Daily Comment (June 10, 2020)

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

[Posted: 9:30 AM EDT]

The relatively muted tenor in risk assets so far today comes as investors look forward to the Fed’s latest policy decision, forecast update and Chairman Powell’s news conference this afternoon.  We’ve also seen some pessimistic forecasts for the global economy from the OECD, signs the Republicans are pushing back harder against the next fiscal stimulus bill and the possibility of a future military takeover in Brazil.  We review all the key news below.

United States:  Today the Fed will wrap up its latest two day policy meeting.  As we’ve mentioned before, the policymakers have made it clear they don’t want negative interest rates, so the benchmark Fed funds rate will be held unchanged at essentially 0.0%.  The real debate will likely be over yield curve control.  Besides watching that debate closely, we’ll be parsing the policymakers’ latest forecasts for the economy and the future Fed funds rate.

COVID-19:  Official data show confirmed cases have risen to 7,264,866 worldwide, with 411,879 deaths and 3,394,970 recoveries.  In the United States, confirmed cases rose to 1,979,893, with 112,006 deaths and 524,855 recoveries.  Here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.


Real Economy

U.S. Policy Response

United States-Germany:  Nearly two dozen Republican House members are urging the Trump administration to reconsider its decision to drastically cut the number of American troops assigned to Germany, according to a letter viewed by the Wall Street Journal.  In the letter, the Congressmen argue that, “such steps would significantly damage U.S. national security as well as strengthen the position of Russia to our detriment.”

United States-Russia-China:  Even though the U.S. and Russia have officially invited China to participate in the new arms control talks to open in Vienna later this month, Chinese officials have reportedly rejected the invitation.  Moreover, Russian Deputy Foreign Minister Ryabkov poured cold water on any hope that Russia would pressure China to participate.  The development undermines hope that a new, multilateral nuclear arms treaty can be signed to follow the U.S.-Russia New START agreement that expires next February.

EU-Russia-China:  The European Commission issued a report accusing Russia and China of conducting targeted influence operations and disinformation campaigns about COVID-19 in the EU, its neighborhood and globally.  The report accuses Moscow and Beijing of trying to “undermine democratic debate and exacerbate social polarization and improve their own image in the COVID-19 context.”

EU:  As EU members jostle to shape the bloc’s upcoming budget and coronavirus recovery fund to their liking, countries including Belgium and Ireland are arguing that more funds may be needed because of the risk of a hard Brexit at the end of the year, on top of the economic damage from the COVID-19 shutdowns.  EU and British negotiators continue to talk but are making little progress on a trade deal for the period after December 31.  Separately, Portuguese Finance Minister Centeno resigned his position, forcing him to also give up his role as head of the EU finance ministers’ group.  The proposed EU budget and recovery fund, including the idea of issuing common EU bonds, will be discussed next week by national leaders rather than finance ministers.  All the same, given Centeno’s pivotal role in pushing through the EU’s fiscal support packages to date, his departure increases the odds that the debt mutualization proposal could be rejected or substantially modified.

Brazil:  One of President Bolsonaro’s sons, who has previously praised the country’s past military dictatorship, said a similar break with democracy in Brazil is now inevitable.  The statement adds to signs that Bolsonaro is leaning toward a military takeover of the country as he deals with the coronavirus crisis, political scandals and fleeing foreign investors.  The political instability associated with any military takeover would likely be at least a near-term negative for Brazilian assets.

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