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

[Posted: 9:30 AM EDT]

Good morning and happy Monday!  Given the news flow of recent weeks, it was rather quiet overnight.  Risk markets are lower this morning.  We update the COVID-19 news.  Here are the details:

COVID-19:  The number of reported cases is 4,122,173 with 283,001 deaths and 1,418,656 recoveries.  In the U.S., there are 1,329,799 confirmed cases with 79,528 deaths and 216,169 recoveries.

For those who like to keep score at home, the FT has created a nifty interactive chart that allows one to compare cases and fatalities between nations, scaled by population.

The virus news:

• The good news:
  • One of the early concerns as hospitalizations rose was a shortage of ventilators. There were measures taken to repurpose assembly lines to make the medical device.  As we have noted in earlier reports, there have been cases of silent hypoxia, where patients have blood/oxygen levels that are critically low yet seem to exhibit little distress.  The usual protocol in such cases is to deploy a ventilator.  However, due to the lack of distress, doctors are now using less invasive measures to raise oxygen levels, instead deploying CPAP machines, laying patients in a prone position or giving oxygen.
• The bad news:
  • We are seeing countries around the world scale back their social distancing measures. Results so far suggest that opening up is leading to rising case counts.
    • In Iran, the number of confirmed cases has increased by 50% since early May following the decision to ease social distancing measures. Despite this rise, Tehran has scheduled a phased reopening over the next two weeks.
    • South Korea has been given high marks for its handling of the virus. The country used aggressive testing, contact tracing and quarantine to keep infections at bay.  However, as the country has eased restrictions, it too is seeing new increases and has ordered nightclubs and bars closed.
    • Northeastern China is reporting a rise in infections. Shulan, a city in Jilin province, has been put on elevated alert.  What is worrying about this news is that Jilin borders North Korea; Pyongyang claims it has no infections, which is highly improbable.  Although the border has been closed for weeks, there are worries that North Koreans may be moving across the border and bringing new cases into China.  Meanwhile, Wuhan has reported its first new COVID-19 cases since the lockdown.
  • One of the characteristics of this virus is that children seem to either be asymptomatic or suffer mild cases. However, there are reports that three children in New York have perished from a virus-related condition.  Although the number is clearly small, we watch for such changes as indications of mutation.
  • Domestic counterintelligence agencies are warning that China is making a concerted effort to hack U.S. research on vaccine development and antiviral therapies. China isn’t the only one.  Allies such as South Korea and Vietnam, and enemies such as Iran, have been reportedly active as well.

The policy news:

• We have been reporting for some time our concerns about the non-bank mortgage servicers. As more mortgage holders need forbearance, the servicers are caught between needing to provide payment on mortgages to meet the obligations of mortgage bond holders and the lack of payments from homeowners.  Most of these firms lack the financial backstops that banks have.  We continue to expect the Fed to eventually provide support for this part of the mortgage industry, but, to date, it has not.
• As we noted last week, the financial markets were signaling growing odds that the Fed may consider negative interest rates. Fed officials downplayed the likelihood and we tend to agree.  The Fed is more likely to engage in balance sheet expansion and forward guidance but seems to hold that the benefits of negative rates are more than offset by the costs.
• The next round of stimulus is under debate. House Democrats are pressing for another trillion in stimulus spending; so far, the Senate is cool to the idea and the White House appears noncommittal.  An interesting element of the proposals is a temporary form of universal basic income, a key part of Andrew Yang’s presidential bid.
• We have seen a strong rally in corporate debt since the Fed announced its support program. However, so far, the Fed actually hasn’t bought anything, a clear indication of the impact of announcement effects.  The actual buying is just about to start.

The economic news:

• Last week’s jobs data was mostly bad; there are scattered reports that companies are planning further job cuts as economic growth slows. Employment data tends to be a coincident to lagging numbers.  This lagging characteristic will likely continue as we are seeing widespread reports of new layoffs being announced.
• Surveys of corporate leaders indicate growing worries about rising protectionism. This isn’t news, as globalization likely peaked in 2006, but the idea of deglobalization has moved from being a fringe idea to mainstream.  We note that in 2019, Chinese investment into the U.S. fell to its lowest level since the Great Financial Crisis, likely a reflection of growing tensions between the two nations.  In Q1, FDI rose $200 mm, down from last year’s quarterly average of $2.0 bn.  Of course, much of this decline can probably be attributed to COVID-19-related disruptions.

The market news:

• One of the downsides of low interest rates is that it makes some financial products very difficult to create. There are reports that life insurance companies are refusing to underwrite policies due to low interest rates.

The foreign policy news:

• For years, economists have argued that China’s economy was overly dependent on investment and exports. In fact, China’s policy mix deliberately disadvantaged households, forcing them to oversave.  This saving provided funds for investment but as household saving continued to rise, it swamped the needs of domestic investment, leading to large trade surpluses.  As China prepares its 14^th five-year plan, policymakers are anticipating a more hostile foreign environment that will require more domestic-driven demand.  Perhaps deglobalization will finally prompt a policy mix that boosts domestic consumption and reduces the trade surplus.
  • China’s credit growth in Q1 rose CNY 1.7 bn, a yearly change of 13.1%. The PBOC is vowing more aggressive growth policies but has refused to offer details.
• The U.K. has outlined its reopening process. Although most stay-at-home orders remain in place, relaxation starts in earnest on June 1, when primary schools reopen.  Additional openings are expected in early July.  The U.K. will impose a quarantine on air travelers.
• In response to the drop in oil revenues due to lower oil prices, Saudi Arabia announced a series of measures designed to reduce the impending fiscal deficit. Spending will be cut and its VAT rate will be tripled.  Austerity is rarely popular, so we will be watching the reaction to these measures from Saudi citizens.  We note that the kingdom has announced a unilateral 1.0 mbpd cut in production, likely in a bid to lift prices and oil revenues; oil prices jumped on the news.

Iran:  At least 19 Iranian sailors died in what appears to be a friendly-fire accident during naval exercises.  Although details are sketchy, it looks like a vessel was mistakenly struck by a ship-to-ship missile.  The exercises were being held in the Gulf of Oman; there are no reports that any U.S. ship was in the vicinity.

India/China:  The border between the two nations has been in dispute for some time but, since it sits in the inhospitable Himalayan mountain range, military operations tend to be limited.  It appears that soldiers from both nations exchanged words and non-lethal blows over the weekend before officers on both sides ordered troops to disengage.

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