Midweek Macro – 5.13.2020

It’s beginning to feel like 2018 again.

  • Investors are getting spooked with escalating tensions between the United States and China.
  • The Trump Administration is putting public pressure on the FED to lower interest rates.
  • Central banks are urging governments to tap their fiscal policymaking powers as interest rates approach negative territory.  

The main difference is that instead of talking about negative rates in the context of a hypothetical economic downturn, the U.S. economy has shed over 30 million jobs so far and as concerns mount over the possibility of a second wave of infections, economists worry that more of these job losses will become permanent.

The S&P 500 is set to open down 2% this morning as trading in Europe and Asia was also lower earlier this morning as worries about the next wave of infections grow as countries as states continue to ease restrictions. This follows leading U.S. infectious disease expert Anthony Fauci’s comments on Tuesday where he warned U.S. lawmakers of the damage that could be done by lifting lockdowns prematurely.

“I think we’re going in the right direction, but the right direction does not mean we have by any means total control of this outbreak”

There is a real risk that you will trigger an outbreak that you may not be able to control, and in fact, paradoxically, will set you back, not only leading to some suffering and death that could be avoided, but could even set you back on the road to try to get economic recovery

  • Anthony Fauci, Director of the National Institute of Allergy and Infectious Diseases

Also not helping stock market sentiment this week is the continued escalation of rhetoric between the United States and China as the Trump administration looks to focus questions of Coronavirus response and preparedness towards Beijing. Lindsey Graham added fuel to the fire with his “COVID-19 Accountability Act” that would require the president ensure and report back to Congress that China has complied with all COVID-19 investigations by the U.S., its allies or U.N. affiliates like WHO within 60 days.

The bill would also authorize the president to impose sanctions such as asset freezes, travel bans, visa revocations, loans to Chinese businesses by U.S. institutions and banning Chinese firms from listing on U.S. exchanges. As expected, Chinese officials responded by calling the bill “immoral” and adding that they have been open and transparent since the beginning of the epidemic.

President Trump renewed his plea for the FED to enact negative rates yesterday. Don’t expect the FED to directly respond to Trump, but Cleveland FED president Loretta Mester did share her thoughts on negative rates more generally when questioned yesterday – “I think that the effects on the banking system and money market funds would make me not want to use [negative interest rates] as a tool”

“It is important for the FED to preserve its credibility as apolitical and independent”

“Not appearing to kowtow to politics is properly part of the Fed’s calculus.”

– Larry Summers  (Former Clinton/Obama Economic Advisor) in 2018

FED Chair Jerome Powell is expected to broach the subject today in his 9AM speech via video for the Peterson Institute as he explores the economic outlook for the rest of 2020. It would not be surprising if Powell echoes comments from his colleagues like Kaplan, Barkin and Kashkari who have all called on Congress to provide fiscal stimulus to bridge the economy through these lockdowns that are lasting longer than expected.

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