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

[Posted: 9:30 AM EDT]

Good morning, and happy Thursday!  This is the last trading day of the week before the Independence Day holiday, so there will be no Daily Comment tomorrow; enjoy the holiday!  Global equity markets are higher this morning on improving global economic data.  Due to the holiday, the BLS has put out the employment report.  We cover it in detail below but in short, it was much stronger than forecast.  We recap the Fed minutes and other policy news.  We also look at the pandemic news.  Concerning China, we take a look at the initial response to the new security law in Hong Kong.  In foreign news, Putin “won” his referendum (the outcome was as certain as the Chiefs playing the Raiders).  Here are the details:

Policy news:

• The Fed released the minutes from the last meeting. Although there were no policy actions taken, there was interest to see what the members were thinking.  There appeared to be a great deal of discussion about forward guidance; this was evident in the dots plot, which showed there would be no change in rates for at least two years.  The members did consider yield curve control; it seems to be in the context of forward guidance, although it was also noted that if the markets were convinced that the Fed would cap rates, it may not need to actually buy a lot of bonds.  Overall, the message was accommodative policy would be in place for a long time.
  • In separate comments, Louis FRB President Bullard warned that the pandemic could still trigger financial problems and thus supported continued broad actions to prop up capital markets.
• In a surprise move, Congress extended the Paycheck Protection Program to August 8. The program still has unused funds, but the deadline of the original bill was set to expire.  President Trump still needs to sign the extension.
• So far, the Fed’s Main Street lending program has not attracted much borrowing. Critics suggest the terms are such that distressed borrowers can’t qualify and qualified borrowers are looking elsewhere.  However, its existence will act as a backstop if the financial markets seize up again, and we would not be surprised to see lending terms ease.

COVID-19:  The number of reported cases is 10,716,063 with 516,726 deaths and 5,499,628 recoveries.  In the U.S., there are 2,686,587 confirmed cases with 128,062 deaths and 729,994 recoveries.  For those who like to keep score at home, the FT has created a nifty interactive chart that allows one to compare cases across nations using similar scaling metrics.  The Axios map has been updated; cases are rising across the country.

Virology: 

• A recent study out of China suggests that being infected by COVID-19 does not bring long lasting immunity. Antibodies, according to the study, offer immunity for only around eight weeks.  If this study is confirmed (and we note it hasn’t been peer reviewed) it would suggest that immunity passports after contracting the disease would not be a good idea and vaccines may only offer limited immunity.  It may be that COVID-19 vaccines would need to be offered on an annual basis, like influenza.  At the same time, it suggests that a more fruitful approach may be antiviral therapies.
• At the same time, the BBC reports that a Swedish study showed widespread evidence of T-cells associated with COVID-19. Although this evidence may indicate that a much larger number of people have been exposed to the virus, it isn’t clear if they have gained any immunity from the exposure.
• COVID-19 may have been with us longer than we thought; some tested in New York had antibodies in February.
• As we get to know more about the transmission of the disease, the primary vector is extended close contact with an infected person. It is less likely to get it from surfaces and incidental contact.  Large, enclosed gatherings are the primary way that people are catching the disease.
• As we see an uptick in cases, states and cities are starting closures and restrictions on various businesses.
• Initially, COVID-19 looked about as problematic as influenza. Although it was novel and humans had little natural immunity, it seemed possible that simply allowing the virus to infect the population and build herd immunity might be a viable plan.  To some extent, this was Sweden’s initial program.  However, as we have watched the disease progress, it appears that the infection is widespread through the body and some of the impact is lasting.  We are starting to see autopsy reports.  These take a while to process but there a now enough to where some patterns can be observed.  First, micro-clotting is being widely seen (of course, in fatalities).  Small clots are being observed in numerous organs, including the brain.  Second, although brains are not showing signs of inflammation (good news, as it suggests the blood/brain barrier is working) the virus does reduce blood oxygen and if it lasts long enough, it can irreparably damage brain cells and is leading to reports of dementia type symptoms in some patients.  This finding may mean patients may need oxygen therapy even if they remain at home.
• Researchers are monitoring cases of the virus where the victims are facing long recoveries, with some exhibiting signs of permanent impairment. Although articles didn’t discuss this issue, the chance that an infection could lead to permanent impairment is a particular risk to athletes.  Sports teams will need to weigh the potential loss of a star to the disease, or the risk to a prospect.  It is possible that this summer’s limited MLB season could be populated with AAA players.  It will be interesting to see how college sports handles this problem; at least professional players are paid directly whereas college players who become infected could see their careers end before they get the chance to “cash in.”  As we have noted before, college athletics are heavily dependent on football; if the season is lost, it may undermine a myriad of college sports.
• As we and others have noted, the recent wave of infections is skewing to the younger population. Although they are more likely to survive, albeit with the above section caveats, there are worries that they could become vectors for vulnerable populations.
• An experimental vaccine that uses a novel gene-based technology has shown some initial promise.
• After the U.S. announced it was purchasing a large amount of remdesivir, the EU is in talks to secure supplies for Europe.
• And, finally, on fears of COVID-19, North Korea took aggressive steps to seal its borders. This action has led to a sharp decline in defections.

China news:

• Although it will be a while before we can know the full impact of the new Hong Kong security law, the initial response has been widespread arrests. Both Britain and the U.S. are taking steps to allow Hong Kongers to move to their respective nations.  The U.K. is offering residency rights and a path to citizenship.  Congress has proposed a bill offering refugee status to Hong Kong citizens under persecution.  It does appear that there could be a meaningful exodus from Hong Kong.   Rubio (R-FL) is preparing a bill to ban Chinese firms from U.S. capital markets.

Economic news:

• There is a cottage industry in economics about what the shape of the recovery will be. Our take is that the recession will end soon (it may be already) but the recovery will be slow.  One new shape that has been suggested is a square root; a sharp bounce followed by flat growth.
• For the past few years, we have noted that the U.S. coastal real estate markets have benefited greatly from foreign buyers. We could see another wave due to the exodus from Hong Kong.  However, in recent months, it does appear that the buying from overseas is slowing.
• One industry that has been booming on pandemic fears, and supported by recent presidential polling, is firearms.

Technology news:

• Tech CEO’s are scheduled to testify before Congress next month. The topic will likely be antitrust.

Foreign news:

• As noted above, the referendum on extending Putin’s rule won easily. Although the Duma had already approved the measure to extend Putin’s rule to 2036, the vote does offer a patina of legitimacy.  There were reports of voting irregularities, but it doesn’t appear they would have been enough to change the outcome.
• The Hagia Sophia in Turkey is a historic religious facility that was both a Greek Orthodox cathedral and a mosque that has been a museum since Ataturk created the modern secular Turkish state. President Erdogan is asking a Turkish court to return the building to religious status, returning to a mosque.  If he does, it will be a notable cultural signal that Turkey is moving from being a secular state to an Islamic one.
• The U.S. is seeking to seize gasoline tankers from Iran on a destination for Venezuela. Both nations are under sanction; seizing the cargos would be sanctions enforcement.

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