The relative perkiness of risk-on assets is about to get a dose of cold water

Outlook:

Today we get the April trade balance and personal income and consumption from the GDP report. Again, income will likely be less bad than the month before (-2.0%) and consumption better, too (from -7.5%) because of government spending to households, plus the payroll replacements. It still remains that a collapse in activity like we are seeing must result in deflation, so the PCE deflator forecasts all shows a drop, if not to negatives.

Analysts and reporters seem to be going out of their way to see the glass half full when it's really two-thirds empty. If it will all be over by the summer, why then is the Trump administration refusing, for the first time anyone can remember, to deliver the customary economic forecast? As for facts, a surge in mortgage applications, for example, is accompanied by a collapse in pending home sales by 33.8% y/y (after -16.3% y/y in March). Last week the NAR reported a drop "in closed sales in April of 17.2%, the sharpest year-over-year drop since August 2010, during the Housing Bust," according to WolfStreet. "Based on this relationship, closed sales of existing homes in May might be down by 30% or more, year-over-year. This will be reported in June." Also, commercial real estate is facing a bust, especially shopping centers and strip malls.

Those with the ability to borrow are not letting the grass grow under their feet. Bloomberg reports corporate bond sales hit the $1 trillion mark in the first 149 days of the year, whereas in a typical year, that number is not reached until much later (like November in 2019 but August in 2017). The government will be borrowing at least $4 trillion this year. Here's a weird tidbit: while consumer credit fell in March, the government changed the reporting for April (due next week on June 5). It will combine on-book and off-book receivables as a single entry. Funny, this is consumer credit. In March, consumer credit rose at only 1.75% in Q1 while revolving credit fell 10.25% or an annual rate of 31%.

First deflation, but then inflation. The losers in inflation are those who cannot borrow and increase debt. As usual, it's the Average Joe. Meanwhile, the rate of return on savings will likely be capped, assuming the Fed adopts curve control, as Fed Williams said earlier this week is looking more acceptable to Board members. Just in time for the consumer to start saving as much as possible. See the chart. The household savings rate rose to 13.10% in March from 8% in Feb and well under 8% for most of the preceding five years.

It goes without saying that most persons in the US are not engaged in the stock market personally and directly, even if they have a position in the form of their pension funds. The jury is still out on whether we get another crash as we saw in March or it's all over. Bloomberg's Authers (who was sharper when he was at the FT) opines the stock market has reached a tipping point now that the majority of S&P names are trading over their 50-day moving average. But he wisely adds that this indicator of lasting recovery is vulnerable to the second Covid-19 Wave or a worsening in US-China relations. Well, both of those things are highly likely!

We guess that the energy of the currencies moving up over the past two days might be due to evaluating Trump's mood and seeing he is fooling around picking petty fights with Twitter, accusing a "fake news" newscaster of murder, and yesterday, calling up his racist supporters. He is wrong on all counts so these are among his more stupid attention-grabbers and diversionary tactics from the death count from the pandemic. Maybe he can't cope with the pandemic, maybe he actually has caught it and it's freaking him out, or some other thing unfathomable to normal people—but the key point is he was not attacking China. But yesterday when he announced a press conference for today on the subject, equities retreated fairly hard and the normal end-of-day exits from long currency positions was fairly extreme. We always get 10-20 points, but yesterday it was double the usual amount.

We suspect the relative perkiness of risk-on assets is about to get a dose of cold water. The problem is that it can be a drip-drip—minor responses--and not the full bucket all at once. Still, everyone knows Trump's modus operandi by now. He is going to make a Big Deal out of attacking China and blaming it for everything he can think of. This has to affect the stock market, yields and the dollar. As usual, the problem is the timing, and also the pace of results vs. expectations. For all we know, by Monday the markets can have digested and discounted whatever Trump says today. We still need to expect fireworks for the sake of hedging bets.

Tidbit: The Guardian has a story about the Trump campaign swiftly acting to remove a cartoon from sale on a website on the grounds it violated copyright (the Maga hats), a charge opposed by something named the Comic Book Legal Defense Fund. The cartoonist wrote he is troubled by how fast the campaign jumped on it, getting the vendor website to remove the cartoon less than 24 hours after posting. "I doubt anyone had even seen it yet on the site. This reveals that the Trump campaign has a system in place, trawling for material they find objectionable. If it happened to me so quickly, it likely has happened to others. How much other content has been removed this way on Redbubble and other sites?

"It must be pointed out: the president of the United States is a hypocrite who complains about the ‘violation' of his free speech on Twitter, then tries to actively suppress the free speech of others. These are actions of an adolescent wannabe-authoritarian."

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