Daily Comment (April 16, 2020)

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

[Posted: 9:30 AM EDT]

Good morning!  Equities are rebounding this morning.  We update the COVID-19 news and initial claims.  The Weekly Energy Update is available.  Here are the details:

COVID-19:  The number of reported cases is 2,076,015 with 138,000 deaths and 522,881 recoveries.  Here is the FT chart:

There is a clear bend in the U.S. curve, which is good news.

The virus news:

The policy news:

  • One of the challenges for the Fed from its policy of expanding the balance sheet is what assets are included. In a sense, what gets included is a political decision.  For example, when the Fed decided to start buying some levels of high yield, where does the bank draw the line?  In other words, who gets excluded and why?
    • The Fed has expanded its purchases of muni paper but is limiting its purchases to large cities and states. Which, of course, is leading smaller government entities to complain.  We suspect the Fed is expecting states to come to the aid of smaller cities.
    • We also suspect the Fed’s reason for this type of support was to avoid systemic risk in the muni market. However, avoiding systemic risk may not mean that all participants are saved.  Given the political nature of this decision, we would not be shocked to see the Fed expand to buy a broader swath in this market.
  • There are reports that lenders can seize stimulus checks to address delinquent debt. If the practice becomes widespread, the negative public relations from such actions will be grim.
  • The small business lending program either has, or nearly has, exhausted its funding. Additional funding is being held up due to partisan divisions.
  • The stimulus checks are starting to hit household accounts. Early reports suggest the money is mostly going to food.
  • Reports of rent relief requests, even from large tenants, are rising.

The economic news:

  • Related to the muni comments above and yesterday’s retail sales data, cities and states are reeling from the loss of revenue. Many states and municipalities rely on sales taxes for the bulk of their revenue and these flows are declining as consumption falls or goes online.
  • Even in the midst of a long expansion, nearly 60% of American households had little to no saving. The sudden increase in unemployment is leading to severe strain for the majority of households.  There are also growing concerns that firms are about to unleash another wave of layoffs for workers who were initially spared.  It appears that firms were anticipating a short downturn, but wider layoffs are emerging as evidence increases that the recovery may be slower than initially thought.
  • The small business bailout program was established with great speed. However, it does have some issues.  And, for some businesses, the bailout doesn’t matter; they probably wouldn’t have survived a normal recession and this downturn is deep enough that continuing to operate has become impossible.
  • The best estimate we have seen for unemployment comes from Alexander Bick and Adam Blandin. Their forecast?  The unemployment rate will reach 20.2% in April.
  • Economic recovery is going to require more than just stimulus, bailout money and Fed support. Confidence among consumers is critical.  This recent poll highlights the issue—nearly 70% of respondents would not resume pre-COVID-19 activities:
(Source: Axios)
  • Finally, yesterday’s retail sales data confirms the shift caused by the lockdown:

The market news:

The foreign policy news:

Odds and ends:  An Islamic State cell operating in Germany was planning attacks on U.S. bases there.  Their plans were thwarted when the group was arrested.  China may be testing low-power nuclear weapons in violation of nuclear testing treaties.

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