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

[Posted: 9:30 AM EST]

On this day in 1918, the first cases of Spanish influenza were reported in Ft. Riley, Kansas.  How ironic it is that we’re now dealing with another big epidemic, though there is still no indication that it will be a mass killer like the Spanish flu.  As always, below we provide an update on COVID-19, its economic impact and the evolving policy responses.  We also discuss the escalating Saudi-Russia oil price war and the results of yesterday’s primary elections.

COVID-19:  Official data show confirmed cases have risen to 121,061 worldwide, with 4,368 deaths and 66,216 recoveries.  New cases continue to slow in China, but the epidemic is accelerating elsewhere.  In the United States, confirmed cases rose to 1,039, with 29 deaths and eight recoveries.  In the hot spot around Seattle, authorities say COVID-19 has now spread to at least 11 elder care facilities; at least three have reported fatalities.  Separately, New York Gov. Andrew Cuomo called out the national guard to help set up a “containment area” in a New York City suburb that has had a rash of cases.  Residents will be free to walk around the three square mile area, but significant public gatherings will be banned for two weeks.  Illustrating one important way the epidemic could impact the political process, former Vice President Biden and Vermont Sen. Bernie Sanders canceled campaign rallies yesterday on concerns about spreading the virus.  Across the pond, even Britain’s junior Health Minister Nadine Dorries has been diagnosed with COVID-19, less than a week after she attended a reception with Prime Minister Johnson.  In South Korea, a new cluster of infections discovered at a call center led to a surge in new cases that ended a four-day string of declines.  Italy had its deadliest day of the crisis, with its death toll rising by 168 to a total of 631 dead.

• Economic Impact.  People are becoming more aware that the epidemic’s dual impact on both the supply side of the economy and the demand side will make the economic harm deeper and longer lasting than initially thought.  Some businesses are expecting the impact to last even into the third quarter.  In terms of the spreading economic impact, today Poland said it will close its schools, universities, cultural institutions and other mass events for next week.  In Japan, worries about the effects of the epidemic have made many major firms reluctant to offer base pay hikes in their annual wage talks beginning today.  Toyota (TM, 126.99) is forgoing its uniform monthly pay scale increase for the first time since 2013.  The moves could hold down Japanese incomes for some time to come.
• Fiscal Policy Response.  Precisely as we warned in our Comment yesterday, the administration’s Tuesday discussions with congressional leaders regarding an economic support package fell flat as both Republican and Democratic legislators apparently want to focus on smaller, more targeted measures instead of broad measures like a payroll tax cut.  For Democrats, that may be because of a perception that the White House is overreaching.  Reports say President Trump has privately floated ideas ranging from eliminating the payroll tax permanently to offering massive tax cuts to the oil and gas industry.  For Republicans, the resistance seems to be rooted in ideological antipathy for big government programs to support the broad working class.  In any case, we suspect the pushback against the program is a key reason for the weakness in stocks this morning.  Still, we note that Democrats in the House reportedly are preparing to propose some targeted measures as early as Wednesday in order to start the ball rolling before Congress starts a one-week break on Thursday.  In terms of administrative action, sources say the Treasury Department is also likely to extend this year’s April 15 tax filing deadline.

• • Italy ramped up the size of its emergency economic support to €25 billion from the €7.5 billion approved just last week.
  • In a video call with EU leaders, ECB Chief Christine Lagarde urged a stronger, more coordinated fiscal response across the Eurozone. A prominent group of German economists also urged Chancellor Merkel’s government to abandon its commitment to a balanced budget in order to boost the COVID-19 fight.
• Monetary Policy Response.  The Bank of England announced an emergency cut in its benchmark short-term interest rate, reducing it to just 0.25% from 0.75% previously.  The central bank also introduced a host of measures aimed at maintaining the flow of credit to British businesses.  The unexpected support for the economy has been a key factor in boosting European stocks so far this morning.

Oil market:  In a further escalation of the oil price war with Russia, the Saudi government said it would boost its crude production capacity to 13 million barrels per day from 12 million previously.  The announcement has put additional significant downward pressure on oil prices so far today.  However, as the threat of lower oil prices continues to suggest reduced U.S. shale drilling, investors are realizing that would likely also cut natural gas production (often a by-product of oil output).  Natural gas prices have therefore surged in recent days.

Russia:  President Putin said he would support a legislative proposal to lift the country’s term limits so could remain in power until at least 2036, which we discussed in yesterday’s Comment.  The Duma has already approved the change.

Super Tuesday II:  In yesterday’s Democratic primary elections, former Vice President Biden again put in a strong showing with convincing wins over Sen. Sanders in Michigan, Missouri, Mississippi and Idaho.  The race in Washington State is too close to call at the moment.  Based on current estimates of how many pledged delegates each candidate has won, we estimate Biden would only have to win 46.8% of the remaining delegates to lock up the party’s nomination on the first vote at the summer convention.  That suggests Sen. Sanders could well drop out in the coming days.  By removing the threat of Sanders-style “democratic socialism,” such a move would likely be positive for equities.  Just as important, Biden seems to be forming a broad, durable coalition consisting primarily of African Americans, white suburbanites and older voters.  That coalition would likely be potent in much of the Midwest and South.  In other words, Biden is positioning himself to be a strong rival to President Trump in the November elections.  If momentum keeps swinging toward Biden, we would look for many foreign leaders to push back stronger against Trump’s foreign and trade policies on hopes of waiting him out until January.

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