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

[Posted: 9:30 AM EDT]

Good morning!  The 13^th episode of the Confluence of Ideas podcast is available; the topic is the first in a series of episodes on the November elections.

Equity futures are lower this morning; market talk suggests it’s due to rising COVID-19 infections, but a good, old-fashioned “pause to refresh” is just as likely.  Poland’s President Duda visits the White House today just before elections in his country.  The Segway is done.  We update the news from China.  We offer some thoughts on reports that the administration is considering additional stimulus and other measures.  There is growing concern about commercial real estate.  Tech leaders are opposed to immigration restriction measures.  Our usual commentary on COVID-19 is available.  Here are the details:

China news: 

• It appears that India and China are reducing recent border tensions. This is the usual pattern; we have seen a cycle of rising tensions followed by steps to prevent a broader war.  The risk is, of course, that the border tensions, at some juncture, do lead to something worse.  One area of concern is that PM Modi has less ability to control public opinion in India, compared to Chairman Xi; it is not inconceivable that an Indian PM at some point in the future may not be able to contain the groundswell and may be forced into a conflict.  In an upcoming WGR, we will look at the history of this issue.
• For the past few days, we have been commenting on the recent EU/China videoconference. In the aftermath, it is clear that EU leaders are unhappy with China’s behavior, but are also reluctant to press too hard on Beijing for fear of hurting trade and investment relations.  The recent row over comments from Peter Navarro suggests similar sentiment exists in the U.S. as well.  The closest historical parallel, in our view, to China’s relations with the U.S., or the EU too, was between the U.K. and Germany from 1870 to 1914.  There was a growing geopolitical rivalry, but deep economic ties as well.

Economic and policy news:

• June and the end of Q2 are coming soon, and several stimulus measures are about to expire. The measures were put in place with fairly short endpoints because the expectations were that the economy would be returning to normal in short order.  It is true that there is ample evidence of the economy improving, but making new peaks in GDP will probably take until H2 2021.  As it becomes apparent that that a new expansion is going to take a while, policymakers are rethinking their ideas on allowing various measures to expire next month.
  • The first round of stimulus checks worked pretty well; renters were remarkably current on making payments and spending levels have shown signs of recovery. The president is apparently on board with another round of stimulus checks.  Although there will be opposition, we would not be surprised to see a second round soon.
  • The tax deadline may be extended again, past July 15^th.
  • President Trump would also like an infrastructure bill, to the tune of $1.0 trillion, but he doesn’t appear to be getting much support from either Congress or the rest of his administration.
  • There are growing concerns about commercial real estate; policymakers are pushing for a new Fed facility to support this market. There are reports that some mall operators are pressing small retailers for rent payments for months when the malls were closed.  This problem highlights the problems in the payment chain; as commercial rents don’t get paid, cash shortages develop to operators and eventually bondholders.
  • Overall, we do expect new measures to be forthcoming. However, as is normal with policymaking, look for there to be much “11^th hour” type brinkmanship before anything gets passed.
• The U.S. is contemplating $3.1 billion of new tariffs on the EU and U.K. if they proceed with a digital tax.  Canada is facing new tariffs on aluminum as Washington tries to cope with rising supplies.  This move is coming just before USMCA goes into effect on July 1.  Congress is planning a vote on leaving the WTO next month.  The measure appears to be jointing led by right- and left-wing populists in Congress.
• There has been a run on plexiglass as shields for COVID-19.

Foreign news:

• The EU is considering banning U.S. travelers from the bloc due to concerns about COVID-19. Interestingly enough, the ban would not exclude China.
• North Korea has engaged in a number of provocative acts recently. It appears that Kim Jong Un may be dialing back some of the tensions.  To some extent, what we have seen recently is consistent with North Korea’s behavior.  Pyongyang often takes aggressive actions and raises tensions, then promises to behave better if it gets sanctions relief, or aid.  What might be different this time is that this news may signal a reengagement of Kim Jong Un; there has been some evidence to suggest he has been sidelined and his sister, Kim Yo Jong, has been driving policy.  She appears to be much more hawkish than her brother.  Knowing what is happening in North Korea is always a challenge, but it is possible we are seeing a divided leadership.
• Russia is holding its military parades today that it usually holds on May 9. These parades were delayed due to the pandemic.  Tomorrow, Russians vote to extend Putin’s rule; we expect him to win.
• British landlords and tenants are facing an end to support, reflecting similar worries in the U.S.

Tech news:

• The S. has suspended work visas for several classes of workers due to high unemployment. The tech industry is upset by the decision as is India.
• The DOJ and states’ attorneys general are meeting to discuss antitrust action against some tech firms.

COVID-19:  The number of reported cases is 9,273,773 with 478,160 deaths and 4,645,628 recoveries.  In the U.S., there are 2,347,102 confirmed cases with 121,225 deaths and 647,548 recoveries.  For those who like to keep score at home, the FT has created a nifty interactive chart that allows one to compare cases across nations using similar scaling metrics.

Virology:

• As lockdowns ease, there has been a rise in infections, not only in the U.S., but around the world. South America has been especially hard hit.  Nursing homes have been a particular area of risk, and Canada has been hit hard.
• There are reports some Chinese nationals in Russia are using forged COVID-19 tests showing a negative result so they can return to China.

Finally, there are reports of soaring temperatures in Siberia.  Although it hasn’t been verified, the city of Verkhoyansk reported a high temperature of just 100^o Fahrenheit on Saturday.  The Russian Arctic is also seeing higher temperatures, with temperatures rising about 0.69^o every decade, compared to world temperatures rising about 0.18^o every decade.  The rise in temperatures is thawing permafrost and contributed to a recent diesel fuel spill, as weakening permafrost damaged a storage tank.  One way this change affects U.S. weather is that it weakens the jet stream and can leave weather systems “parked” over parts of the U.S., leading to extended heat waves, or rainfall and flooding.

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