Daily Comment (July 23, 2020)

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

[Posted: 9:30 AM EDT] | PDF

U.S. equity markets continue to tick higher, buoyed by expectations of continued stimulus.  The stronger EUR is lifting European stocks, while Chinese equities fell on U.S./China tensions.  Relations with China continue to deteriorate; that’s our lead-off story this morning.  We update the latest policy news as a plethora of programs are due to end by July 31.  We update the pandemic news, recap other foreign developments and wrap up with economic and market news.  The new Weekly Energy Update is available.  Off to the details:

China news:

Policy news: 

  • The GOP Senate leadership says it has an agreement with the White House and will announce the details later today. We will be watching to see the size of the next direct payment to households.  We do note there is growing opposition to additional spending among GOP budget hawks; although we doubt their opposition will be enough to derail the bill, it could mean the GOP leadership will more closely track Democratic proposals to ensure passage.
  • The Fed is deliberating additional stimulus before its July 28-29 meeting. In the background, the Fed continues to debate structural policy changes that would adjust how the central bank reacts to inflation.  In the aftermath of Paul Volcker, the Fed has tended to try to preempt inflation.  The trauma of the high interest rate years led a generation of officials to try at all costs to prevent rising inflation expectations.  The policy worked so well that they now find themselves in the position of feeling the need to signal that they will not act preemptively to prevent a rise in price levels.  To some extent, future policy decisions will depend on this structural policy change.
    • In related news, it does appear that Chris Waller and Judy Shelton will be confirmed by the Senate for the last two open positions on the FOMC. Waller will be a traditional dove, but Shelton appears to be more sensitive to politics.  It may turn out that she doesn’t act as she has been portrayed, but, for now, we are assuming she will be dovish with a GOP president and hawkish with a Democratic president.  However, if we are correct in our assessment, the impact of her dissents will likely be small.

COVID-19:  The number of reported cases is 15,255,093 with 606,206 deaths and 8,670,684 recoveries.  In the U.S., there are 3,971,343 confirmed cases with 143,193 deaths and 1,210,849 recoveries.  For those who like to keep score at home, the FT has created a an interactive chart that allows one to compare cases across nations using similar scaling metrics.  Axios has updated its state infection map; the pace of infections appears to have leveled off.


Foreign news:

Market and Economy news:

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