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

[Posted: 9:30 AM EDT]

After yesterday’s strong market action, investors are again in risk-on mode based on optimism that the coronavirus pandemic may be peaking.  We report on all the key developments relating to the virus as well as building pressure for a cut in oil production and Chinese use of the pandemic as cover for more mischief in the South China Sea.

COVID-19:  Official data show confirmed cases have risen to 1,362,936 worldwide, with 76,373 deaths and 292,188 recoveries.  In the United States, confirmed cases rose to 368,449, with 10,993 deaths and 19,919 recoveries (though the recovery data is lagging).  Here is the chart of infections now being published by the Financial Times:

Virology

• For the first time since January 20, there were no reported deaths from the coronavirus in China (though it’s important to remember the country is suspected of seriously underreporting its experience with the virus).  Of the 32 new infections reported in the country, all were in patients arriving from overseas.  As shown in the chart above, multiple key countries are now showing the “bend in the curve” that suggests the rate of infection is slowing, even if the peak in deaths is probably still in the future.
• President Trump continues to press for widespread use of the antimalarial drug hydroxychloroquine to prevent coronavirus infections.
  • That suggests Trump is taking the advice of international trade advisor Peter Navarro rather than top pandemic advisor Dr. Anthony Fauci, who has asserted that the small studies to date on the drug’s effectiveness are “at best, suggestive.”
  • India said it is now willing to start exporting hydroxychloroquine again, but with restrictions.  According to the foreign ministry, it will focus its shipments on neighboring countries that have few alternatives to Indian supplies and countries where the virus outbreaks are the worst.
• Scientists are starting to investigate whether people’s genetic variations explain why some of the infected have only slight symptoms, while others get much more sick and die.

Real Economy

• In a new poll, 73% of Americans said the pandemic has reduced their family’s income, with 24% saying their income has been cut “very significantly.”  In the poll, conducted in late March, 71% of respondents said the pandemic had affected their personal or business activities, including travel and investments.  In a similar poll conducted in February, only 13% said the same.  The new poll also showed 62% were avoiding public places, 48% were changing or cancelling travel plans, and 35% were putting off a large purchase.
• Facing a continued rise in Japanese cases, Prime Minister Abe has declared a state of emergency that will give governors in seven prefectures the power to request business closures to increase social distancing.
• Philippine President Rodrigo Duterte has approved the extension of a community quarantine across the island of Luzon until April 30.

Financial Markets

• Goldman Sachs (GS, 158.23) has published a new analysis showing companies in the S&P 500 Index will cut their stock repurchases by half this year compared with last year, weakening a key prop for stock prices as they shore up their balance sheets.
• In the debt markets, continued downgrades by the major ratings firms have tripled the total value of “fallen angel” bonds (corporate obligations that previously were considered investment grade) to more than $120 billion in just the last few weeks.

U.S. Fiscal Policy Response

• In a reminder of how the crisis is affecting government power over the economy, President Trump said 3M Company (MMM, 140.70) has succumbed to his pressure to import more than 166 million N95 respirators from its factories in Asia to supplement the 35 million per month that the company produces in its U.S. facilities.  The deal will require the company to divert much of its foreign mask production from its Asian customers to the U.S., though it will still be allowed to export some respirators to Canada and Latin America.

U.S. Monetary Policy Response

• Launching yet another new program, the Fed said it is working with the Treasury Department to create a facility offering term loans to banks and other lenders to finance their participation in the new Payroll Protection Program (PPP) being run through the Small Business Administration.  The financing, to be backed by the lenders’ PPP loans, aims to increase the amount of loans the banks can make.
  • The program is separate from the Fed’s new Main Street Lending Facility, which will help businesses that are too large to qualify for help from the SBA programs and too small to receive aid from lending facilities the Fed is creating for large, highly rated corporations.
  • Together with the half-dozen other new lending and debt-buying programs launched by the Fed to support the economy, the new PPP financing program marks an enormous socialization of U.S. debt.  In the short term, the programs offer an important cushion for private-sector obligations.  They’ve already helped stabilize debt markets, at least for favored sectors.  In the longer term, they could morph into the substitution of public-sector debt for private-sector debt, as during the Great Depression and World War II.  Therefore, the programs will likely have a significant impact on issues ranging from the federal debt burden to economic growth and income equality.

Foreign Fiscal Policy Response

• EU finance ministers are meeting later today to hammer out a financial aid program for Italy, Spain, and other bloc members that have been hard hit by the virus crisis.  EU Economy Commissioner Gentiloni is pleading with member states to forget their past fights and rally behind an ambitious plan, including joint debt to fund economic support and reconstruction.  Hard-hit members like Italy and Spain complain the proposals on the table are insufficient, while creditor countries in the north, such as Germany and the Netherlands, continue to resist mutual obligations.
• Along with the state-of-emergency declaration, Japanese Prime Minister Abe announced a new economic support package amounting to ¥39 trillion ($357 billion).

Political Fallout

• As Prime Minister Johnson continues to fight the virus in intensive care, Cabinet Office Minister Michael Gove today declined to say whether full executive authority has been given to Foreign Secretary Dominic Raab, who is the prime minister’s designated stand-in as first secretary of state.  That suggests the British political system is unsure about how much power Foreign Secretary Raab really has.
• Poland’s right-wing Law and Justice Party last night used the coronavirus crisis to ram through a series of major electoral system changes, just weeks ahead of the May 10 presidential vote.

Global Oil Market:  Ahead of Thursday’s virtual meeting between OPEC, Russia, and other major oil producers to address the Saudi-Russia price war, Saudi Arabia and its OPEC partners are warning that global storage capacity will soon be completely full and prices could fall further.  The warning aims to put pressure on Russia and other major producers, including the U.S. and Canada, to cut output on Saudi terms in order to support prices.

United States-China:  The U.S. State Department has issued a statement condemning China for using one of its coast guard ships to ram and sink a Vietnamese fishing boat in a disputed area of the South China Sea last week.  The incident suggests China is again trying to assert its sovereignty over the region while the world’s attention is diverted by the coronavirus pandemic.

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

[Posted: 9:30 AM EDT]

Happy Monday!  Global equities are rising on hopes that the pandemic is stabilizing.  We update the COVID-19 news.  Here are the details:

COVID-19:  The official number of global cases is 1,280,046, with 69,789 fatalities and 265,462 recoveries.  Here is the updated FT chart:

We have received requests for a chart weighted by population.  We found this one yesterday.

Note that Japan’s numbers are rising at a slow pace but showing no signs of “bending.”  We suspect the recent action to declare a limited state of emergency (see below) is due to worries that an exponential rise may be in the offing.

The virus news:

• PM Johnson, the first G-7 leader with a confirmed case of COVID-19, has been hospitalized. Foreign Secretary Raab is the designated successor if Johnson becomes incapacitated.  The PM’s office is suggesting his hospitalization is just for observation but there are reports that his condition has worsened.
• U.S. officials are warning that this will be a difficult week.
• Some European nations are preparing to ease movement restrictions. Italy is considering serological testing to determine who can return to normal life and who must remain in lockdown.  Essentially, the presence of antibodies will determine if one has been infected and is now immune.
• Ventilators have been a point of discussion with COVID-19; this report suggests that being put on the device is a grave situation that the majority don’t survive.
• Japan has declared a state of emergency for seven prefectures. The area includes Tokyo.  There has been a surge of new cases in Japan.
• A tiger at the Bronx Zoo has tested positive for COVID-19, an apparent case of humans infecting other mammals.
• There have been a series of cell tower fires in the U.K. after rumors that 5G causes COVID-19 spread.
• On a lighter note, a Finnish tradition appears to be catching on in the rest of the world.

The policy news:

• Our position has been that the COVID-19 recession would be historically deep in terms of magnitude but short in duration. That belief was based on the expectation that policymakers would move quickly to support the economy and virus suppression efforts would relax by autumn.  Like all our forecasts, they are always subject to re-evaluation.  We have three immediate concerns:
  • Although Congress moved with uncommon speed to pass a $2.0 trillion support package, passing is one thing…execution is another. On Friday, small businesses were able to apply for loans for the first time.  Reports suggest the program has not gone well.  First, the Treasury didn’t get rules to banks until late Thursday.  Second, banks put their own restrictions on the loans.  Borrowers went to banks to apply only to be turned away or faced with a myriad of rules.  Compare this mess with how Switzerland executed its program.  This stimulus will do little good if the process fails to deliver funding soon to small businesses.  We also note that large restaurant and hotel chains can tap this program, which probably means it will run out of capacity quickly.
  • While $2.0 trillion is a massive program, it probably isn’t enough. Here’s a way of thinking about it—nominal U.S. GDP is near $22.0 trillion.  That means the U.S. economy generates around $418 billion per week.  The stimulus will fund the U.S. economy for about five weeks.  Obviously, we haven’t lost the entire economy; some level of business is still being conducted.  At the same time, 80% of U.S. counties, representing 96% of GDP, are on lockdown.  If the economy remains stalled beyond five or six weeks, additional help will probably be necessary.  Congress needs to be working on this now, just in case.
  • That being said, we do give credit to the Fed for moving rapidly and, so far, effectively. We still think that at some point the central bank will need to dip into the junk bond market and support at least down to “B,” simply because too many large companies have fallen into the category.  Estimates now suggest the Fed’s balance sheet could end up at $9.0 trillion, well above its current $5.8 trillion, before things settle.
• Meanwhile, Germany continues to push back against a Eurobond, instead calling for more emergency lending. If this continues, the Eurozone will be in grave danger.
• The UN is warning that it is facing a budget crunch due to spending on COVID-19.

The economic news:

• One observation from Friday’s March employment report is that there was significant divergence between the payroll survey and the household survey with reference to employment.  As most of you are aware, the employment report consists of two different surveys, one gathered from employers and the other from households.  The employer survey is where the non-farm payrolls number is generated.  The household report is where the unemployment rate comes from.  The two numbers often diverge; the payroll report will capture those working at traditional businesses, while the household report is better at capturing sole proprietors and gig workers.  In March, payrolls fell 976k; employment from the household survey plunged 2.9 million.  The household survey is sobering, suggesting conditions are much worse than they look.

• Emerging market economies are reeling from COVID-19. Default risks are rising, reflected in recent dollar strength.
• Supply chains are payment chains in reverse. Goods and services flow one direction, money the other.  Supply chains work due to financing.  There are growing worries, again seen in recent dollar strength, that these supply chains are being threatened by funding issues.
• Texas is being especially hard hit from COVID-19.

• Shipping firms are facing an employee problem. Some sailors are stuck in port due to lockdowns.  This is leaving ship crews working extreme hours.  Simply put, those on ships are being stretched to the limit, while others can’t get to their vessels.
• Hoarding isn’t just for households. Countries are restricting food exports.

The market news:

• Oil prices plunged overnight on news that a spat between Russia and the Kingdom of Saudi Arabia (KSA) has delayed today’s scheduled meeting on output reduction. The meeting will be held on Thursday.  We have seen prices rally off the lows as the market is betting that a deal will be made at some point.  However, the fact that a “you started it; no, you started it” fight between adult leaders of Russia and the KSA has led to a delay is a clear indication that managing these egos will be a challenge.
• Meanwhile, President Trump has backed away from his threat to implement tariffs on oil. Although such ideas have been circulating for some time, it is important to note that a tariff might not be all that effective in propping up prices.  Assume the U.S. puts a $10 per barrel tariff on imported oil.  Foreign prices will likely fall in response, but perhaps even more importantly the dollar will soar.  The dollar strength will have unintended consequences for the global financial system.  If the government wants to support oil producers (after all, why should any government outside of OPEC want higher oil prices), a better tactic would be to do what we do for farmers.  Simply set a price for oil and pay oil companies the difference between the world price and the desired price.  Although this would require a massive “spend” of political capital, we could see it as part of a stimulus bill.
• So, will we get a deal or not? We suspect that a deal will be struck and will likely collapse in short order.  Both Russia and the KSA want a wide agreement with other producers to prevent the loss of market share.  However, any reading of cartel behavior shows that the larger the cartel, the less likely it is that it will avoid free riders.
• One interesting piece of evidence on how much oil demand has declined: air quality around the world is showing remarkable improvement.
• One fallout from the virus is that Chinese household borrowing is slowing rapidly, and bad debt is rising.

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

[Posted: 9:30 AM EDT]

Happy Friday!  It’s employment Friday, although this may be one of the most irrelevant reports ever.  Since the survey is conducted around the 10^th of the month, much of the jump in claims won’t be reflected in this report.  But, our quick take is that the weakness was profound as payrolls plunged 701k and the unemployment rate jumped to 4.4%; we have the details below.  We update the COVID-19 news.  Global stocks are under pressure, while oil makes a historic rally.  Here are the details:

COVID-19:  The official number of global cases is 1,030,628, with 54,137 fatalities and 218,771 recoveries.

The virus news:

• As the data above show, there are now over 1.0 million reported cases of the virus. We believe this is a deep undercount.  A new concern has emerged: the tests for the virus may be much less reliable than we thought and could be generating false negatives.  In one sense, if a person is sick and getting tested, a false negative probably won’t change their behavior.  They don’t feel well in the first place, which is why they wanted to be tested.  However, false negatives bring an undercount and will make the virus appear more deadly than it actually is.
• The real fix is a vaccine; although there is hope that one might emerge by autumn, more likely we will see one by H1 2021.
• NYC is looking increasingly grim. The city now has 45 mobile morgues in operation as the city’s death toll is now over 1,500.
• Critical drugs necessary to treat patients of COVID-19 are in short supply, exacerbating difficulties. Having a ventilator but lacking the drugs to sedate a user makes the device less effective.

The policy news:

• The special lending and cash distribution programs are starting to operate and the early read is not encouraging. The details of the small business loan program have not been fully determined.  Community banks complained about the interest rate on the loans, so the administration lifted it to 1% instead of 0.5%.  Meanwhile, distribution of virus checks may not be fully realized until September.  Passing the laws to stimulate the economy was a major win, but execution is the next step and, given the scale of the programs, it will not be seamless.  And, the administration has apparently eased regulations on paid leave, which could reduce its effectiveness.
• One of the problems in managing a crisis is that it is hard to determine how intertwined an area of the market is to the entire system. If Bush administration officials had realized how important Lehman debt was to the money market sector, we doubt they would have let the firm fail.  At the same time, there is always a worry that if you bail out everyone, you create moral hazard; in other words, policymakers reward bad behavior.
  • We are seeing a dramatic spike in credit downgrades, leading to a cascade of fallen angels.[1]

The chart shows that for the month ending March 20, $32 billion has left investment grade.  The past two weeks have been far worse.  A net $560 billion of corporate debt has been downgraded, with $97 billion now officially fallen angels.

• The Fed’s various support programs purposely exclude high yield. Bill Dudley, the former NY FRB president, recently argued that the Fed should not include such bonds on the basis of moral hazard.  We understand the sentiment but would argue that now is not the time to enforce market discipline because it is very difficult to know which debtor will trigger systemic problems and which won’t.
• We have been generally optimistic, all things considered, because of the aggressive policy response. Although we remain so, we are worried that the combination of the lack of execution and short-sighted reluctance to support all borrowers will trigger unanticipated negative outcomes.  To quote the recently departed Kenny Rogers, “…there will be time enough for countin’ when the dealin’s done.”
• Another area to watch is mortgages; defaults are almost certain to spike, and we doubt the nation would tolerate another response like we saw after the Great Financial Crisis.
• Members of the FOMC are pressing for more fiscal stimulus.

The economic news:

• As we continue to digest the incoming U.S. economic data and how it’s starting to reflect COVID-19, we think it’s important to emphasize that the March ISM Manufacturing Index released this week probably overstated the health of the factory sector.  The overall index fell to 49.1 in March, only modestly below the 50 level that indicates expansion, and not dramatically weaker than the readings of 50.1 in February and 50.9 in January. The figure for March was actually above every reading from August through December 2019.  The problem is that the overall figure is the average of five subindexes (new orders, production, employment, supplier deliveries, and inventories), and the subindex on supplier deliveries has been distorting the overall number for several months running.  That subindex measures how long it takes for manufacturers to get their supplies delivered once they’ve placed their orders, with the idea that delayed deliveries are a sign of high demand and strong factory activity.  When the subindex is higher, it means more manufacturers are experiencing delayed deliveries.  The problem is that the recent high numbers for the subindex are more a reflection of supply chain disruptions from last year’s trade war and this year’s virus shutdowns rather than high demand or strong manufacturing activity.  Excluding the distorted supplier delivery subindex from the calculation, the overall ISM Manufacturing Index for March would have been just 45.2, its lowest reading since May 2009.  That’s additional evidence that the economy has now slipped into a deep contraction.  Since the virus shutdowns are sure to keep the subindex on supplier deliveries high over at least the next couple of months, we’ll continue to focus on our adjusted measure of the ISM index to get a better sense of how the factory sector is faring.

• The chart above shows how the ISM Manufacturing Index, if computed excluding the subindex on supplier deliveries, is now at its lowest level since late in the Great Recession of 2008-2009.
• We are seeing a steady stream of reports of layoffs, buyouts, and furloughs. We are also seeing reports of wage cuts to maintain employment.

The market news:

• The key market news is oil. Prices leaped yesterday on reports that President Trump had engineered a meeting of OPEC and Russia with tentative promises of production cuts.  Prices are higher this morning on reports that OPEC+ will hold a virtual meeting on Monday to discuss output reductions.
• It appears the KSA is trying to get as broad of a group as possible to agree to reductions. This makes sense.  The wider the agreement, the better the chances of success…with one caveat.  Cartels always suffer from free riders.  Although all participants benefit from output constraints, an individual member has a great incentive to cheat.  We do expect some sort of deal on Monday, with promises of 10.0 mbpd of production cuts.  We do not expect cuts of this magnitude to be achieved.  At best, 3.0 to 5.0 mbpd is about all that can be expected, and we seriously doubt Russia will actually cut anything.  Failing to make any sort of deal at this meeting would be a disaster but it would be naïve to expect that compliance will be anywhere near what is promised.  This doesn’t mean a deal won’t have an impact; if the KSA doesn’t raise output to 12.0 mbpd, we probably avoid single-digit oil prices.  But, even with a deal, demand destruction is still a reality and prices in the $20s will be with us for a while.
• Add this industry to others that have found fortune in the era of COVID-19.

Foreign policy:

• Russia has extended its stay-at-home order, while Brazil continues to shun such measures.
• It appears the U.S. and China have engineered a truce of sorts in their recent rhetoric battle.
• The IMF is poised to support the EM markets with a $1.0 trillion loan package.

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[1] A fallen angel is an investment-grade bond that has been downgraded to junk status and can no longer be held in an investment-grade bond portfolio.

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

[Posted: 9:30 AM EDT]

Good morning!  After a drubbing yesterday, we are seeing a rebound in global markets this morning.  One of the factors helping sentiment is a 10% jump in crude oil prices.  The White House is continuing to talk to Russia and the KSA, and the president is meeting with energy executives.  However, Moscow has indicated it won’t change its policy anytime soon.  China announced it is buying oil for its strategic reserves.  Linked here is our updated Weekly Energy Update.  We update all the COVID-19 news, including some charts on what is happening in the economy.  Here are the details:

COVID-19:  The official number of global cases is 951,901 with 48,284 fatalities and 202,342 recoveries.  The FT did not issue an infection chart; we will try to find one for tomorrow.

The virus news:

• One of the characteristics of COVID-19 is a high number of asymptomatic cases. Sampling in Iceland suggests 50% of those who tested positive had no symptoms.  It may turn out that the disease is much more widespread than we think and we may achieve herd immunity quicker.  However, until testing becomes widespread and, perhaps even more importantly, serological testing is developed to determine who has immunity, nations are stuck with implementing difficult quarantine measures.  At the same time, those who are asymptomatic, during their infectious phase, become innocent carriers of the disease.
• Viruses mutate; China is warning that some patients seem to have a form that has very mild symptoms but shed the virus for long periods of time. If this mutation is real and spreads, the only hope is a vaccine.
• U.S. intelligence agencies are claiming that China concealed the extent of the outbreak; the fact that the U.S. has more cases with one-third of the population supports this theory.
• Latin America is becoming the next hotspot for infections. Brazil has been adamant about not implementing social distancing measures.  Although this policy runs counter to how most of the rest of the world is dealing with the crisis, poor nations with high levels of informal workers may not have much choice.  There are really two methods of dealing with a pandemic—one is to try to “flatten the curve” via social distancing measures so that the health care system can cope with the influx of infections.  This approach reduces infections but tends to extend the impact of the pandemic because herd immunity is slower to develop.  The other method is to simply accept that mortality will be really high but the impact will be short.  In developed nation democracies, the political impact of doing nothing is probably not feasible.  But, in the emerging world, allowing the disease to run its course may be a possible option.  Brazil appears to be a test case, although Mexico is operating similar policies.
• Italy is probably undercounting its death toll.
• As we learn more about the impact of the virus, it appears to have greater impact on men.
• Wimbledon has been canceled.
• Most U.S. states have now issued stay-at-home orders.
• Although China has been getting back to work, we are hearing reports of renewed quarantine efforts as new infections appear.

The policy news:

• While the White House is discussing an infrastructure package and House Democrats are preparing a fourth stimulus package, it doesn’t appear the Senate is ready to do anything further. We suspect another fiscal injection will be required.
• As we noted in the last WGR (which will be wrapped up in next week’s report), the EU is under tremendous strain. Italy desperately needs Germany to act as a benevolent regional hegemon.  Meanwhile, France is making aggressive efforts to maintain employment by giving aid to companies who are, in turn, required to keep workers on the payroll.
• The Fed continues to aggressively address liquidity issues; its last action is to ease reserve calculations by excluding Treasuries up to a year and central bank deposits when establishing leverage ratios. As we noted yesterday, the Fed is also showing itself as the world’s central bank.  This role was generally unspoken before; now it is explicit.

The economic news:

• Initial claims jumped to 6.65 million, a new record. We cover the data below.  There has been a surge in layoffs reported recently and the data confirm it.
• We are seeing a surge in worker revolt. Production workers, delivery drivers, health care workers, warehouse employees, and grocery clerks are starting to push back against what they see are unsafe working conditions.  They have high leverage at this moment.

The market news:

• China is expecting a surge of bad loans due to the COVID-19 downturn; in response, it is setting up a distressed debt market to manage this problem. The numbers are staggering, perhaps $1.5 trillion.
• Increasing oil shipments and storage is boosting tanker rates.

Foreign policy:

• Mask diplomacy is becoming a big deal. China is sending masks around the world and using this action to project soft power.  Russia is engaging in similar activities. Meanwhile, Congress is pushing to collapse medical supply chains away from China.
• The machinery of U.S. bureaucracy grinds slowly; as U.S. states and cities scramble for medical protective gear, the U.S. is sending such goods overseas. This is simply a case of the bureaucracy acting as it normally does and the executive branch not keeping up.  It does appear the White House is getting in front of these shipments and halting them.

Iran:  There are reports that Iran is planning attacks on U.S. military bases in Iraq.  The U.S. is warning Tehran against such actions.

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

[Posted: 9:30 AM EDT]

Happy April Fool’s Day!  But please don’t expect any foolishness here!  As always, we soberly review the latest U.S. projections on the course of the COVID-19 pandemic, which have rattled the markets so far this morning.  We also note the Fed has come out of the closet as the world’s central bank (see detailed discussion below), while Europe continues to struggle with a way to support its economy.

COVID-19:  Official data show confirmed cases have risen to 874,081 worldwide, with 43,537 deaths and 185,194 recoveries.  In the United States, confirmed cases rose to 189,633, with 4,081 deaths and 7,136 recoveries (though the recovery data is lagging).  Here is the main chart of infections now being published by the Financial Times:

• Virology.  In its daily news conference yesterday, the Trump administration laid out the projections that prompted the president to back down from his goal to end the nation’s lockdowns as early as April 12.  If strict social distancing is maintained, the projections call for a total U.S. death toll of 100,000 to 240,000, versus as many as 2.2 million if social distancing is abandoned.  The projected number of serious cases is many times greater, so the key issue will be how badly local health systems are overwhelmed.  The statements appear to be a major factor in pushing U.S. equities sharply lower so far today.

• • Highlighting the political danger from mismanaging the pressure on a health system, British Prime Minister Johnson is being criticized for insufficiently testing NHS doctors and other workers in self-quarantine. The few tests done to date indicate only some are actually infected, suggesting they’ve been pulled from the front lines for no good reason.
  • Several European countries have adopted the Asian strategy of urging everyone to wear masks in public, based on growing evidence that people experiencing no symptoms can spread the disease more widely than previously thought. In the U.S., CDC Director Dr. Robert Redfield said his agency is reviewing its recommendation that healthy people who aren’t hospital workers should refrain from using masks.
  • About 70 crew members on the U.S.S. Theodore Roosevelt have now tested positive for COVID-19, prompting the aircraft carrier’s commander to order the remaining 5,000 or so sailors into quarantine in vacant hotels on Guam.
  • Now that China has gotten egg on its face from the faulty masks and test kits some Chinese firms have sold abroad, the government has banned firms from exporting medical supplies if they’re not licensed to sell them domestically.

• Real Economy.  IHS Markit said its final March PMI for the Eurozone manufacturing sector came in at a seasonally adjusted 44.5, modestly lower than the flash estimate of 44.8 and the final February reading of 49.2 (see data tables below).  In the U.K., the IHS Markit/CIPS manufacturing PMI fell to a three-month low of 47.8 in March versus 51.7 in February.  As with all major PMIs, readings under 50 point to falling activity.
• Financial System.  In a welcome sign that the junk bond market may be stabilizing after seizing up in early March, junk bond prices have improved a bit this week.  At least two major firms have also been able to float riskier debt.  Below-investment grade obligations are still trading at elevated spreads over U.S. Treasuries, but the improved market dynamics suggest that aggressive fiscal and monetary policy may have turned the tide.  All the same:

• • Reports note a massive shriveling in the market for unconventional mortgages, which aren’t backed by the government and therefore aren’t being bought by the Fed. Multiple firms have stopped offering the mortgages, denying financing for many irregular or self-employed people who find it difficult to qualify for a conventional mortgage.
  • Under pressure from the Bank of England, most of the U.K.’s major banks have agreed to suspend their dividends and stock buybacks in order to preserve capital during the crisis. The regulators also expect them to refrain from paying bonuses.  As might be expected, the news has driven British bank shares sharply lower so far today.

• U.S. Fiscal Policy Response.  President Trump has called for $2 trillion in new spending on infrastructure to help rekindle economic growth after the coronavirus crisis passes.  The new spending, which would follow the three major economic support bills already passed into law, would be paid for by borrowing at today’s super low interest rates.  House Speaker Pelosi has also been calling for a “Phase 4” economic bill that includes infrastructure investment, but Senate Majority Leader McConnell hasn’t been supportive.  Separately:

• • Major private-equity funds are lobbying hard for their portfolio companies to be deemed eligible for the $350 billion in small-business rescue loans included in last month’s economic support package.
  • Flight attendant unions are urging Treasury Secretary Mnuchin not to make airline rescue grants contingent on transferring an equity stake to the government, as allowed in the Phase 3 package. The flight attendants fear the stake provision amounts to a “poison pill” that would discourage airline executives from accepting the money and result in mass layoffs.

• U.S. Monetary Policy Response.  Launching yet another new rescue program, the Fed said it will temporarily allow approximately 170 foreign central banks and international monetary authorities to borrow dollars by pledging the U.S. Treasuries they hold at the New York FRB.  The new “FIMA Repo Facility” will supplement the currency swap facilities already in place with more than a dozen major central banks.  Amid the global scramble for dollars touched off by the coronavirus crisis, the Fed said a key aim of the facility is to give foreign central banks access to the dollars they need without forcing them into disruptive sales of their Treasury holdings.  The facility will likely be considered especially helpful for smaller emerging markets, though China was probably the key country under consideration.  In a broader sense, the facility may be one of the most radical, risky, and controversial of the Fed’s many moves to counter the crisis as it amounts to a full, unabashed embrace of being the world’s central bank or the global lender of last resort.  That role is clearly at odds with the broader U.S. trend toward deglobalization, and it is out of sync with the administration’s policy of withdrawing from the traditional U.S. role as global hegemon.
• Foreign Fiscal Policy Response.  The EU continues to struggle to come up with fiscal programs that can cushion the blow from the crisis without generating pushback from the northern creditor members.

• • European Commission President Ursula von der Leyen formally proposed the creation of a new EU unemployment reinsurance program to help national governments finance short-time wage subsidies, which are designed to discourage firms from laying off workers when orders dry up.
  • To help Europe recover from the coronavirus, French Finance Minister Le Maire proposed an EU-wide facility funded by common EU debt, but the program would be limited to five or 10 years and focused strictly on economic recovery to head off German and Dutch objections to mutualizing obligations.

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