Daily Comment (May 27, 2020)
by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA
[Posted: 9:30 AM EDT]
Risk assets appear set to follow through on their rise yesterday, reflecting not only more signs of a nascent economic recovery from the coronavirus crisis, but also a slew of new stimulus measures in the U.S., Europe and Japan. We highlight all the key coronavirus and other news below.
COVID-19: Official data show confirmed cases have risen to 5,615,689 worldwide, with 351,077 deaths and 2,307,901 recoveries. In the United States, confirmed cases rose to 1,681,418, with 98,929 deaths and 384,902 recoveries. Here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.
- In New York, the epicenter of the pandemic in the U.S., new COVID-19 deaths yesterday totaled just 73, marking their lowest level since the surge of infections began in early March. New York City Mayor Bill de Blasio said he expected the city to enter its first phase of reopening in the first, or second week of June.
- In contrast, Brazil continues to report accelerating infections and deaths. In fact, for the first time, yesterday it reported more deaths from COVID-19 than the U.S.
- According to data tracker STR, the U.S. hotel occupancy rate rose to 32.4% in the week ended May 16, marking the fifth straight week of increased occupancy after the low of 20.0% in the week ended April 11.
- The latest reading was the highest occupancy in nine weeks, but still far below the 61.8% rate reported at the beginning of March before coronavirus cases surged.
- Revenue per available room, a key hotel-performance metric, was just $25.12, up slightly from the prior week, but down nearly 74% from the same period last year.
- U.S. retailers sitting on mountains of, now out-of-date, inventory after the long lockdown are expected to launch massive sales as the economy reopens, potentially helping to boost demand but likely also putting further downward pressure on consumer inflation.
- As economic activity and oil demand show continued signs of recovering, Russian officials signaled they may hold off on committing to any extended production cuts ahead of a June meeting among major oil exporters. The news is weighing modestly on global oil prices so far today.
U.S. Policy Responses
- Senate Majority Leader Mitch McConnell (R-Ky.) said on Tuesday that there would “likely” be a fifth coronavirus relief bill “in the next month or so.” Although he insisted the bill would not be the $3-trillion proposal that passed the House last week, he expressed confidence that further economic support is needed.
- Larry Kudlow, the director of the White House National Economic Council, said the Trump administration is examining proposals to provide cash incentives to encourage unemployed Americans to return to work. He made the comments after being asked about a proposal by Sen. Rob Portman (R., Ohio) to provide a temporary $450-a-week bonus for unemployed workers returning to work, on top of their wages.
Foreign Policy Responses
- Even going beyond last week’s groundbreaking proposal from Germany and France, European Commission President Ursula von der Leyen proposed today that the EU issue €750 billion in debt to establish a coronavirus recovery fund totaling €500 billion, all of which will be handed out as grants to economically hard-hit parts of the EU, and to provide €250 billion in loans to member states. To pay off the debt in the coming decades, she also proposed a suite of new EU taxes and levies hitting everything from tech giants to carbon emissions.
- The surprisingly aggressive proposal from von der Leyen has been enough to help give a boost to global markets today, but just as important is the way that the common debt issuance has so far gotten relatively limited pushback, even from the frugal Germans.
- However, it’s important to remember that this is still just a proposal. To be implemented, it still needs to be approved by all 27 countries in the EU, including the frugal creditor nations primarily in the north.
- Downplaying the threat from a German court’s recent ruling against the European Central Bank’s bond-buying program, board member Isabel Schnabel said the ECB is “not adjusting our monetary policy in any way in response to this ruling,” on grounds that it is strictly an issue for the court and the Bundesbank. The statement is probably an accurate characterization of what the ECB and most European policymakers hope will happen with the court ruling, and the statement is supportive of European equities. Over time, however, we still believe the court ruling will play into the fractures between the EU’s creditor nations in the north, versus its debtor nations in the south.
- In Japan, Prime Minister Abe’s government approved a second supplementary budget providing an additional ¥31.9 trillion to buffer the economy from the crisis. Combined with planned spending by local governments and the private sector, as well as loans offered by financial institutions, total new support will be ¥117.1 trillion. This is on top of the ¥100 trillion in support approved just last month. At today’s exchange rates, the total support to date of more than ¥200 trillion is equivalent to about $2.01 trillion.
- In France, President Emmanuel Macron said his government plans to spend billions of euros to help shield France’s auto industry from the crisis, including a state-backed credit facility of €5 billion for automaker Renault (RNLSY, 4.13), and various consumer rebates and subsidies to stoke demand for more fuel-efficient cars. The plan would also create a €1-billion fund focused on modernizing the auto industry, spurring consolidation among smaller companies and investing in research and development.
- In Japan, Economy Minister Yasutoshi Nishimura said a program to provide up to ¥20,000 ($186) a day in subsidies to travelers who take overnight trips is likely to take effect in late July for nearby trips, expanding to all domestic trips in August. The subsidies can be used to pay for lodging, meals and other expenses.
China-Hong Kong: In another clear sign that pro-democracy protestors are picking up where they left off during the coronavirus crisis, hundreds of demonstrators gathered to oppose the reading of a contentious law on China’s national anthem in the city’s de facto parliament, sparking renewed clashes with police. As we’ve noted before, the spiral of tightening controls imposed by Beijing and intensifying protests is a distinct negative for Hong Kong equities. Importantly, the U.S. is considering a range of sanctions to punish China for its crackdown on Hong Kong, including possibly imposing new restrictions on financial transactions, and freezing the assets of Chinese officials.
Russia-Libya: The U.S. military has accused Russia of deploying fighter jets to Libya, from a base in Syria, in order to support renegade General Khalifa Haftar in his effort to take control of the country. Russia has long supported General Haftar, but this dramatic escalation could mark a significant expansion of Russian ambitions in the region.