Daily Comment (June 3, 2020)
by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA
[Posted: 9:30 AM EDT]
Our newest podcast episode, “The Long-Term Effects of COVID-19,” is available. We continue to build on themes discussed in the previous episode, “The Lessons of History,” in which we examined the effects of earlier pandemics. In this episode, we discuss how the COVID-19 pandemic will likely accelerate the reversal of the equality/efficiency cycle toward equality. Deglobalization is a key element of that shift. Although we believe the world has been steadily moving toward equality, this pandemic is moving the process forward. The eventual outcome is higher inflation, although it may take several years for higher price levels to become evident.
Turning to the latest news, it appears the U.S. civil rights protests eased notably last night, but risk assets are rallying today mostly on optimism regarding an eventual coronavirus vaccine, a potential recovery in the economy and labor market, and additional monetary and fiscal stimulus. We discuss all the key developments below.
United States: The latest reports suggest the intense civil rights protests of the last week eased somewhat on Tuesday night, possibly because many cities toughened their curfews and state and local officials began taking action to address protestors’ anger over law enforcement practices and a perceived impunity for police brutality. In Minnesota, where the protests first erupted, Governor Tim Walz said the state is launching a civil rights investigation into “systemic discriminatory practices” by the Minneapolis Police Department. State officials also said the economic cost of the violence in Minnesota alone was at least $1 billion, not including the impact of lost jobs and looting. As we’ve mentioned previously, investors have generally overlooked the violence on the assumption that it will be short-lived. The more salient issue is that the violence could have political implications for the November elections. If the protests continue to ease, the political impact will become less likely.
COVID-19: Official data show confirmed cases have risen to 6,411,023 worldwide, with 380,880 deaths and 2,750,891 recoveries. In the United States, confirmed cases rose to 1,831,821, with 106,181 deaths and 463,868 recoveries. Here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.
- The administration’s top infectious disease official, Dr. Anthony Fauci, said the ability of the human body to naturally overcome COVID-19, in most cases, is strong evidence that a protective vaccine can be developed for the disease. In fact, he expressed cautious optimism that several successful vaccine candidates would prove effective “within a reasonable period of time.” In his view, the key question is how long those vaccines will be effective.
- Still, despite the progress on vaccines and treatments, and falling infections in most major developed countries, cases continue to surge in many large developing countries. India reported a fourth straight day in which new, confirmed cases of COVID-19 exceeded 8,000, bringing the country’s cumulative total to more than 200,000.
- In Iran, daily infections have now rebounded almost back to their highs from late March. Despite the rebound in infections, however, Tehran continues to ease the lockdown measures that helped push the caseload lower over the last two months.
- Just weeks after a staggered reopening of schools in Israel, a surge of infections has forced the government to quarantine around 10,000 students and teachers. The outbreak has also pushed the country’s new infections to almost 100 cases a day for the first time since early May, close to the threshold at which health officials have indicated some lockdown restrictions would be re-imposed. This development is important because it undermines a growing sentiment around the world that young people’s relative lack of susceptibility to COVID-19 means schools and universities can safely reopen.
- Even though the OPEC+ group of oil-producing countries is expected this week to extend its massive output cut of 9.7 million barrels per day to early autumn, Saudi Arabia is reportedly so confident that the cut has helped restore order to the market that it will soon reverse its supplemental cut of 1 million barrels per day. Nevertheless, the expected extension of the baseline cuts continues to buoy crude prices.
- In New Zealand, Prime Minister Ardern released details of a possible loosening of restrictions that would mean the country’s businesses could return to normal with no gathering limits, or social-distancing requirements as early as June 10.
- Sweden’s top epidemiology official, Anders Tegnell, said in an interview that even though the country’s relatively light coronavirus lockdown helped minimize the damage to the Swedish economy, the government should have imposed tighter restrictions to avoid having such a high death toll. The government said on Monday that it would appoint a commission to investigate the country’s approach to the pandemic, bowing to pressure from opposition politicians.
- While the U.S. yield curve as measured by the 10-year Treasury versus the 2-year note or the 3-month bill has recently held steady, with both spreads in the range of 50-60 basis points, the less popular 30-year/5-year spread has widened to almost 120 basis points for the first time since 2017. Traders ascribe the widening to a greater supply of longer-term debt and moderating Fed purchases due to the relative stabilization in the economy.
- Ten weeks after the Fed calmed the corporate bond market by promising to buy up to $750 billion of individual businesses’ debt obligations, not a single company has signed up for the program. The Fed’s sole purchases in the market have been $3 billion in corporate bond ETFs. Echoing the traditional reluctance of banks to access Fed backstops, it turns out that companies are reluctant to sign up for Fed purchases because such a move could be seen as a sign of weakness during the market’s rebound.
U.S. Policy Response
- President Trump will meet this week with his top economic advisors to discuss policy options for the next economic support bill. Although the scope of the plan is still in flux, reports suggest a wide variety of measures are under consideration:
- One top focus will be on ways to encourage people to go back to work, including a proposal to cut the federally funded enhanced unemployment benefit from $600 per week now to as little as $250 per week through the second half of the year.
- The administration is also discussing a tourism tax deduction, or credit for people who take a vacation somewhere in the U.S. in the next three to six months.
- The president and his aides also continue to push proposals for which they have long been advocating, including a payroll-tax holiday and a capital-gains tax cut.
- A longer-term priority will be measures to encourage companies to do business in the U.S., including making certain rules permanent that allow firms to deduct the cost of relocating manufacturing operations from China and other countries.
Foreign Policy Response
- As Europe continues to play catchup with the aggressive monetary and fiscal programs put into place by the U.S. to support the economy during the coronavirus crisis, the ECB is expected to unveil some €500 billion in additional bond purchases at its policy meeting tomorrow. That would boost its total firepower to almost €1.5 trillion, or $1.68 trillion, putting it on a par with the U.S.’s spending plan and setting the stage for the central bank to buy most of the new debt that Eurozone governments will issue this year to fight the crisis.
United States-Venezuela: The Trump administration further increased its economic pressure on the Venezuelan government by imposing sanctions on four shipping firms allegedly involved in supplying the country with fuel products.
United States-China: Adding to the general trend of U.S.-China decoupling, Senator Rob Portman (R-Ohio) and Senator Tom Carper (D-Del.) today plan to introduce legislation to stop China and other “malign state actors” from stealing U.S. taxpayer-funded research at universities by enhancing the authority of federal agencies to monitor and punish the schools and scientists.