actions of the Federal Reserve, which can increase or decrease the quantity of reserves by changing its securities holdings, as it did in response to the global financial crisis and the COVID-19 crisis.
Reserves Have Ranged from 8 to 19 Percent of Bank Assets from 2010 to 2022
Why does the quantity of reserves matter? Because the “price” at which banks trade their reserve balances, which in turn depends importantly on the total amount of reserves in the system, is the federal funds rate, which is the interest rate targeted by the Federal Open Market Committee (FOMC) in the implementation of monetary policy. In 2022, the FOMC stated that “over time, the Committee intends to maintain securities holdings in amounts needed to implement monetary policy efficiently and effectively in its ample reserves regime.” In this ample reserves regime, the Federal Reserve controls short-term interest rates mainly through the setting of administered rates, rather than by adjusting the supply of reserves each day as it did prior to 2008 (as discussed in this post). In today’s post, we describe a method to measure the sensitivity of interest rates to changes in the quantity of reserves that can serve as a useful indicator of whether the level of reserves is ample.
The Demand for Reserves Informs Us about Rate Sensitivity to Reserve Shocks
To assess whether the level of reserves is ample, one needs to first understand the demand for reserves. Banks borrow and lend in the market for reserves, typically overnight. The reserve demand curve describes the price at which these institutions are willing to trade their balances as a function of aggregate reserves. Its slope measures the price sensitivity to changes in the level of reserves. Importantly, banks earn interest on their reserve balances (IORB), set by the Federal Reserve. Because the IORB rate directly affects the willingness of banks to lend reserves, it is useful to describe the reserve demand curve in terms of the spread between the federal funds rate and the IORB rate. In addition, we control for the overall growth of the U.S. banking sector by specifying reserve demand in terms of the level of reserves relative to commercial banks’ assets.
There is a clear nonlinear downward-sloping relationship between prices and quantities of reserves, consistent with economic theory. The chart below plots the spread between the federal funds rate and the IORB against total reserves as a share of commercial banks’ total assets. When reserves are very low, the demand curve has a steep negative slope, reflecting the willingness of borrowers to pay high rates because reserves are scarce. At the other extreme, when reserves are very high, the curve becomes flat because banks are awash with reserves and the supply is abundant. Between these two regions, an intermediate regime–that we refer to as “ample”–emerges, where the demand curve exhibits a modest downward slope. The color coding of the chart reflects the shifts in the reserve demand curve over time. In particular, the curve appears to have moved to the right and upward around 2015 and then moved upward after March 2020, at the onset of the COVID pandemic.
Reserve Demand Has Shifted over Time
This chart highlights two of the main challenges in estimating the slope of the reserve demand curve. First, the curve is highly nonlinear, which means that a standard linear estimation approach is not appropriate. Second, various long-lasting changes in the regulation and supervision of banks, in their internal risk-management frameworks, and in the structure of the reserve market itself have resulted in shifts in the reserve demand curve. A third challenge is that the quantity of reserves may be endogenous to banks’ demand for them. Therefore, to properly measure the reserve demand curve, one must disentangle shocks to supply from those to demand. As we explain in detail in a recent paper, our estimation strategy addresses all three of these challenges.
Estimating the Slope of the Reserve Demand Curve
Our approach provides time-varying estimates of the price sensitivity of the demand for reserves that can be used to distinguish between periods in which reserves are relatively scarce, ample, or abundant. The chart below presents our daily estimates of the slope of the demand curve, as measured by the rate sensitivity to changes in reserves. Although we do not have a precise criterion for when reserves are scarce versus ample, during two episodes in our sample, the estimated rate sensitivity is well away from zero. The first episode occurs early in our sample, in 2010, and the second emerges almost ten years later, in mid-2019. In two other periods—during 2013-2017 and from mid-2020 through early September 2022—the estimated slope is very close to zero, indicating an abundance of reserves. The remaining periods are characterized by a modest negative slope of the reserve demand curve, consistent with ample (but short of abundant) reserves. The overall pattern of these estimates is robust to changes in the model specification, such as including spillovers from the repo and Treasury markets or measuring reserves as a share of gross domestic product or bank deposits (instead of as a share of banks’ assets).
Rate Sensitivity Changed over Time, Following the Path of Reserves
Interest Rate Spreads Alone Are Not Reliable Indicators of Reserve Scarcity
As we discuss in our paper, the time variation in the estimated price sensitivity in the demand for reserves is based on observations of small movements along the demand curve due to exogenous supply shocks. The location of the curve itself, however, also changes over time. That is, there is not a constant relationship between the level of reserves and the slope of the reserve demand curve.
In our paper, we find evidence of both horizontal and vertical shifts in the reserve demand curve, with vertical upward shifts being particularly important since 2015. This finding implies that the level of the federal funds-IORB spread may not be a reliable summary statistic for the sensitivity of interest rates to reserve shocks, and that estimates of the price sensitivity in the demand for reserves provide additional useful information.
In summary, we have developed a method to estimate the time-varying interest rate sensitivity of the demand for reserves that accounts for the nonlinear nature of reserve demand and allows for structural shifts over time. A key advantage of our methodology is that it provides a flexible and readily implementable approach that can be used to monitor the market for reserves in real time, allowing one to assess the “ampleness” of the reserve supply as market conditions evolve.
Gara Afonso is the head of Banking Studies in the Federal Reserve Bank of New York’s Research and Statistics Group.
Gabriele La Spada is a financial research economist in Money and Payments Studies in the Federal Reserve Bank of New York’s Research and Statistics Group.
John C. Williams is the president and chief executive officer of the Federal Reserve Bank of New York.
How to cite this post:
Gara Afonso, Gabriele La Spada, and John C. Williams, “Measuring the Ampleness of Reserves,” Federal Reserve Bank of New York Liberty Street Economics, October 5, 2022, https://libertystreeteconomics.newyorkfed.org/2022/10/measuring-the-ampleness-of-reserves/.
The views expressed in this post are those of the author(s) and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the author(s).
Vir awarded $1 billion multi-year BARDA influenza contract
The US Government’s Biomedical Advanced Research and Development Authority (BARDA) has made an initial investment of approximately $55
The post Vir awarded…
The US Government’s Biomedical Advanced Research and Development Authority (BARDA) has made an initial investment of approximately $55 million for rapid development of VIR-2482, the Vir Biotechnology’s investigational prophylactic monoclonal antibody (mAb) for seasonal and pandemic influenza viruses.
Its purpose being to support pandemic preparedness for influenza and other infectious disease threats, this is the first award from BARDA – part of the US Department of Health and Human Services’ (HHS) Administration for Strategic Preparedness and Response (ASPR) – for pre-exposure prophylaxis for influenza.
VIR-2482 is an investigational intramuscularly administered influenza A-neutralising mAb. It has been shown in vitro to cover all major influenza A strains that have arisen since the 1918 ‘Spanish flu’ pandemic and is designed as a universal prophylactic for influenza A.
Furthermore, VIR-2482 could have the potential to overcome the limitations of current flu vaccines and result in higher levels of protection, given it does not rely on an individual to create their own protective antibody response. Additionally, the incorporated Xencor Xtend Technology is half-life engineered, meaning a single dose could potentially last an entire flu season.
Seasonal influenza (or flu) is a highly contagious respiratory disease that can cause severe illness and life-threatening complications. In just the past few years, seasonal influenza has resulted in around 4 million hospitalisations and circa 500,000 global annual deaths.
Pandemic influenza, by contrast, is a contagious airborne respiratory disease with unpredictable timing and severity and against which humans have little or no immunity. Four such pandemic influenzas have occurred in only the past century, with the 1918 ‘Spanish flu’ alone having resulted in 50 million deaths worldwide.
Given the past two years’ and ongoing experience with SARS-CoV-2 and its variants, the BARDA multi-year contract – potentially an investment of up to $1 billion in total – aims to continue the Authority’s efforts in preparing for and responding to public health emergencies. Currently, there is a significant unmet need to address shortcomings in preventative and therapeutic options for influenza, the efficacy of the present options that do exist ranging from only 10% to 60%.
Therefore, this initial $55 million investment aims to address these shortcomings. It includes for a phase 2 pre-exposure prophylaxis trial, to begin this second half of the year, with initial data expected by mid-2023. The balance of the award is subject to up to 12 options being exercised by BARDA in further support of the development of pre-exposure prophylactic antibodies, including and beyond VIR-2482.
This extended area, beyond prevention of influenza illness, will potentially be for supportive medical countermeasures for up to 10 “other pathogens of pandemic potential”, whether they be “chemical, biological, radiological [or] nuclear”.
Dr Rajesh Gupta, vice president, global health portfolio and public-private partnerships at Vir Biotechnology, said: “COVID-19 reinforced the ever-present global threat of infectious diseases, and the critical need for readily available solutions in advance of the next pandemic.”
A commercial-stage immunology company, Vir Biotechnology’s current development pipeline includes product candidates targeting hepatitis B and hepatitis D viruses and human immunodeficiency virus, in addition to influenza A and COVID-19, the latter of which Vir (together with GSK) previously delivered the antibody sotrovimab (Xevudy) for. The company also co-discovered ansuvimab-zykl for addressing the Ebola crisis.
Bolyn Hubby, PhD, executive vice president and chief corporate affairs officer at Vir Biotechnology, said: “Just as the COVID-19 pandemic required unprecedented cross-sector collaboration around the globe, tackling the outbreaks and pandemics of tomorrow will require an ‘all hands on deck’ approach that unites a broad array of public and private organisations.”
Under a collaboration agreement signed with GlaxoSmithKline (GSK) in 2021, GSK holds an exclusive option to lead post-phase 2 development and commercialisation of VIR-2482.
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