by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA

[Posted: 9:30 AM EDT]

Good morning!  It’s employment week; we are expecting a very weak report for April, with the unemployment rate in the 16% area.  Equity futures are lower.  We update the COVID-19 news.    Here are the details:

COVID-19:  The number of reported cases is 3,523,121 with 247,752 deaths and 1,130,996 recoveries.  In the U.S., there are 1,158,341 confirmed cases with 67,686 deaths and 180,152 recoveries.  Here is the FT chart:

The virus news:

• The good news:
  • Roche (RHHBY, 42.84) has received clearance for emergency use of an antibody test from the FDA. The company claims an impressive accuracy—100% in detecting COVID-19 antibodies and a 0.2% false positive result.
  • There are currently 254 therapies being tested for COVID-19 and 95 vaccines. That is good because many of these will fail.  Meanwhile, there is also something of a geopolitical race for a vaccine; the soft power a nation would get by being the first to bring a vaccine would be large.  So far, the U.S. has shown little interest in global participation to find a vaccine.  One would assume that if the U.S. does develop it first, we would protect Americans first and the rest of the world later.
  • Here’s another oddity of COVID-19—habitual smokers are underrepresented among those hospitalized. In France, this news has led to a run on smoking-cessation products on the idea that nicotine may act on the lungs in such a way that it slows the invasion of the virus in the body.
  • There is increasing investigation of blood plasma to treat COVID-19. Some studies are looking at introducing antibodies from those who have recovered from the virus, while others are looking at regulating the immune response.
• The bad news:
  • Meanwhile, in comparison to the Roche test, others have been far less impressive in (a) determining if a patient has been infected, or (b) suggesting they have been infected when they haven’t. We hope the Roche test is as good as they say it is, but, compared to the others, we will go with Reagan’s “trust but verify.”
  • There are widespread reports that imported PPE, especially masks, are substandard. The N95 mask, named because it filters out 95% of small particles and gives the standard of protection, is being imported but tests show that about 60% fail.  News such as this will undermine confidence in global medical supply chains and bring production back to the U.S.
  • There are lingering concerns that if the virus is in the air, HVAC systems could spread it through the ventilation system.
  • Although herd immunity can be achieved without a vaccine, the cost is really high.
  • Russia is seeing a surge in cases of the virus. The official case count jumped 10k on Sunday.

The policy news:

• The economic data released this month and next will look awful; this is no surprise. However, even though the downturn is well anticipated, the data will likely drive another round of fiscal action.  Already, political camps are laying out their goals.  Democrats want more aid for state and local governments.  Congressional GOP leaders are pushing for liability protection.  The White House is flirting with tax cuts and maybe a further delay in filing taxes this year.  With divisions this wide, bridging them means that another round of fiscal stimulus will take a while.  For now, the official line from the administration is that we should have a “pause” to see how approved spending affects the economy.
• Hurricane season is less than a month away. Forecasts suggest it will be an active season.  On average, the Atlantic hurricane season generates 12 named storms of which three become major (category 3+) hurricanes.  Most university projections are expecting mid-to-high teens for this year’s season.  FEMA is preparing for an elevated season with the added complication of COVID-19; one can imagine hurricane shelters, which often put lots of unrelated people in close quarters, as potential vectors for spreading the virus.
• The EU will begin debating a €1.0 trillion stimulus package to address COVID-19. This comes in the aftermath of a program half this size for the Eurozone.  So far, we are seeing widening credits spreads between sovereign yields of the southern nations compared to the northern ones.  This spending is, in part, designed to narrow that gap.

The economic news:

• Last Friday’s manufacturing ISM data came in better than expected. Don’t be fooled.  It was much worse than expected.  Why?  The supply deliveries component has distorted the report.  Under normal circumstances, slower deliveries usually coincide with a robust economy.  Therefore, the ISM is constructed to treat slow deliveries as positive.  However, in the current environment, slower deliveries are an artifact of shutdown orders; in other words, in a really strong economy, bottlenecks in deliveries occur due to tightening supplies.  In the current situation, bottlenecks simply reflect the shelter-in-place orders.  Here are a couple of charts:

Note that it is unprecedented to see a supplier delivery reading above 70 with an ISM less than 60.  In this chart, we adjust the ISM by excluding supplier delivery.  This leads to a reading of 33, which is more in line with a deep downturn in the economy.

• Bees are critically important to America’s food crops. Lockdown measures have reduced the ability of beekeepers to move their hives to fruit and nut orchards.  However, another threat has emerged in the northwest—the Asian giant hornet.  This insect, native to Asia, has recently been found in the U.S.
• Around the globe, various levels of government are starting to ease social distancing restrictions. In the U.S., three-fifths of the states are allowing some businesses to reopen.  It is unknown how this will go.  We don’t know how the virus will behave in the summer months.  There is some speculation it could act like influenza and spread less quickly.  However, opening businesses is one thing; getting customers is something else.  Early evidence suggests that business activity will recover slowly, at best.  The other risk, of course, is a return of the virus and the need to reimplement lockdowns.
• Construction firms in the U.S. report slow activity. Although stalled projects have resumed as lockdowns ease, order pipelines show little future activity once current jobs are completed.

The market news:

• In the Great Financial Crisis, investors with cash were able to make investments in stricken firms at favorable rates. Interestingly enough, this time around, the Fed has moved so fast to offer support that these same investors are finding themselves shut out of these opportunities.
• As the first week of May is upon us, landlords and mortgage lenders are bracing for another round of missed payments. This is a classic case of “who bears the cost of adjustment.”  Lenders and landlords clearly can’t get money from renters and borrowers who have no income but there has been varying responses on how these missed payments will be handled.  Some of the lenders or landlords want a lump sum for the lost payments, which doesn’t appear likely.  There have also been calls for organized rent strikes.  Although eviction and foreclosure are options, neither is all that attractive for mortgage holders or landlords; there is no guarantee that the unit can be re-rented, and if home prices fall foreclosure can mean a drop in mortgage values.  We will be watching to see if the Fed comes to the rescue here as well.  As we noted above, we doubt there will be fiscal action to resolve this situation anytime soon.

The foreign policy news:

• As we detailed last week, relations with China continue to deteriorate, and it’s not just the U.S. Punishing China looks to be a major campaign point this November.  The U.S. is building alliances in the South China Sea with those who are increasingly worried about China’s aggressive actions in the area.  SoS Pompeo continues to argue there is a “significant amount of evidence” that COVID-19 came from a Chinese bio lab.  China is also accused of hiding the virus’s lethality in order to hoard medical supplies.  The administration is accelerating plans to remove China from the U.S. supply chain.

Turkey:  Sensing that President Erdogan is in trouble, the U.S. is increasing sanctions threats to forestall the activation of Russia’s S-400 missile defense system.  The Fed has widened swap lines to foreign central banks and created a Treasury repo market for central banks that are not given swap lines so these excluded central banks can access dollars without having to sell their bonds in reserves.  It appears that Ankara, facing a dollar supply crunch, will not get help from either source.  The Fed won’t give a swap line to such a dodgy borrower and Turkey doesn’t have enough reserves to repo.

Iran:  Iran’s new parliament is chock-full of hardliners and the election authorities restricted more liberal candidates.  However, just because there is a large majority of a certain political leaning doesn’t mean factions can be avoided.  There is an apparent battle for who will replace Ali Larijani for speaker of the parliament.

North Korea:  Well, to paraphrase the early Weekend Updates, Kim Jong Un is still not dead.  He was seen at a fertilizer factory over the weekend.  We do note there was an exchange of gunfire on the DMZ; no casualties were reported.

Venezuela:  Although details remain scant, there was apparently some sort of mercenary incursion into Venezuela last month.  There is no evidence that the U.S. government was directly involved in the action, but it is possible the U.S. was aware of the event.  Apparently, it went badly.

Argentina:  Buenos Aries is almost certainly going to default (again!) and require some sort of bailout.  However, the economic minister of the country, Martin Guzman, suggests in an FT op-ed that much of the emerging world will require similar support.  He seems to be suggesting we may see a broad debtors’ strike which would roil the global financial system.  In related news, growing financial stress is leading to trade tensions in South America and may threaten the Mercosur, the free-trade zone on that continent.

Germany:  The Social Democrats are arguing that Germany would be better off without U.S. nuclear weapons on its soil.  The presence of these warheads has been a sore point for the German left for decades.  However, maintaining the alliance has always led Germany to allow the U.S. to deploy these weapons despite the misgivings.  As the alliances fray, we may see these nukes go.  If they do, Germany will need to dramatically boost its conventional defenses or develop nukes of its own in the face of the potential threat from Russia.  Or, Germany could take the route favored by the SDP for ages, which is to improve relations with Moscow.  As long as Chancellor Merkel is in power, the nukes will likely stay.  But, if the SDP can break free from the current coalition, and perhaps join the Greens, this issue may return.

U.K./U.S. trade:  The two nations will launch talks for a free-trade agreement tomorrow.  If Brexit comes at the end of the year, it is clear Westminster wants to have a deal with the U.S. prepared.

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by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA

[Posted: 9:30 AM EDT]

Good morning, happy Friday and happy May Day, the international celebration of Labor Day.  Most European financial markets will be closed, although Denmark and the U.K. remain open.  Equity futures are lower as tensions with China rise, while oil is rallying again.  We update the COVID-19 news.  Relations with China are deteriorating; we report on the latest.  Here are the details:

COVID-19:  The number of reported cases is 3,274,747 with 233,792 deaths and 1,022,331 recoveries.  In the U.S., there are 1,070,032 confirmed cases with 63,109 deaths and 153,947 recoveries.  Here is the FT chart:

Here is an updated map of all the state-level social distancing measures.

The virus news:

• The good news:
  • We have been reporting of evidence that some of those who have recovered from COVID-19 have tested positive again, suggesting there isn’t much of an immune response from contracting the virus. Reports out of South Korea suggest that the tests actually reveal flaws in the test; those who reportedly were re-infected did not become ill.  Instead, the test was picking up virus fragments.  Thus, there is a good chance that those who have recovered do have some degree of immunity.
  • Although remdesivir is getting a lot of press, there are other drugs being tested against the virus. This “repurposing” process is actually what led researchers to remdesivir; it was originally created to combat Ebola.  Interestingly enough, it failed against that disease.  The benefit of a repurposed drug is that it has likely already passed safety tests.  This testing is positive because usually one drug alone doesn’t work forever with infectious diseases because the virus mutates against it.
  • As we have been reporting, the administration is preparing to bring a vaccine to the country by January.
• The bad news:
  • Researchers at the Center for Infectious Disease Research and Policy (CIDRAP) at the University of Minnesota published a report suggesting that (a) COVID-19 will likely be spreading for another 18 months to two years until herd immunity is achieved, and (b) there is a chance that, similar to the Spanish influenza pandemic, a strong return in autumn could occur.
  • It appears the Veterans Administration is preparing for continued fatalities; it ordered $300k of body bags.
  • COVID-19 is spreading rapidly in Brazil. To some extent, this was a deliberate policy of the Bolsonaro government, which concluded that the Brazilian economy could not tolerate aggressive social distancing.  Officially, the country has 87,187 confirmed cases and just over 6k fatalities; these numbers are likely a serious undercount.  There are anecdotal reports suggesting the health care system is being overwhelmed.  The situation is deteriorating enough to where Brazil’s neighbors are either considering or implementing steps to manage the border to limit the spread into their countries.  These measures will almost certainly reduce trade.
  • Russia’s prime minister has tested positive for COVID-19.
  • Although the Senate has returned to Washington, the Capitol physician, Dr. Brian Monahan, warned that he does not have access to unlimited testing and that he will only test senators and staffers who exhibit symptoms. The average age of a senator is 61.8 years old and 28% are 70 or older.  If the Senate is infected, we could see significant problems develop.
  • China is reporting that 60% of new COVID-19 new cases are asymptomatic. This scenario facilitates the spread of the disease in the absence of widespread testing.

The policy news:

• For the past several years, a number of states have created impediments to applying for unemployment insurance. The goal was to eliminate potential abuse of the system.  When the economy had unemployment below 4%, these changes didn’t matter all that much.  But, now that millions of Americans are filing for unemployment insurance, the rules are becoming an obstacle to households getting aid.
• The Fed is widening potential participation in its $600 billion Main Street lending program by expanding the eligibility criteria. The Fed will now support lending to larger firms (15k employees from 10k) and the size of the loans will be lowered to $500k from $1.0 million.  Restrictions on firms held by larger companies will remain in place.
• The Paycheck Protection Program is being panned by a larger number of businesses who find that the requirements of using 75% of the loan proceeds to pay employees is too restrictive. Many businesses, especially in large cities with high rental costs, are finding that they need more funding for rent and less for payrolls.

The economic news:

• In a recent WGR, we examined the issue of optimization, arguing that efficiency can introduce fragility into a situation. The meatpacking crisis looks like an example of this underlying issue.
• Colleges and universities are facing a major crisis due to COVID-19. It isn’t obvious if they can safely reopen next fall and it hardly makes sense to pay tens of thousands of dollars for online education when it can be found much cheaper.  State public colleges are being hit with budget cuts as states struggle to balance budgets, and private schools, especially small ones with limited endowments, may not survive.  International students, who had represented a source of full-tuition paying attendees, may not be able to return from abroad.
• Rent strikes are widening which may put some mortgage-backed securities at risk.

The market news:

• The FDA is limiting the use of ethanol-based hand sanitizers, fearing the product may have carcinogenic impurities. This is yet another blow to the farm belt and the ethanol industry.

The foreign policy news:

• The COVID-19 pandemic is straining Western relations with China. We have been documenting conflicts with the U.S. and the EU.  Now, Australia can be added to the list.
  • Australia’s PM Scott Morrison is calling for an international inquiry into the origins of COVID-19. Although Morrison has suggested that China wasn’t necessarily the target of the proposed investigation, the Chinese government is viewing his call as a threat.
  • One of the industries at risk with deteriorating relations between Australia and China would be mining. Recently, an Australian mining executive invited a Chinese diplomat to an official event held by Australia’s health minister, a violation of protocol.
  • Australia’s intelligence agencies, consistent with findings by similar organizations in the U.S., have not found definitive proof that COVID-19 originated in a Chinese biology lab. However, that isn’t to say there isn’t circumstantial evidence to support this theory.  President Trump suggested that he is “confident” COVID-19 came from a Wuhan laboratory.
  • The U.K. and Sweden are also supporting an inquiry.
• Officially, the U.S. intelligence community has indicated that COVID-19 was not a bioweapon. There has been some conjecture that the naturally occurring virus (likely originating in bats) may have leaked out of a Chinese lab due to poor biosecurity.  U.S. intelligence agencies have confirmed they are investigating this possibility.
• If it turns out that China is responsible for introducing the virus to the world, what is to be done? The administration is making plans to punish China; actions may include tariffs, a repudiation of some of the Treasuries China holds in its foreign reserves, stripping China’s sovereign immunity (which would subject China to the tender mercies of the U.S. tort bar), demanding reparations, blocking Chinese assets in government pension funds and other measures.  Any of these would dramatically increase tensions between the U.S. and China.  The one we would be most concerned about is the repudiation action.  We could write a whole report on that (perhaps a future WGR) but suffice it to say that such a move would effectively end U.S. hegemony.  One of the two roles of a global hegemon is to provide a reserve currency which, outside of a gold standard, implies also providing the reserve asset, which is currently the Treasury.  If reserve managers suddenly believe that the U.S. would selectively default on Treasuries, we would be in a world where there would be limited assets available to reserve managers.  This is a bit like crossing the streams.
• As we noted earlier this week, China pressed the EU to temper comments about the origin of the virus. Apparently, the pressure is becoming strident.
• Taiwan is an extremely sensitive issue for China. The U.S. and China have engaged in strategic ambiguity[1] over the island since the 1970s.  However, maintaining that ambiguity requires the world to avoid suggesting that Taiwan has the status of a state; once that bridge is crossed, Taiwan is no longer a runaway province of the mainland but a renegade.
  • The Netherlands has run afoul of Beijing by changing the name of the foreign mission in Taiwan to “Netherlands Office Taipei,” which is clearly less than calling it an embassy but enough to trigger a response from China. The announcement came on April 27, the day when the Dutch named Taiwan a colony in the 17^th  China is considering trade retaliation against the Netherlands.
  • Australia is backing Taiwan’s return to the WHO, which will certainly infuriate Beijing.
• Meanwhile, tensions between Secretary of State Pompeo and China are rising rather strongly. He is continuing to press for access to Wuhan labs, something that China likely sees as an infringement on sovereignty, and he is calling for China to stop arresting Hong Kong protestors.  It appears it is starting to get personal as these screenshots from Chinese television show.

• Beijing has tried to use sales of medical equipment to nations reeling from COVID-19 as a form of soft power. However, there have been persistent reports of substandard equipment; the state of Missouri received counterfeit KN95 masks from China and Illinois may have as well.  Now, Britain is reporting it has received ventilators from China that may be deadly.  The combination of potential negligence at the Wuhan labs and the faulty medical equipment is raising the odds of retaliation against China.
  • At the same time, the White House itself is divided over this issue. Peter Navarro, a China hawk, has been pressing for the U.S. to produce more medical equipment domestically.  Other members of the administration oppose this action for fears that it will (a) harm relations with China, (b) raise costs, and (c) lead to shortages of such equipment at this important time.
  • The GOP as a party is becoming increasingly hostile toward China.
  • In addition, the White House wants Phase 1 of the trade deal with China to be executed. China is “committed” to the agreement, but further escalation of tensions could bring the arrangement into doubt.
• China claims it forced the U.S.S. Barry, an Arleigh-Burke class guided missile destroyer, out of the South China Sea. The U.S. has not confirmed the Chinese report.  A second U.S. ship has reportedly made a freedom of navigation operation in the South China Sea.
• Finally, China is finding itself under pressure from frontier market borrowers who are facing difficulties in servicing their debt. China has been a major lender to many of these nations through its “one belt, one road” project and is now facing calls to offer debt relief.  We suspect Beijing is reluctant to offer significant support, viewing itself as a developing nation.  The U.S. behaved similarly after WWI; Europe asked for debt relief to which President Coolidge allegedly responded with, “they hired the money, didn’t they?”

Saudi Arabia:  Reuters is reporting that the U.S. threatened to withdraw American military support from Saudi Arabia if the kingdom didn’t agree to cut output.  The Saudis, as one would expect, have not responded to this report.  We will be watching to see if MBS allows this statement to stand; if it does, it would make him look weak.  And, as we have stated all along, promising to cut is one thing, but reducing supplies is another.

Hezbollah:  Germany has banned Hezbollah from any activity in its country and is pressing the rest of Europe to adopt its measures.  The actions will weaken relations with Iran, which views Hezbollah as a client.

Iran:  Iran’s recent launch of a satellite suggests that it is mastering intercontinental ballistic missile technology.  Although it cannot reach the U.S. yet, Iran is clearly heading in a direction where it will be able to achieve that goal in a few years.  Already, Europe is at risk.  If Iran acquires a nuclear weapon, the ability to deliver a bomb would make Iran impossible to invade and overthrow.

North Korea:  The latest in the unending game of “where is Kim?” is that luxury boats are now at the Wonsan compound.  Although the appearance of these vessels doesn’t tell us much about the health of the young general, it may suggest he isn’t dead quite yet.

Venezuela:  The Maduro government is reportedly selling gold reserves (around nine tons) to Iran and the latter is using its aircraft to ferry the bars back to Tehran.  Venezuela is reportedly paying Iran for its assistance in operating PDVSA’s moribund refineries.  Iran has been using gold for some time to conduct trade and skirt U.S. sanctions.  We have no reports of how much Iran paid Maduro for the gold, but we would not be surprised if Tehran paid a premium.

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[1] Where two parties say the same thing but mean something entirely different.  This is a very effective strategy in diplomacy and marriage.

by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA

[Posted: 9:30 AM EDT]

Good morning as another month, that feels like a year, comes to a close.  Just a reminder—tomorrow is May Day, the international celebration of Labor Day.  Most European financial markets will be closed, although Denmark and the U.K. will remain open.  The ECB meets today; initial market reaction to the statement was negative as the moves taken appear modest.  Equity futures are mixed, and oil continues to recover; our Weekly Energy Update is available.  We update the COVID-19 news.  Here are the details:

COVID-19:  The number of reported cases is 3,207,248 with 227,971 deaths and 984,161 recoveries.  In the U.S., there are 1,040,488 confirmed cases with 60,999 deaths and 124,023 recoveries.  Here is the FT chart:

Here is another interesting graphic—it shows the spread of COVID-19 over time.  What is shown is that the only parts of the world that have not reported the virus are some islands in the Pacific.  According to rt.live, there are only seven states with R₀ higher than one and six are in the Midwest.

The virus news:

• Equity markets rose yesterday on reports that Dr. Fauci, the head of the National Institute of Allergy and Infection Diseases, had positive comments related to Remdesivir, an anti-viral medicine produced by Gilead Sciences (GILD, 84.09). There are generally two different paths to dealing with COVID-19.  The first is developing a vaccine.  A vaccine, widely distributed, would establish herd immunity.  A vaccine will be difficult to create; making vaccines has a host of problems, one of which is the mutation of viruses into a less virulent form, reducing the incentive to create one.  A successful vaccine for any coronavirus has never been developed and research on coronaviruses suggest that natural immunity doesn’t last very long.  Additionally, if the virus mutates, COVID-19 may require a new vaccine each year, similar to influenza.  Despite these hurdles, the efforts to make a vaccine are impressive.  There are joint projects with drug makers and academia, and the U.S. is planning a crash effort to make and distribute a vaccine.  The other path is to create treatments for those who have the virus.  A successful antiviral would mean that catching the bug would likely be less dangerous; this was the path taken for HIV.  In addition to Remdesivir, other drugs are being investigated as well.  As noted above, Dr. Fauci’s comments were very well received yesterday.  However, there are conflicting studies on Remdesivir, some suggesting the drug isn’t all that successful in helping patients. As a result, having other drugs to combat the virus may be necessary.  Having both types might be needed to successfully corral COVID-19, especially if the virus regularly mutates.  We do note that despite mixed results for Remdesivir, the U.S. may greenlight the drug for emergency use.  Our take?  We suspect that Remdesivir has some value, but we may find that it is more effective for certain degrees of infection, or that timing is critical.  We note that Tamiflu works best when taken early against influenza; waiting until the symptoms have become obvious tends to reduce its effectiveness.  Something similar may emerge with Remdesivir.
• In our daily coverage of COVID-19, we have seen a broad spectrum of reports. At first, the virus looked like a typical respiratory malady.  Although it was clearly deadly to some parts of the population (aged, with co-morbidity factors), a large number of those infected appeared to be asymptomatic, or with very mild symptoms.  However, as the virus spread around the world, new symptoms emerged.  There were cases of blood clotting apparently caused by the disease, and younger patients were suffering strokes after being infected.  Patients who appeared mildly ill would have blood oxygen levels so low doctors tended to immediately ventilate.  Renal failure was reported.  Certain cancers are now a co-morbidity factor.  Even dermatologists are reporting very odd symptoms from COVID-19. There is also a tendency for patients to be afflicted and appear to recover, only to become suddenly deathly ill.  It sort of seems like there is a “second-week syndrome” with COVID-19.  Simply put, whatever we are dealing with is affecting the human body much more broadly than it looked initially.  It is unclear what we are dealing with here.  However, one possibility is that the virus is mutating much more rapidly than expected.  It is possible that the U.S. is being hit with different strains of the virus.  This may account for the wide differences in fatalities.  One possibility is that the West Coast was infected by a less virulent Asian strain, while the East Coast was infected by a stronger variant from Europe.
  • The CDC now has offered six symptoms that COVID-19 tends to cause.
  • Although the virus continues to surprise, there is a consensus that children are less at risk from COVID-19. It may be that they are not vectors for transmission either.
• Every government that has faced this disease has taken a number of policy steps to try to cope with the outbreak, while also reducing the impact on the economy as much as possible. Social distancing reduces the spread of the disease and saves capacity in the medical system.  However, social distancing cannot exist indefinitely because of the harm done to the economy.  Essentially, policymakers are being asked to manage two conflicting goals; keeping people safe and maintaining some semblance of an economy.  This puts leaders in a very difficult spot, because either goal could be considered absolute and there will always be a pundit somewhere who can castigate a leader for putting a focus on either.
  • Due to the broad spectrum of responses, there have been a number of natural experiments that we have been tracking. Sweden has been an important test case for COVID-19 social distancing policy.  The country has had a “light touch,” putting fairly modest restrictions that are not aggressively enforced.  Its death rates are elevated, but not widely different than other nations.  A NYT study showed its fatality rates are about 18% above normal, which is low relative to other countries.

• The above chart from the FT shows Sweden’s death rate compared to other nations. Here is the entire array.
• On the other hand, the disease has been starkly more deadly for the elderly in Sweden; 86% of the 2,194 confirmed deaths have come from those over 70. Sweden’s experience seems to suggest that less restrictive measures may not be as risky for the entire population, but may be a problem for the elderly.  On the other hand, it is important to draw the right lessons from an analog; Sweden’s population density is 64 people per square mile, 194 out of 235 nations.  The U.S. ranks 177, with 94 people per square mile.  The U.S. experience shows that highly populated areas tend to be more at risk.  What this may mean for the U.S. is that restrictive measures may be appropriate for urban areas, while less restrictive measures may work in rural and more suburban settings.
• Meanwhile, India is struggling to reopen; workers are reluctant to return to work, fearing another outbreak of the virus. Meanwhile in China, manufacturing is starting to recover but the consumers of Chinese goods, both home and abroad, are slower to restart buying.

The policy news:

• The Fed met; as expected, it didn’t do anything but clearly indicated that if more was necessary, it would act. Here is a report that compares the changes in the last two statements.  The statement does show that this was a continuation meeting.  Nothing new was revealed, and what is in place will likely remain so for a while.  Chair Powell signaled that fiscal policy should remain expansionary.  On a side note, it appears the KC FRB will not be able to hold its annual monetary policy meeting in Jackson Hole this year, for the first time since 1982.
• The ECB is planning on expanding its balance sheet further, but left rates unchanged. It did ease conditions for banks to borrow, which has been characterized as “helicopter money for banks.”  For the most part, financial markets were a bit disappointed in the statement.  In the press conference, Chair Legarde appears to be following the Greenspan playbook, which is to answer each question with a long response resulting in fewer questions and the answers are hard to follow.  The ECB simply can’t move as much in some areas, like yield curve control, compared to the Fed.  That lack of power is reflected in Eurozone financial assets.
• What to do about food? President Trump has used the Defense Production Act to force meatpackers to reopen slaughterhouses, in some cases overruling state regulations.  However, it isn’t clear if this action will lead to a return of meat processing.  It’s one thing to open facilities, but it’s another to get workers to return to their jobs.  COVID-19 have ravaged these facilities where workers process carcasses in close quarters.  Unions representing these workers have criticized the executive action.  It is clear that if meat processers don’t open soon, shortages will start to develop; chicken will probably be first and beef last.  At the same time, these workers have more leverage than one would think.  These jobs are very difficult and don’t pay all that well.  If the workers don’t show up, the firms could fire them, but replacing them won’t be easy.
  • One of the underlying problems for the food service industry is that there has been a huge shift in demand. Sales to restaurants have collapsed, while grocery store demand has soared.  This situation has created a logistical nightmare; the packaging and distribution appropriate for commercial firms is completely wrong for households.  Quantities are too large and are not in packaging that households can manage.  So far, shortages in grocery stores have mostly been sporadic, but the food service industry doesn’t necessarily want to retool itself for households only to see restaurants roar back later this year.  So, for now, we are limping along with reports of some food being lost.

The economic news:

• The Eurozone economy fell at its fastest pace on record in Q1; that record will almost certainly be broken in Q2.
• Chinese PMI data held up rather well in April, although exporters remain depressed.

The market news:

• Firms are increasingly turning to convertibles to raise money (not this convertible!).  Nearly 60% of equity capital raised this month has come from these bonds, which can convert to equity if the stock price recovers.  In 2008, we saw a similar pattern.

The foreign policy news:

• An important indicator has been announced that China is feeling more confident about having the virus under control. It has scheduled a date for its National People’s Congress for May 22.  It will be held in Beijing, meaning it will be held in person.
• Because of the closure of stores, some countries are struggling to update their inflation indices.
• The battle of the virus narrative between the U.S. and China continues. China has embarked on an aggressive campaign to hold itself blameless for COVID-19.  At the same time, the U.S. is engaging its intelligence agencies to determine if China, or the WHO, withheld data on the pandemic.

Brexit:  Although the focus recently has been on COVID-19, Brexit negotiations have been held.  The conventional wisdom is that PM Johnson will ask for an extension.  However, what we have seen thus far suggests that the U.K. fully intends to leave at the end of the year and if that intention leads to a hard break with the EU, so be it.  Although there hasn’t been much attention paid to Brexit recently, a hard break would likely be taken as negative for U.K. financial assets.  A side note:  PM Johnson is a new father.

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by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA

[Posted: 9:30 AM EDT]

The uptick in the markets today comes as coronavirus lockdowns continue to be softened around the world and several drug groups say they could have a COVID-19 vaccine within months.  The Fed ends its latest policy meeting today.  Overseas, it’s still a mystery where Kim Jong Un is, while Russia has apparently sent yet another hit squad to kill an enemy overseas.

COVID-19:  Official data show confirmed cases have risen to 3,132,363 worldwide, with 217,947 deaths and 938,037 recoveries.  In the United States, confirmed cases rose to 1,012,583, with 58,355 deaths and 115,936 recoveries.  Here is the chart of infections now being published by the Financial Times:

Virology

• Multiple U.S. and foreign pharmaceutical companies working on a COVID-19 vaccine say they have moved up their timetable for testing and could have a product available for emergency use as early as this fall.  Several organizations have already started safety and efficacy tests on human subjects.  The news should be a significant positive for a wide range of risk assets.
• On a less positive note, many commercial and academic laboratories in the U.S. say a lack of high-level coordination has left them processing far fewer coronavirus tests than they could.  Lab executives and public health officials blame barriers including fragmented supply chains, relatively strict test guidelines, incompatible electronic systems and a lack of centralized data on where capacity exists.

Real Economy

• President Trump invoked the Defense Production Act to declare meatpacking plants as critical infrastructure that must keep operating, in spite of some local governments and unions preferring to close them to slow the spread of the virus.  The move will require new measures to protect workers from infection, but it will not compel employees to return to work if they don’t want to.  Nevertheless, the news should be positive for major meat company stocks.
  • As much as 25% of U.S. pork production capacity is currently idle as is about 10% of beef production.  Administration officials said they feared 80% of all U.S. meat production capacity could be shut down without any action.
  • Large packing plants have become a target for virus shutdowns because they often represent a large, concentrated share of the total workforce in the small or rural communities where they are typically located.
• The American Petroleum Institute released data showing U.S. oil inventories expanded less than anticipated last week.  The news is boosting oil prices sharply higher so far today, although it will be important to see whether the more benign picture is confirmed by the Energy Information Agency’s data later this morning.
• As European countries gradually ease their coronavirus restrictions, high-frequency alternative data on economic activity, such as electricity use and travel, are already starting to show a revival.
• Unfortunately, new analysis shows that emerging market countries trying to support their plunging currencies last month depleted their foreign exchange reserves at the fastest pace since the global financial crisis of 2008-2009.  The drawdown of reserves leaves some nations vulnerable to further shocks, so the news is likely to be negative for emerging market bonds and stocks.

Financial Markets

• As a reminder that Italy’s economy has been left in tatters even as it gets control of the pandemic, Fitch has cut its rating of Italian sovereign bonds to BBB-.
  • With the downgrade, Fitch joins Moody in assessing Italy’s debt at just one notch above junk.  S&P last week rated it two notches above.
  • In its announcement, Fitch suggested it had been prepared to cut the rating even further, but the Italian government provided additional information that allowed for the investment-grade assessment.

U.S. Policy Responses

• Treasury Secretary Mnuchin said Payment Protection Program loans of $2 million or more would face an audit before being forgiven, with spot checks for smaller loans.  The audits will check whether the funds were really used to keep or rehire workers or meet other allowed expenses.
  • Some observers question whether the SBA will really be able to conduct effective audits, which it normally entrusts to banks.
  • All the same, the announcement reflects concern about the political ramifications if the emergency lending leads to widespread fraud.
• In another setback for the PPP, many restaurant owners are expected to forego or return the loans on concerns that they can’t meet the requirement to spend the funds within eight weeks, especially when lockdown orders are still in place and many of their employees have more income from unemployment benefits than they get from working.
• Senate Majority Leader Mitch McConnell told Republican lawmakers he doesn’t want to include infrastructure funding in the next coronavirus relief bill, but he does want a provision shielding companies from liability in pandemic-related lawsuits.

International Policy Responses

• Expectations are building that the ECB, as early as this week, could significantly expand its relatively modest €750 billion coronavirus bond-buying program toward something more similar to the Fed’s aggressive programs.
• The leftist economist Thomas Piketty, who is famous for his recent books linking capitalism to inequality, said in an interview that the EU’s need for a strong fiscal response to the coronavirus crisis was being undermined by the policy of making unanimous decisions.  To solve the crisis, he called for “a small group of countries” to start making decisions on their own based on majority voting.  The idea is yet another reflection of the growing potential for a breakup of the bloc.

Political Fallout

• Australian Prime Minister Morrison has called for an independent international inquiry into the origins of the COVID-19 crisis.  The call has drawn a furious response from Chinese officials, who have accused Morrison of being a U.S. pawn and threatened a boycott of Australian goods.

United States:  The FOMC will wrap up its latest policy meeting today.  While no change is expected in the Fed’s basic policy stance, the policymakers will release updated economic forecasts and Chairman Powell could provide additional color on policy going forward during his post-meeting news conference.

North Korea:  There is still no solid news on Kim Jong Un’s whereabouts, but media reports say North Korean consumers have been panic-buying staples.  If even domestic residents of the Hermit Kingdom are sensing a potential crisis, it provides further evidence that an important development may be happening.

Russia-Czech Republic:  A Prague district mayor says he is under police protection after authorities informed him that he and two other Prague officials, including the city’s mayor, were the targets of a Russian intelligence agent sent to the Czech capital to “liquidate” them.  The officials were apparently targeted for their role in removing a statue of a Soviet war hero from a public square in Prague.

Brazil:  The supreme court has authorized a police investigation into President Bolsonaro, days after Justice Minister Celso de Mello resigned and accused the president of crimes ranging from influence-peddling to obstruction of justice for trying to replace police officials investigating his family members.  The threat of a massive new political scandal and potential impeachment will likely be negative for Brazilian assets.

Lebanon:  As Lebanon’s government begins lifting its coronavirus lockdown, protesters demanding economic and political reforms are already back in the streets staging violent demonstrations.

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by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA

[Posted: 9:30 AM EDT]

Market sentiment continues to get a boost from the fact that many foreign governments and various U.S. states are easing their coronavirus restrictions.  As always, we review all the latest virus news below.  We also provide an update on the continued mystery of North Korean leader Kim Jong Un’s whereabouts.

COVID-19:  Official data show confirmed cases have risen to 3,060,152 worldwide, with 212,056 deaths and 905,662 recoveries.  In the United States, confirmed cases rose to 988,469, with 56,253 deaths and 111,583 recoveries.  Here is the chart of infections now being published by the Financial Times:

Virology

• A placebo-controlled study of the arthritis drug Kevzara was stopped early when it became clear that it wasn’t likely to help patients with a severe form of COVID-19.
  • Highlighting the importance of using placebo controls to avoid wrongly judging a drug as being effective, patients taking the placebo and those taking the drug both did better than expected, but those taking the placebo did best.
  • A separate placebo-controlled study of Kevzara on patients with an even more severe form of the disease is continuing.
  • Studies are also continuing on dozens of other drugs, but the fast-developing science and changing dynamics of the pandemic are posing challenges for scientists.
• The Trump administration said it is prepared to send all 50 states enough tests to screen at least 2% of their residents for COVID-19, asserting that is the minimum level needed to help control the pandemic.
• The CDC announced it will start serum antibody testing in parts of Georgia where community spread of the disease is accelerating.
• The State of New York announced just 337 new deaths from the virus yesterday, marking its lowest daily tally since March 31.

Real Economy

• New analysis shows more than 30 million workers in Europe’s five biggest economies have applied to participate in short-term leave plans because of the crisis.
  • That beats the 26 million or so U.S. workers who have applied for unemployment benefits in the crisis to date.
  • Designed to limit outright unemployment, the European plans provide funds to companies to cover part of participating workers’ wages on condition that they be kept officially on the payroll.
• Because of the huge contribution that tourism makes to the overall European economy, observers are becoming increasingly worried about the impact if the virus extends or prevents traveling during the summer holiday.
• Though investors are focused on plunging crude oil prices as the world starts running out of places to store it, there is also a developing shortage of places to store refined product.

Financial Markets

• As companies scramble to preserve cash as the pandemic saps revenue, data from S&P shows more companies have suspended or canceled their dividends so far this year than in the previous 10 years combined.

U.S. Policy Responses

• Expanding support to states remains politically contentious.  For example, President Trump said he was skeptical about providing any state funding in the next fiscal support bill.  Senate Majority leader McConnell will likely end up supporting an aid package, but with restrictions on how and where the money will be spent.
• The SBA yesterday reopened its electronic portal for Payroll Protection Program loan applications, known as E-Tran.  However, the overwhelmed system was plagued by instability, crashes, and long wait times, severely limiting the number of loans processed.
• New analysis shows roughly half of all U.S. workers stand to earn more in unemployment benefits than they did at their jobs before the coronavirus pandemic shut down the U.S. economy.
  • Adding the federal government’s emergency weekly payment of $600 to the average state payment of about $378 will give workers a total income of $978, compared with the median weekly wage of $957 in the first quarter.
  • Until the federal payment expires at the end of July, the high level of unemployment aid could make it harder to entice some workers back to their jobs, especially if they are skittish about being exposed to the virus.
• State governments from California to South Carolina continue to gradually ease lockdown restrictions.

International Policy Responses

• The European Commission has proposed a temporary easing of bank capital standards in order to boost lending.  If approved by the European Parliament and national governments, the relief aims to increase lending by as much as €450 billion this year.
• New Zealand and Australia are the latest major developed countries to start easing social distancing restrictions, with both nations reporting dramatic decreases in new infections over recent weeks.
• In the U.K., the government is expected to approve and announce a plan to ease its lockdown measures later this week.
• As China continues to lift its restrictions, heavy equipment makers are boosting prices to take advantage of a sharp rebound in construction and infrastructure investment.

United States:  The FOMC begins its latest policy meeting today.  The policymakers are widely expected to leave the interest-rate policy unchanged when they announce their decision tomorrow.  However, given the wide range of support programs the Fed has undertaken to help cushion the economy from the COVID-19 crisis, all eyes will be on any potential new moves that might be announced in the accompanying statement.

North Korea:  Paramount leader Kim Jong Un remains out of sight, leaving foreign governments unsure about whether he is still alive and in control of the country.  South Korean officials insist Kim is well, but South Korea and the U.S. scrambled six reconnaissance planes to spy on North Korea yesterday amid rumors he is dangerously ill.  The North Korean government uses a highly refined system of secrecy and diversion to keep the outside world from knowing what’s going on with its leader.

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