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.  In this episode, we discuss how the COVID-19 pandemic will likely accelerate the reversal of the equality/efficiency cycle toward equality.

Good morning and happy employment Friday!  We go into the details below, but the quick snapshot is that the numbers are much better than forecast and mostly confirm the ADP data from earlier in the week that was stronger than expected.  Global equities are mostly higher this morning as optimism over economic reopening and policy support continues.  China remains in the news.  As usual, we update what we know about COVID-19.  There was an Iranian prisoner swap.  This week’s Asset Allocation Weekly (AAW) is posted; this week’s report shows how the equity markets recover before the peak in unemployment.  Onward!

China:

• Although details are lacking, China is apparently considering a $28 billion backstop to the banking system.
• Despite the ban on demonstrations, protestors in Hong Kong defied their government and turned out in force to remember the Tiananmen Square anniversary.
• The Xi regime is apparently concluding that the costs of seeing the West isolate Hong Kong is worth bringing it under control. This decision suggests Beijing may have been worried that its major cities might push for similar democratic measures if Hong Kong retained its degree of independence.  Given how much this move will likely cost China, either the government is underestimating how much it will cost or the government was very worried about Hong Kong’s defiance.  We suspect the latter is the case.
  • According to reports, the White House isn’t considering direct sanctions on President Xi over Hong Kong.
  • China is clearly making an attempt to separate the EU from the U.S. through trade and investment. Although the U.K. has been remarkably aggressive in opposing Beijing’s policy changes in Hong Kong, the EU has been reluctant to criticize.
• Secretary of State Pompeo praised NASDAQ (NDAQ, 117.93) rules on Chinese-listed companies, calling them a “model” for the rest of the world.
• Facebook (FB, 226.29) is putting labels on state-controlled media pages, essentially putting a warning on feeds from such sources.
• Recent data from the Peterson Institute makes it abundantly clear that China is nowhere close to meeting its Phase 1 commitments. We believe that it is just a matter of time before the administration concludes that China is failing on the deal; it remains to be seen what reaction will occur.  However, as we have always said, watch USTR Lighthizer; if he leaves, it would suggest he believes the administration won’t follow through on changing the trade relationship with China.

Foreign news: 

• The U.S. and Iran engineered a prisoner swap. Iran released Michael White, a Navy veteran who had been detained while visiting Iran.  The U.S. deported Sirous Asgari, a scientist who was detained on charges of violating U.S. sanctions.  Although relations between Iran and the U.S. remain tense, the fact that this swap occurred does suggest backchannel contacts are operable.
• One of our concerns with any administration is the problem of bandwidth. A government can find itself under great strain due to multiple simultaneous problems.  That is what the Trump administration is facing currently.  The deteriorating relations with China, trade issues with the EU, civil unrest at home, the pandemic—it’s a lot happening in real time.  It is under conditions of stress that foreign nations try to take advantage of the distraction in Washington.  We note that recently Iran and Venezuela jointly violated U.S. sanctions; so far, neither has seen any retaliation.  Expect more problems to develop in the coming weeks.  We are watching North Korea and Russia to see if they try to take advantage of the situation.
• A major diesel fuel spill has occurred in Siberia.
• When political systems fracture, fringe groups emerge. The latest in Italy is dubbed the “orange jackets,” a movement with overtures to France’s “yellow jackets.”  This new movement is so extremely populist that the League party won’t affiliate with it.  Although sympathizers with such political extremes always exist, it is during periods of turmoil that they can coalesce into political movements.

COVID-19:  The number of reported cases is 6,658,334 with 391,588 deaths and 2,886,183 recoveries.  In the U.S., there are 1,872,334 confirmed cases with 108,211 deaths and 485,002 recoveries.  For those who like to keep score at home, the FT has created a nifty interactive chart that allows one to compare cases between countries, scaled by various variables.

Policy news:

• The expanded unemployment benefits of $600 per week expire at the end of July. There is a debate on whether they should be extended.  The Congressional Budget Office has weighed in on the debate.  Its research suggests that over 80% of recipients would get more in benefits than they would earn working and that extending the benefits would likely lead to lower growth this year.  However, not extending the benefits will lead to lower growth and employment in 2021, most likely because the growth and employment occurred in 2020.  Our read on the report likely means the expanded benefits probably won’t be extended.
• Chile is asking the Fed to extend swap lines to the country and is asking the PBOC to increase the swap line with China.

Economy news: 

• As we have been noting, the next area where we expect support to be provided is commercial real estate. Businesses are not paying their rent and some landlords are taking legal action.  The uptick in business bankruptcies suggests that property owners are likely to see continued declines in rent payments and there is a chance this could cascade into lower property values and commercial mortgage defaults.
• OPEC has agreed to meet and will likely extend production cuts at least another month. Oil prices rose on the news.

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