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

[Posted: 9:30 AM EST]

Happy Friday as we wrap up another long week.  After three days of vigorous equity rallies, we are taking a breather this morning.  We update all the COVID-19 news.  Venezuela’s president is indicted.  Israel has a new unity government.  Here are the details:

COVID-19:  The official number of global cases is 542,788 with 24,361 fatalities and 124,351 recoveries.  There is growing skepticism over China’s numbers; this is especially pertinent given media reports that the U.S. now has more cases than China.  Here is the usual FT chart:

There is a recognizable “bend” developing in the U.S. infection rate.  That is potentially good news.

The virus news:

• Boris Johnson has tested positive for the virus, the first G-7 leader to do so. So far, his symptoms have been mild, and he is continuing to work in isolation.
• There is a growing debate among epidemiologist modelers about how COVID-19 is spreading. The conventional position is that the virus is potentially dangerous because it is novel and there is no imbedded immunity in the community.  This position prescribes widespread social distancing.  However, other modelers suggest there is a significant number of cases that were asymptomatic so the level of immunity in the community may be much higher than we think.  If the latter is true, then the need for social distancing is less critical.  What we see is that the disease is overwhelming the medical capacity in several cities worldwide.  This observation bolsters the conventional position.  However, the opposing position may be the one that leads us out.  Sweden has opted for very modest restrictions; it is gambling that (a) most cases are mild and thus the costs of infection are bearable, and (b) its medical system can handle the influx of cases if it is wrong.  Sweden, Mexico and Brazil are offering natural experiments on the policies of lockdowns and social distancing.
• As we noted yesterday, Russia is postponing a referendum on extending Putin’s time in office. It also announced social distancing measures and is going to tax bank deposits to pay for them.
• Earlier this week, the U.S. Navy announced that 23 sailors aboard the U.S.S. Theodore Roosevelt tested positive for COVID-19. This vessel has been ordered to port so the remaining sailors can be tested.
• China has closed its borders to foreign travelers in an attempt to prevent a rebound in cases.

The policy news:

• The House is expected to vote on the stimulus bill, which passed the Senate yesterday. Although we expect it to pass, it will not be without drama.  The leadership is trying to ensure it can get enough members back in Washington to form a quorum.  House leadership was hoping to pass the measure with a voice vote, but it only takes one member to object which would force a physical vote; hence the rush to Washington.
• In the bill, airlines will give equity stakes to the government in return for support. Cruise lines, due to foreign ownership, won’t get aid.
• Although getting this bill passed is a significant achievement, the reality is that it only partially replaces the losses already endured. Further measures are likely, but getting them passed will become increasingly difficult.
• The ECB has started new bond purchases. We are already seeing yield spreads narrow between countries.

• The next “big thing” will be countries figuring out how to restart after social distancing restrictions are relaxed. The U.S. is considering a county-by-county  Europe is working on similar policies.  It seems to us that the key to this approach is wider testing for both current infections and immunity.  Without those elements, restarting the economy is a shot in the dark; start too soon and you risk a jump in infections, but wait too long and one suffers unnecessary pain.
• The Fed’s balance sheet has exceeded $5.0 trillion for the first time on record. The Treasury is trying to give support to mortgages on fears that homeowners will slow or stop payments.
• The EU continues to struggle with policy surrounding the virus. Border blockages are playing havoc on internal trade.  The blocks are also affecting migrant farmworkers.  Our upcoming Weekly Geopolitical Report is a two-part series on this issue.
• The U.S. is planning to approve delays to tariff payments due to the virus.

The economic news:

• The jump in initial claims, reported yesterday, was historic. And, it is quite possible that the claims data was understated.  We modeled the unemployment rate using the four-week average of claims and continuing claims.  We will likely see a massive rise in unemployment.

The March employment data will be very sensitive to the survey week, which is usually the second week of the month.  We may not get the full impact of the virus until the April data is released, which comes out in early May.

• Although we continue to lack data on the level of damage to the economy, there are high-frequency reports from new sources that suggest serious weakness. Here is one on consumer confidence.  Polling suggests widespread pain.
• With reference to our recent WGR, the Swiss have been managing their shutdown with relative ease because of government strategic stockpiles of foodstuffs.
• Companies are reporting a jump in sales of tops and shirts, but without the corresponding pants and skirts—perhaps a reflection of increased videoconferencing.

The market news:

• Despite the Fed’s efforts, short-dated T-bill yields have turned negative, a sign that liquidity issues persist.
• Insurers are scrambling to deal with expectations of incoming claims due to COVID-19.
• Ecuador may be on the brink of default.
• Casinos in Macau have reopened; crowds are thin.
• The NHL has canceled its season.
• Oil markets remain under pressure. China has been reportedly building inventory, taking advantage of low prices.  The key issue is storage; once available storage is tapped, oil prices would be vulnerable to a catastrophic decline.  Iran is facing additional pressure; the S. has limited Iraq’s waiver to buy Iranian oil to 30 days.  If the U.S. finally ends the waivers, Iran will have one less nation to buy its crude.  The KSA is reportedly struggling to find buyers for its crude oil.

Foreign policy:

• Presidents Trump and Xi held a call in a bid to ease rising tensions between the U.S. and China.

Israel:  Although Netanyahu and Gantz vowed not to form a unity government, under the stress of the virus, they have worked out a deal.

Venezuela:  The U.S. has indicted Venezuelan President Maduro for narcotics trafficking and has offered a $15 million reward for information leading to his capture and conviction.

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

[Posted: 9:30 AM EST]

The long-awaited initial claims data is out; we offer details below, but claims rose a record 3.28 mm.  After a two-day respite, equities have turned lower.  As we note below, the Senate has passed a $2.0 trillion spending package.  As usual, we update the COVID-19 data.  The Weekly Energy Update is available.  Here are the details:

COVID-19:  The official number of global cases is 487,648 with 22,030 fatalities and 117,749 recoveries.  Although we report on this data each day, readers should note that these numbers are, at best, a mere snapshot.  The number of actual cases is probably far higher.  Here is the usual FT chart:

The virus news:

• Spain has now suffered more fatalities than China. Nursing homes in Spain have suffered significant numbers of deaths.  The EU is struggling to acquire COVID-19 drugs due to the lack of airfreight capacity.
• There are some interesting developments on the testing front. The U.K. looks poised to roll out a home test for the virus.  That could dramatically increase data on the disease and help policymakers fine-tune shutdown orders.  In the U.S., a simpler test is replacing the current one.  The current test requires a special swab that is administered deep within the nasal cavity, and the associated gagging can expose health care workers administering the test.  The new test eliminates that risk.  The U.K. and Senegal are doing a trial on a 10-minute COVID-19 test.  Perhaps even more important, the U.K. is running a trial on a test that would determine if a person has immunity to COVID-19; this would be a huge breakthrough because we could tell who is no longer at risk to the disease.  These individuals could return to everyday life.  Meanwhile, the lack of testing kits in Europe is preventing medical personnel from being tested.  The search for drugs that would help victims recover from COVID-19 continues apace.
• Medical capacity limits are being hit in some cities in the U.S. As ERs fill up, doctors are being forced into triage decisions.
• Epidemiologists are watching Wuhan to see if there is a rise in infections after restrictions are lifted.
• Brazil and Mexico continue to avoid aggressive containment measures, perhaps creating a natural experiment to see how the virus spreads and how lethal it is without constraints.
• There is a patron saint for epidemics, St. Corona.

The policy news:

• The $2.0 trillion stimulus bill passed the Senate last night. The deal has five major components:
  • Income support: There will be direct payments to households of $1,200 per adult with additional payments for dependent children. The payments phase out at $75k for individuals or $150k per household.
  • Business bailouts: The bill sets aside $500 billion for loans to businesses, with $25 billion for airlines. Buybacks would be curbed for aided companies.
  • Unemployment insurance: This existing benefit is increased by $600 per week for four months. Gig economy workers are included.
  • Hospitals: This sector gets $150 billion.
  • Small businesses: The bill gives $367 billion of loans and grants to firms with less than 500 employees.
• The bill now moves to the House.
• Although this bill is a massive spending package, it may not be enough. Expect lawmakers to do more in the coming weeks.  This deal would not be a cure, but a stopgap; after all, economists are expecting a massive drop in Q2 GDP and this amount may not fill that one-quarter gap.
• Europe is opening the fiscal spigots as well:
  • Germany has released the “debt brake” and is deploying deficit spending.
  • France is promising massive medical spending.
  • Even little Malta is boosting fiscal spending.
  • The U.K. and the Netherlands are abandoning fiscal austerity.
  • Nine Eurozone nations have issued a call for “coronabonds,” which would be a common debt instrument for the currency bloc. If this single bond emerges, it would increase the viability of the Eurozone.
• At the same time, European leaders are worried that the crisis could lead to foreign investors buying vulnerable companies.

The economic news:

• Estimates for U.S. Q2 GDP are looking increasingly dire. Forecasts for China’s GDP for 2020 are falling as well.
• China has been ramping up its economy after its shutdown due to quarantine. Sadly, companies are finding that exports are falling as the rest of the world slows.
• The USPS may be on the brink of failure due to the virus.

The market news:

• Bonds have been a mixed bag. Investment grade is rebounding as the Fed measures improve liquidity.  However, high yield, which lacks similar support, remains strained.  Weekly flows data show a massive “bond dump.”  This chart shows the weekly flows into bond mutual funds and ETFs, showing the raw data with a 12-week moving average.  The chart speaks for itself.

• Corporate insiders are buying stock. Meanwhile, companies are hoarding cash.  Gold bars are in short supply.
• One measure of economic stress is the dollar; when financial stress rises, the dollar tends to rally. At some point, we do expect the U.S. will take steps to deliberately weaken the dollar.

Foreign policy:

• The G-7 was unable to issue a joint statement because the U.S. insisted that COVID-19, the official name for the virus issued by the WHO, be called the Wuhan virus. The U.S. is also pushing the U.N. to single out China as the source of the virus.  Although this may appear petty on its face, the naming fight reflects the U.S. reaction to an aggressive propaganda campaign by Beijing over the virus.  China has allowed rumors to circulate that COVID-19 originated from a U.S. bioweapons lab, or that it may have been in Italy before it was in China.  Beijing has also made numerous high-profile donations of medical equipment, designed to raise its profile.  All of this has raised tensions between the U.S. and China to high levels.
• Russia has announced it would delay a referendum on extending Putin’s presidency due to the virus.

Odds and ends:  Turkey has indicted 20 Saudis in connection with the murder of Jamal Khashoggi.  There is growing dissention within the right-wing populist AfD in Germany.

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

[Posted: 9:30 AM EST]

For the first time in ages, it actually feels right to say, “Happy Wednesday,” given the historic surge in U.S. stocks yesterday (the Dow’s rise of more than 11% was its best daily gain since 1933).  Just as important, Republicans and Democrats in the Senate early this morning reached a deal on a $2 trillion economic support package aimed at mollifying the effects of the COVID-19 pandemic (see below).  As always, we review all major news related to the pandemic below.

COVID-19:  Official data show confirmed cases have risen to 436,159 worldwide, with 19,648 deaths and 111,847 recoveries.  In the United States, confirmed cases rose to 55,238, with 802 deaths and 354 recoveries (though the recovery data is lagging badly).  Here is the latest chart of infections from the Financial Times:

The rate of infections continues to grow exponentially as does the economic disruption from containment measures.  Spain has now become a key center of infections, with hundreds dying daily.  In the U.K., Prince Charles has tested positive for the virus; officials refused to say whether Queen Elizabeth has been tested since she last visited with the prince on March 12.  There are increasing signs that Russia is systematically underreporting its cases.  Fortunately, however, there are welcome signs of fiscal and monetary support being put into place.

• Real Economy.  As we’ve noted, a key risk is that infections spreading widely throughout the general population will lead to legions of sick elderly and other compromised individuals, overwhelming the nation’s hospitals and ICU wards.  That sets up a potential conflict between President Trump, who wants to end most lockdowns in the next couple of weeks, and state and local public health officials who want to control demands on their health systems at all costs.

• • Trump administration officials on Tuesday urged anyone leaving the New York metro area to self-isolate for 14 days to avoid spreading the virus to other parts of the country.
  • The U.S. Navy said several sailors on the U.S.S. Theodore Roosevelt tested positive for COVID-19 after the aircraft carrier’s recent port visit in Vietnam. Those sailors have been airlifted from the ship, while others are quarantined on board.  The incident highlights the risk that widespread infections could potentially compromise military readiness.
  • The global airline industry group IATA said total industry revenues this year will fall by $250 billion, or 40%, because of the pandemic.
  • In India, the government has ordered a lockdown of the entire country for the next 21 days, but the move may be backfiring as migrant workers who are potentially infected rush to return to their rural villages.
  • More positive news continues to come out of China, where a poll of 119 firms conducted in mid-March by the American Chamber of Commerce in China showed 22% of respondents said they have already resumed normal business operations. Another 13% expect a return to normal business by the end of this month, and 23% more by the end of April.  However, canceled orders from the Western retailers threaten to derail the ramp up in operations.

• Financial System.  With millions of Americans losing their jobs and suddenly finding it difficult to pay their mortgages, mortgage REITs continue to buckle under the strain.  At least four significant mortgage REITs have now said they can’t make margin calls as the value of their assets declines.  Since the Fed has only moved to buy obligations guaranteed by Fannie Mae and Freddie Mac, firms specializing in buying non-agency backed paper have been especially hurt.
• U.S. Fiscal Policy Response.  Key provisions of the Senate’s draft economic support package, which Majority Leader McConnell aims to pass later on Wednesday, remain under wraps at this writing but reportedly include:

• • A $500 billion fund to provide low-interest loans to large businesses and state and local governments, some of which will backstop Fed loans; the fund will be overseen by an inspector general and five-member congressional panel
    • Some $50 billion will be channeled specifically to the passenger airline industry
    • Airlines are banned from buying back stock or paying CEO bonuses while receiving funds and for one year after
  • Some $367 billion in low-interest loans to small businesses
  • Some $150 billion in additional resources for healthcare providers
  • Increased unemployment benefits of $600 per week for workers who lose their job, along with four extra months of benefits beyond the normal 26 weeks; jobless benefits would be extended to nontraditional employees like gig workers and freelancers
  • Checks in the amounts of $1,200 per adult and $500 per child paid directly to many U.S. citizens, with reduced amounts for those with higher incomes
  • Bans on any funds being used to support businesses owned by President Trump, Vice President Pence, members of Congress or other high government officials

• Foreign Fiscal Policy Response.  After a meeting of Eurozone finance ministers yesterday, Eurogroup President Centeno said there was broad support for using the bloc’s €500 billion sovereign bailout fund to combat the economic effects of the pandemic.
• Monetary Policy Response.  Moving fast to implement its new support programs for commercial loans, the Fed directed top money manager BlackRock (BLK, 371.70) to buy agency commercial mortgage-backed securities secured by multi-family home mortgages on behalf of the New York Federal Reserve.  The Fed also tapped BlackRock to manage the new Fed-backed facilities buying new and seasoned investment-grade bonds from U.S. companies.  Separately, the People’s Bank of China is consulting with Chinese banks on a possible cut in deposit rates, with the aim of boosting institutions’ profitability again after previously ordering them to cut lending rates and ease credit standards.

Odds and ends:  Some Russian oil firms are reportedly pushing back against President Putin‘s effort to boost production in his market share war with Saudi Arabia.

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

[Posted: 9:30 AM EST]

As Tuesday dawns and financial markets surge, it’s important to remember that true market stabilization amidst the pandemic would probably require three things: 1) full support for the economy and financial markets by the Federal Reserve and other major central banks; 2) a credible fiscal support package from the U.S. Congress to cushion the economic impact; and 3) a slowdown in the rate of infections that would take pressure off national health systems.  Investors today are encouraged by yesterday’s progress on the first factor after digesting it overnight, but there is still work to do on the second and the third, as discussed below.

COVID-19:  Official data show confirmed cases have risen to 392,331 worldwide, with 17,156 deaths and 102,972 recoveries.  In the United States, confirmed cases rose to 46,450, with 593 deaths and 17 recoveries.  According to a new IPSOS poll, just 1% of Americans say they’ve been able to get tested for the virus, but 5% say they know someone who tested positive.  Here is the latest chart of fatalities from the Financial Times:

The key takeaway from the chart is that the rate of infections continues to grow exponentially, with hospitalizations and deaths rising in tandem.  Spain had more than 500 deaths from the virus in the last day.  In Belgium, new hospitalizations moderated a bit, but the number of victims going into intensive care surged.

• Real Economy.  As discussed in greater detail below, IHS Markit said its “flash” composite PMI for the Eurozone plunged to a record low of 31.4 in March from 51.6 in February.  According to IHS Markit, the figures are “indicative of an 8% annualized decline in Eurozone GDP, and it is unlikely that the index has hit rock bottom yet.”

• • German Finance Minister Sholz said the pandemic will reduce German GDP by 5% this year.
  • British Prime Minister Johnson finally succumbed to pressure and announced a stay-at-home order for all of the U.K., arguing, in part, that the move was necessary to keep the National Health System from being overwhelmed. Officially, the lockdown is for three weeks, but Johnson aides have admitted privately that it could last until May or even beyond.
  • Japanese Prime Minister Abe succumbed to pressure to postpone the Tokyo Summer Olympics until 2021 at the latest.
  • Major U.S. airlines are drafting plans for a potential voluntary shutdown of virtually all passenger flights across the U.S.  Government agencies are considering ordering such a shutdown as COVID-19 cases make it harder and harder to staff the nation’s air-traffic control system.
  • In contrast with the job losses in travel, tourism, and small businesses, major retailers facing a surge in demand for food and household products and have announced plans to hire at least 500,000 new workers in the coming weeks.
  • Highlighting the improved situation in China, authorities said they will soon relax travel restrictions into and out of the hard-hit Hubei province. However, there is some concern that the move could be premature, especially as China and other Asian countries report a surge in imported infections that could lead to new waves of the epidemic.

• Financial System.  Real estate investment trusts that specialize in buying mortgage-backed securities are playing a prominent role in the current market turmoil, dumping their holdings in response to margin calls by their banks.  Expectations are that the financial system will see a surge in missed mortgage payments as more people lose their jobs.  Separately, major credit-rating firms have issued a wave of downgrades for corporate and government bonds, eliminating some triple-A designations and cutting many below investment grade.  In addition, reports now say powerhouses Goldman Sachs (GS, 134.97) and Bank of New York Mellon (BK, 27.49) both had to put money into their money market funds to keep from “breaking the buck,” which we see as the modern-day equivalent of a bank run.
• Fiscal Policy Response.  For the second straight day, Senate Republicans and Democrats couldn’t agree on the Phase III economic support package.  Showing they’ve learned the lessons of the corporate bailouts in 2008, the Democrats continue to insist that the support be weighted toward assistance for workers rather than working capital for companies.  Even though the failure to reach an agreement sent markets lower, it’s encouraging that all participants continue to express optimism that a deal will soon be made.  Separately:

• • EU finance ministers today formally approved a suspension of the Eurozone’s deficit and debt limits in order to allow countries full scope to boost spending to combat the epidemic.
  • A dozen countries in the Middle East, North Africa and central Asia have already approached the IMF for financial assistance to help limit the human and financial cost of the coronavirus.

• Monetary Policy Response.  Although the massive new asset purchases announced by the Fed yesterday weren’t enough to offset the disappointment over the failed fiscal support bill, we think they could end up being seen as a turning point in the crisis.  In general, the Fed is now saying it will do whatever it takes to support the economy and financial markets in the midst of the crisis.  Indeed, the program has appeared to have some modest success in the debt, precious metals and currency markets.  Now that more details are available, we think the key elements in the program, which will be backstopped by the fiscal program from Congress, are as follows:

• • To ensure sufficient liquidity in the financial system, the Fed will now buy U.S. Treasuries and mortgage-backed securities without limit;
  • To support the multi-family housing sector, the Fed will now begin purchasing commercial mortgage-backed securities issued by government-supported entities;
  • To support the consumer and business lending markets, the Fed will now relaunch the Term Asset-Backed Securities Loan Facility (TALF) of 2008, under which it will lend money to investors to buy securities backed by credit-card loans and other consumer debt;
  • To support the market for new, highly rated corporate debt, the Fed will wade into commercial banking by offering corporations bridge loans of up to four years, with limits on dividends and stock buybacks for firms that defer interest payments on their loans;
  • To unblock the market for existing corporate debt, the Fed will now purchase bonds already issued by highly rated companies and eligible exchange-traded funds;
  • To support the markets for municipal bonds, the Fed will expand last week’s commercial paper facility to purchase high-quality, short-term obligations of state and local governments;
  • To further support municipal obligations, the Fed will expand last week’s money market facility to purchase high-quality, ultrashort-term obligations of state and local governments.

Odds and ends:  After failing to convince Afghanistan’s rival presidents to form a national unity government, Secretary of State Pompeo said the U.S. will slash $1 billion from its aid budget for the country.  Secretary of Defense Esper says the U.S. military has conducted a raid in Honduras to rescue a U.S. citizen facing an undisclosed danger.

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