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

[Posted: 9:30 AM EST]

It’s Friday employment day, although the data is mostly irrelevant.  This report covers February, before COVID-19 hit the U.S. economy.  We detail the data below, but the quick read is that the data was very strong.  As has been our practice, we update COVID-19 news.  Risk markets are under pressure globally as the virus spreads and policymakers appear to be caught off guard.  Russia and Turkey declare a ceasefire.  Here are the details:

COVID-19:  The number of reported cases is now 100,278, breaking the 100k level for the first time; fatalities are 3,406 and recoveries are 55,694.

• We are seeing a massive risk-off trade in the financial markets. World equity markets are under pressure; U.S. equity futures, at the time of this writing, are down in the neighborhood of 3%.  Gold prices are higher and Treasury yields continue to march lower.  Mortgage yields are falling to record lows; it isn’t clear how much stimulus this development will generate.
• The news from the world outside of China remains grim. Seattle closed its schools.  In France, a deputy in the National Assembly is in intensive care, afflicted with the virus.  Islamic holy sites are being closed.  The economic costs continue to mount.  Credit spreads are starting to widen around the world as default fears rise.  Food prices are showing signs of rising again in China.  Under normal circumstances, that would be good news for U.S. agriculture.  However, global shipping has been disrupted and, at least for now, it isn’t likely that U.S. grain and meat will make its way to China.  Oil demand has been hit hard by the virus.  Maryland has declared a state of emergency; its proximity to Washington, D.C. will increase fears.  The airline industry has been hit hard; a British airline has failed.  The European Parliament has canceled over 100 events.
• There is an old saying that the first victim of war is the truth. Similar sentiments can be expressed about pandemics.  Fact checkers have been hard at work debunking reports that the U.S. created the virus (it should be noted that a similar rumor that it originated in a Chinese biological weapons factory circulated a couple of weeks ago).  Other reports offered novel ways of protecting oneself from the virus; all have been found to be false.   Reports out of China are suggesting that a second, more virulent strain of COVID-19 has emerged.  Geneticists warn against concluding that the virus is becoming more deadly.  The work of Adam Kucharski puts the disease in context.
• Another developing trend is that countries and businesses are being accused of hoarding. Italy is complaining that other EU nations won’t share medical supplies (so much for European solidarity).  Globalization has moved from a virtue to a vice.
• Our expectation of this event is that it would be significant in impact but short in duration. Part of this expectation is built on the idea that we would see aggressive fiscal and monetary policy stimulus.  So far, we have to say the results have been mixed at best.  The Fed did act aggressively, but the bond market is making it clear they didn’t move nearly enough.  The ECB hasn’t moved at all.  However, what has really surprised us is the lack of fiscal action.  This is an election year; history shows a pattern where incumbents use all sorts of tactics to boost growth to improve either re-election or the election of a new president from the incumbent party.  Rahm Emmanuel had a famous quote, made during the financial crisis, that “one should never let a crisis go to waste.”  And yet, so far, the White House has pushed back on suggestions of fiscal actions.  As the airlines have swooned, the president has indicated no aid will be forthcoming.  The attitude seems to be that COVID-19 isn’t a big deal and that nothing—no tariff rollbacks, payroll tax holidays, credit support or even cash distributions—is necessary.  We find this attitude a bit surprising; the economic data will start to deteriorate soon but, due to delays in reporting, the worst won’t be seen until April and May.  In terms of the November elections, this is the most critical time because most voters’ view of the economy is based on what was happening two quarters ago.  If the stimulus isn’t forthcoming, the rebound could be much less robust than we expected and the odds of recession are rising.

Turkey and Russia:  The two have set a ceasefire.  The refugee threat to Europe remains.  We will be watching to see if the agreement holds but clearly neither Ankara nor Moscow want a broader war.

Odds and ends:  There was an OPEC agreement but it doesn’t appear Russia will participate.  The remaining members offered to cut production by 1.0 mbpd, but without a 0.5 mbpd cut from Russia oil prices have plunged this morning.  On Thursday night, the Reserve Bank of India (RBI) seized control of its fourth largest lender, Yes Bank (YESBANK, 16.60).  The takeover was to prevent a loss in confidence of the Indian financial system due to Yes Bank’s inability to raise capital to improve its financials.  The president’s national security team has advised that he block Infineon Technologies’ (IFNNY, 20.20) proposed acquisition of the American chipmaker Cypress Semiconductor Corp. (CY, 19.18) due to its links to China.  In order to stimulate the U.K. economy, Prime Minister Boris Johnson appears to be looking into eliminating tax breaks that benefit the “staggeringly rich.”  In Tunisia, two militants on a motorbike blew themselves up outside the U.S. Embassy.

View the complete PDF