Daily Comment (October 7, 2020)

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

[Posted: 9:30 AM EDT] | PDF

Our Daily Comment today opens with a discussion of the latest coronavirus news.  We haven’t led off with pandemic news very often in recent months, given that authorities and scientists are gradually getting their hands around the crisis.  Today, however, we decided to go back to a coronavirus lead off because of the way President Trump’s statements on pandemic relief are having such a significant impact on the financial markets.  We also include a few words on tonight’s vice presidential debate in the U.S. and other news from overseas.

COVID-19:  Official data show confirmed cases have risen to 35,865,117 worldwide, with 1,050,821 deaths and 25,005,316 recoveries.  In the United States, confirmed cases rose to 7,502,004, with 210,918 deaths and 2,952,390 recoveries.  Here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.


 Economic Impacts

  • Although there has already been some discussion of how the U.S. labor market data is distorted in the midst of the pandemic, economists are starting to gather evidence that the distortions actually are common worldwide.  For example, one economist at the OECD estimates there are as many as 30 million discouraged workers worldwide who have dropped out of the labor force, and therefore, they aren’t counted as unemployed.
  • Even though high unemployment will likely be a drag on further economic recovery, many companies in the U.S. and Europe are buying back bonds to reduce the cash piles they built up earlier this year, signaling expectations for more stable economic times ahead.

 U.S. Policy Responses

  • In testimony before Congress yesterday, Federal Reserve Chair Powell warned that since the economic recovery from the pandemic is still incomplete, failure to provide additional fiscal support to affected households and businesses could result in potentially “tragic” consequences.
    • In Powell’s view, any loss in economic momentum now could scare households and businesses into cutting their spending, potentially setting off a downward economic spiral.
    • In contrast, he argued that with so much remaining slack in the economy, there is little risk of providing excessively generous relief.
  • Despite Powell’s continuing calls for more fiscal support and recent negotiating progress between Treasury Secretary Mnuchin and House Speaker Pelosi, President Trump called off any further talks on a new pandemic relief package at least until after the election, citing Democratic hopes to provide financial relief to state and local governments.  Later in the evening, however, he reversed course and signaled he would sign off on another round of stimulus spending if it included direct checks to individual taxpayers (to be sent out immediately), aid to airlines, and additional assistance to small businesses.
    • The initial initiative to end the talks was puzzling, even to many Republicans, especially those who saw a new relief package as essential to helping Republican senators facing tight races in the November election.  Foreclosing any chance of new stimulus would put the Republicans in even greater risk of losing control of the Senate.  Trump’s reversal is probably tied to the party’s realization that they can’t be seen as responsible for shutting off new fiscal measures.  Trump’s insistence that any new stimulus checks would be sent immediately, presumably before the election, is a clear sign that the back-and-forth is closely tied to electoral calculations.
    • At one level, Trump’s initial decision to end the talks underscores just how much he has decided to come out swinging after his hospitalization for COVID-19.  Since returning to the White House on Monday evening, the president has made several other equally provocative moves aimed at energizing his base, including forcefully downplaying the risks from the virus and requiring companies to pay much higher wages to highly-skilled foreign workers brought into the country on H-1B visas.  At another level, since the latest polling points to Trump losing considerable support after his combative approach to the first presidential debate and his infection with the coronavirus, it’s also possible Trump may be expecting to lose the election and, prior to his reversal, was hoping to deny the Democrats any policy wins simply out of spite.
    • In any case, the chaotic, contradictory statements should make it clear that the financial markets may have gotten ahead of themselves by looking past the risk of a disputed election and looking ahead to more fiscal stimulus.  The situation is a reminder that the political environment will probably remain quite volatile over the coming weeks.

 Foreign Policy Responses

  • As infections rebound in Sweden, approaching levels last seen during the spring, the government is again relying mostly on voluntary measures to battle the pandemic.  Its latest measures, in force for less than a week, merely recommend that all members of a household should isolate for a week if one of them becomes infected. Those unable to work from home will be eligible for sick pay.  Anyone experiencing cold-like symptoms, such as a sore throat, is encouraged to stay at home and get tested for COVID-19.

 U.S. Election:  Vice President Mike Pence and Senator Kamala Harris, the Democratic vice presidential nominee, will face off in their first and only debate tonight amid President Trump’s ongoing bout with COVID-19, which is likely to keep the coronavirus pandemic in focus during the matchup.  Check out this article for a review of some of the other key themes likely to be dealt with in the debate.

U.S. Technology Industry:  The House Judiciary Committee’s subcommittee on anti-trust law issued its long-awaited report on anti-competitive practices in the technology industry, including recommendations that major firms like Facebook (FB, 258.66) and Amazon (AMZN, 3099.96) be forced to dramatically restructure their businesses.  For example, the report suggests forcing companies to restructure so they cannot use their dominance in one area to harm rivals in another. Business lines should be split apart and kept under separate management, if not sold off.  The report also calls for regulators to presume that any proposed acquisition by a dominant company are anti-competitive unless proven not to be.  Even though it’s not clear that the recommended measures would be passed by Congress, the report highlights the growing regulatory risk to the major technology stocks that have been performing so strongly this year.

Saudi Arabia:  In a sign that Saudi Arabia is edging closer to recognizing Israel and breaking with the Palestinians, Prince Bandar bin Sultan bin Abdulaziz issued a blistering attack on the Palestinian leadership for criticizing the Gulf states that have already recognized Israel.It is assumed that a prince of Bandar’s status (a former Saudi ambassador to the U.S. and chief of Saudi intelligence) would not make such a statement on Al Arabiya television unless it was sanctioned by the royal court.

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