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

[Posted: 9:30 AM EDT] | PDF

Good morning.  U.S. equity futures are a bit weaker as the financial markets continue to watch for some sort of fiscal action.  We start today’s coverage with policy news, including an update on the latest with the fiscal stimulus talks and the Fed’s Beige Book.  Election tampering comes next.  Brexit talks have restarted, which boosted the GBP yesterday.  China news is next.  The pandemic update follows, and we discuss the latest with technology.  We close with international odds and ends.  And, being Thursday, the Weekly Energy Update is available.  Here are the details:

Policy:  Two items of note—the fiscal talks and the Beige Book.

• Although talks continue, it is looking less likely that a deal will be passed before the election. It still doesn’t look like the Senate will go along with whatever Speaker Pelosi and Treasury Secretary Mnuchin negotiate, so any sort of deal with substance may not occur until next year.  For the most part, financial markets have discounted this outcome.  The lack of fiscal assistance will probably lead to weaker H1 economic growth next year, but if we do see a package in Q1, H2 will likely show a rebound.
  • Fed officials are warning that more fiscal support is necessary to help lift growth.
• Some of this weakness is already starting to show in the economy, at least according to the Beige Book. The survey of the Fed districts suggests that the economy continues to grow, but the pace of recovery is decelerating.  The report noted that housing and auto sales are strong and constrained by the lack of supply, which portends better future growth and supply is expanded.  Labor markets remain mixed, with goods production worker demand high but services spotty.
  • There are media reports that the Fed is not providing the stimulus it promised in March. This is a misread of what the Fed is actually doing.  The Fed is providing a backstop to the shadow banking system by ensuring working markets for assets that are often used in repo lending.  This backstop is usually at a rate above the market, which means that in a crisis it provides support, but in normal times, the lines are “untapped.”  This is actually good news; it suggests the financial markets are functioning.  But, if one thought the Fed was going to buy the world, they were mistaken.
  • Meanwhile, in the CMBS market, the use of special servicers, who supervise distressed debt, is rising.

Election tampering:  There are reports that foreign actors have acquired voter registration data.  Russia and Iran are accused of this action, but we suspect others have the information as well.  There are reports that emails from right-wing groups threatening registered Democrats have been distributed in Alaska and Florida.  The administration has accused Iran of the spoofing; given the obvious and ham-fisted nature of the threats, it probably was not from more sophisticated actors, such as China or Russia.  We did discuss the possibility of foreign interference in our May WGR series on the elections; we would expect more to come as the actual election day looms.

Brexit:  PM Johnson set a deadline; the EU ignored it, and the U.K. broke off talks.  After some groveling, the EU agreed it would have to make concessions too, giving Johnson a win and talks have restarted.  For the most part, the differences aren’t all that wide.  A deal of some sort should be possible.  An EU negotiating team will meet in London today to resume talks.

China:  China has been experiencing a solid recovery from the pandemic.  But its path to success is one it has used for years—exports and investment. Infrastructure spending has led to a sharp rise in steel production.  Brad Setzer of CFR tracks foreign flows and makes a strong case that China’s recovery is being built by absorbing foreign demand, a trend that will almost certainly trigger a backlash.  The pattern of recovery will create rising foreign reserves that will need to be invested, and China is already planning to boost outward investment.  How should the U.S. react?  The most effective tool would be to take steps to appreciate the CNY.

• China has unveiled a new law to ban exports of goods tied to national security. We would expect these laws to reduce exports of rare earths.
• In this week’s AAW, we discussed the notion that inventory restocking will likely support growth in the coming quarters. Of course, not all of that rebuilding will come from domestic sources.  There are reports that shipping costs are rapidly rising on goods from China, part of the drive to rebuild inventories in the U.S.
• The leader of Tibet’s government in exile, Lobsang Sangay, has met with Robert Destro, the new special envoy to Tibet. As one would expect, Beijing was not happy.
• After the 2008 Financial Crisis, China started its own bond-rating firms. They are apparently easy graders as the majority of issuers are rated AAA.

COVID-19:  The number of reported cases is 41,388,387 with 1,132,676.  In the U.S., there are 8,338,387 confirmed cases with 222,220 deaths.  For illustration purposes, the FT has created an interactive chart that allows one to compare cases across nations using similar scaling metrics.  The FT has also issued an economic tracker that looks across countries with high frequency data on various factors.  The Axios state infection map is updated.

Virology: 

• As the virus makes a comeback in Europe, Ireland has moved to implement a full national lockdown. The Czech Republic is following suit.  Hospitals across Europe are preparing for increasing caseloads.
• There is some good news; the medical system is getting better at treating the disease, and although infection rates are rising, fatalities are not. Treatment plans have improved, making the disease less deadly.
• Researchers are turning to wastewater analysis to track infection rates.
• The CDC is adjusting the guidelines about virus exposure. Instead of exposure within six feet for 15 minutes, it is now exposure within six feet for a total of 15 minutes over a 24-hour period.  The CDC has been slowly acknowledging that the virus spreads via aerosols, and this change is another element of that adjustment.
• China is promising vaccines for the emerging world, using the treatment as a diplomatic tool.

Technology:  As has been widely reported, the DOJ and several state attorneys general are accusing Google (GOOGL, USD 1585.99) of antitrust violations.  The government is accusing the company of acting to maintain a monopoly; the company is falling back on the 1980s defense, which is that no consumers were harmed by their actions.  There is a growing consensus that monopoly causes problems even if consumers are not harmed.  In addition, there is bipartisan support for the action.  The outcome of the indictment will likely take years to conclude, and it isn’t completely clear what actions the government might take against the company.  It can be hard to break up an integrated company, and the firms tend to construct themselves with this issue in mind.  If history is any guide, the company’s competitors will try to take advantage of government scrutiny to make inroads into Google’s domain.  The effect it has on equity performance remains to be seen.

Odds and ends:  The U.S. is expanding its sanctions to prevent the completion of the Nord Stream 2 pipeline. … In Nigeria, protests against policy brutality turned deadly yesterday as soldiers opened fire against protestors; at least 10 people died. … The Turkish lira fell to new lows after the central bank refused to raise interest rates to defend the exchange rate.

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