If governments are allowing the re-opening of economies, it’s a government embrace of risk

Outlook:

This week we have three major central bank meetings—the Fed, the BoJ and the ECB. In the absence of a Covid-19 bond in Europe, it's hard to see what the ECB can say that would be new or even interesting. It will presumably increase QE. The same thing is true for the Fed, which has been hyper-active and while not getting praise, escaping the usual griping about being behind the curve. The BoJ's announcement that it will buy corporate bonds (and commercial paper) is highly favorable in more than one way—it shows the BoJ is not a hidebound bunch of old fuddy-duddies and capable of adopting a new stance. We would really like to know if these central bankers are talking to one another. Normally they do, but it probably has to be a secret from Trump's xenophobic White House.

In addition to the Fed, we get 34% of the S&P companies reporting Q1 earnings. Tech starts the week, but then we will hear drums beating ominously in the jungle about retailers and other vulnerable sectors. In earnings as elsewhere, though, it's not Q1 that counts but rather the outlook and guidance for Q2, if companies are brave enough to venture forecasts.

The big data this week might be GDP on Wednesday, likely the biggest contraction since 2009, according to the WSJ. S&P Global predicts a drop by 7.5% annualized, although the WSJ survey gets 3.5%. The bright side is that almost 85% in the survey see Q3 recovering, which has to be wishful thinking since we simply do not know what shape the pandemic will take us into over July-Sept, never mind the fall when experts warn to expect a resurgence.

The WSJ highlights that retail sales (reported in mid-April) fell 8.7% in March, and the lockdown didn't begin until the last week of March. Industrial production fell 5.4% in March, which must mean capital spending went to zero. We say talk of "pent up demand" as some states start to loosen lockdown rules may also be wishful thinking—people without wages/income are in no position to exhibit retail demand. Even those receiving unemployment benefits will not be spending like there's no tomorrow. In a nutshell, Q2 data will be a nightmare.

And yet, what if the optimists who like risk-on today are actually right and we gloom-and-doomsters are wrong? What if Q3 does deliver a massive recovery? What if China is the model—a lousy Q1 followed by a V-shaped recovery in Q2 and Q3? We can't deduce anything from the currencies, which are not consistent against one another on the basis of conventional risk-on/risk-off. Maybe the stock market is right to rally—after all, most of the newly jobless are lower-level service sector workers without pension plans and 401k's; the remainder do have those things and most funds are required to stay x% invested with some maximum in cash.

The forecaster's problem today is teasing apart what is short-term and what is long-term. If you believe the scientists who say it will be 1918 all over again because that's how viruses behave—a second surge of infections and deaths in the fall—then you hang on to the doom scenario. But we have four or five months ahead during which recovery can be robust and inspire the famous human ability to overlook the elephant in the room. Besides, by end-September we may have treatments. We may even have tests, although Bill Gates, who is an authentic expert by this time, is not hopeful on that front and names the unwillingness to prioritize testing by the US government as the single worst thing about this whole episode, although he was too clever to put it quite that boldly.

If governments are allowing the re-opening of economies, however limited, it's a government embrace of risk. Markets are sure to follow. On the FX market's now-standard evaluation of risk, the 10-year yield has bottomed and the dollar has peaked. Whether they deserve it or not, other currencies can thrive, like the AUD. Normally these bouts of risk-on last 3 to 5 to 7 days, but this one may have more lasting power. This time the data-dependency lies more with the cases/mortality metrics than with the economic data.

Tidbit: To set the record straight: In North Charleston, South Carolina on Feb 28, 2020, Trump said "Now the Democrats are politicizing the coronavirus. They have no clue, they can't even count their votes in Iowa. This is their new hoax." Attacking the White House's response to the coronavirus has become the Democratic Party's "single talking point."

Tidbit 2: In the category of things we didn't know: Bats account for about 25% of all mammals on earth. There are over 1,300 species of bats in the world (40 in the US), making them the second most common group of mammals after rodents, which are 50%. All other mammals, including humans and cats and dogs and horses, cows and pigs, account for the remaining 25%. Bats, according to an article in Science Alert, fostered Ebola, SARS, rabies and MERS as well as, most likely, COVID 19. "Why is that? According to new research, it's because bats may be the ultimate incubator, courtesy of a fiercely effective and robust immune system that seems to, in effect, train up viral strains, encouraging them to adapt and evolve into becoming as fit and infectious as they possibly can.

"It's an unfortunate side effect of what is otherwise an awesome survival mechanism. Not unfortunate for bats, that is, but certainly for other species – because when viruses manage to leap from bats to other sorts of animals, including humans, the recipients' immune responses aren't equipped to counter these attuned, efficient, and highly transmissible pathogens. ‘The bottom line is that bats are potentially special when it comes to hosting viruses,' says disease ecologist Mike Boots from UC Berkeley. ‘It is not random that a lot of these viruses are coming from bats.'"

Bat bodies can manufacture an anti-viral thing named interferon-alpha that signals surrounding cells to go into a "defensive, antiviral state." Paradoxically, the virus adapts to the new conditions but doesn't die, meaning the virus can live on—and replicate.

 

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