THE DAILY EDGE: 8 MAY 2020

VIRUS UPDATE

• The number of new cases in Germany rose the most in a week, just days after the government declared the first phase of the pandemic to be over. There were 1,268 additional infections in the 24 hours through Friday morning, according to data from Johns Hopkins University. That is the third day of rising cases and brings the total number to 169,430. Germany is preparing to open restaurants, hotels and all shops as well as to restart professional soccer games as Chancellor Angela Merkel on Wednesday declared some progress in fighting the virus, which so far has caused 7,392 deaths in the country. (Bloomberg)
• New infections from the coronavirus have surged in Iran two weeks after it began easing restrictions on its population.
• South Korea’s Health Ministry said 13 new coronavirus cases are linked to a patient who visited three nightclubs in Seoul on May 2. About 1,500 people visited the three clubs that day, and a ministry official said there is high chance more virus cases would be confirmed.
• Coronavirus could infect 44 million people in Africa, WHO says
• Coronavirus Hijacks the Body From Head to Toe, Perplexing Doctors More than a respiratory infection, Covid-19 wreaks havoc not just on lungs, but also the brain, kidneys, heart, vascular and digestive systems, and feet. Inflammation and abnormal blood clotting are likely culprits.
• A drug for rheumatoid arthritis appeared to help improve lung function in hospitalized Covid-19 patients, a positive sign for treating those with severe inflammation in their organs. Treatment with anakinra, sold by Swedish Orphan Biovitrum AB as Kineret, was associated with a 90% survival rate and reduced respiratory symptoms, according to an observational study of 29 patients published Thursday in the Lancet Rheumatology journal.
• Antimalaria Drug Hydroxychloroquine Doesn’t Help Treat Covid-19, Large but Inconclusive Study Finds
• Few New Antibody Tests Judged Reliable Just 12 antibody tests have been granted authorization for emergency use after being reviewed by the FDA. No at-home antibody tests have been authorized, and researchers overall have expressed greater concern about their quality.

PANDENOMICS

China’s service sector conditions remain challenging as pandemic weighs on demand

(…) Total new business received by Chinese service providers fell for the third month in a row in April. That said, the rate of decline eased further from February’s record pace and was only modest. The reduction in total sales was widely linked to weaker demand conditions both at home and overseas. Notably, new export orders fell at the second-sharpest rate since the series began in September 2014 (…).

The sustained drop in total new work led to a further fall in employment across the sector. Moreover, the rate of job shedding was the quickest recorded since data collection began in late-2005. Despite lower headcounts, backlogs of work declined again in April as lower intakes of new business freed up capacity. (…)

Consumer Activity Tracker Ticked Down in China, but Was Unchanged in the US (GS)

U.S. Consumer borrowing plummets (ING)

Demand for Small Business Loans Cools Nearly two weeks after the federal government relaunched its small business aid program with an additional $310 billion, more than 40% of the money remains available.

(…) But the likely biggest reason for the slowdown is that many business owners have concluded that the SBA’s Paycheck Protection Program simply doesn’t meet their needs, lenders and others say, or they are waiting for the government to clarify the terms under which loans can be forgiven.

The program is generally aimed at companies with 500 or fewer employees, and it requires them to spend 75% of their loans on payroll to have the loan forgiven. Many small retail businesses, such as restaurants and hair salons, say that is a problem because they remain largely shut down and are operating with skeletal staffs.

“Since we can’t hire back our team, our current math is at most 10% [of the loan] will be forgiven for us,“ said Bob Garner, co-founder of Glory Days Grill, a Maryland-based casual restaurant chain with 21 locations. ”It’s basically a large loan we are going to be stuck with.”

For very small firms, especially in urban areas, payroll costs are eclipsed by other expenses, such as rent. (…)

• California warned it faces a $50 billion-plus budget deficit. House Democrats are drafting stimulus aid expected to include more than $750 billion for state and local governments.
• Facebook said it would allow employees do their jobs remotely through the end of the year.
• Beginning Friday, California retailers such as clothing stores, bookstores, florists and sporting goods stores can reopen for curbside pickup. Manufacturers in the state will also be allowed to restart operations.
• Michigan Gov. Gretchen Whitmer said manufacturers in the state, including auto makers, could return to work Monday, before the state’s stay-at-home order expires May 28.
• Mortgage Lenders Tighten Screws on U.S. Credit in Echo of 2008 Mortgage rates are at record lows, but borrowers are running into the toughest loan-approval standards in years.
• Spain’s deputy PM calls for EU to step up or risk extinction Pablo Iglesias sets out stall for shift to left with minimum income guarantee proposal

CONSUMER WATCH

Via David Rosenberg:

• The Washington Post/University of Maryland poll shows that only 56% of consumers intend to shop at the supermarket (I suppose that is a bullish data point for delivery services). Just 33% are comfortable entering a retail store. And a mere 22% say they are willing to dine in a sit-in restaurant.
  
• In the U.K., an Ipsos Mori survey found eerily similar polling results. More than 40% are reluctant to shop or send their kids back to school, even after government officials allow for it. And more than 30% are worried about going back to work or getting together with friends.
  
• A YouGov/CBS poll finds that 71% of Americans have zero intention of heading out to a restaurant or bar despite all these other feelings of being forlorn and claustrophobic and 85% say they wouldn’t get on an airplane even if they could.

From the NY Fed:

(…) Turning next to respondents’ expectations, we see a decline in median expected spending growth over the next twelve months to 1.5 percent, compared to 2.4 (2.6) percent reported in December (April) 2019—easily its lowest reading since the first reading of this series in the SCE Household Spending survey in August 2015.

As shown in the chart below, the decline in overall spending growth expectations is entirely driven by a sharp decline in expected non-essential spending growth (defined as spending on hobbies, leisure, vacation, and other items that one does not absolutely need). While the median expected growth in everyday essential spending (that is daily living expenses related to what one absolutely needs) increased slightly to 3.2 percent, the median expected growth in non-essential spending dropped to 0.2 percent in April, from 1.4 percent in December 2019, respectively.

There was also a big increase in the dispersion in non-essential spending growth expectations across respondents in April. For example, some 25 percent of respondents reported expected cuts in non-essential spending over the next twelve months of 6.8 percent or more. The declines in expected non-essential spending growth were comparable across age, education and income groups. (…)

Finally, we consider expectations regarding making various large purchases over the next four months. The average probability of making a large purchase in electronics, home appliances, furniture, a car or other vehicle, or vacations and trips over the next four months all declined in April to new series lows (since this series’ start in April 2015). For most categories the magnitude of the decline was again increasing in income.

CHINA

Some readers have been commenting/asking about investing in China, perhaps particularly if the U.S. market becomes less appealing (The Day After…). I am no expert on China. I post China-related items that I find relevant for the global economy and developed markets. Also

• I am too old to invest in China, time is no longer on my side…;
• I like to understand what I invest in and I cannot pretend to understand the Chinese economy;
• I like to be able to invest with reasonably solid and dependable economic and financial data; I can’t rely on most government economic data from China, data that is so smooth and never revised for such a large and complex economy…

But that’s just me. At present, I am focused on return of capital and cash flow from investments in a world where capital gains will be more challenging and interest rates near zero for quite a while.

But for those who care, I will post or link interesting stuff on China. This is from Schroders:

• China A-shares: the opportunity for investors

U.S. and China Negotiators Pledge to Implement Phase One Trade Deal The top trade negotiators for the U.S. and China talked on the phone Friday, pledging to create favorable conditions for the phase one trade deal, China’s state-run Xinhua News Agency reported.

SENTIMENT WATCH

It’s JPMorgan vs. Citi as Wall Street Splits on Market Direction Wall Street’s biggest firms are divided on where markets are heading next.

(…) Citigroup Inc., for one, doesn’t get the “puzzling” rise in stocks.

“Extensive policy response, led by ample liquidity provided by central banks, likely contributed to the move in the markets,” economists including Igor Cesarec and Catherine Mann wrote in a note Thursday. “However, since it is not clear that markets can be propped up indefinitely, caution is warranted. Risk assets could be fragile once the cold, hard economic reality hits again.”

On the other hand, JPMorgan Chase & Co. sees the stock market advance as justified — and one which can continue.

“While the collapse in economic activity is historic, so too is the global policy response to cushion the impact and support a recovery,” strategists led by Marko Kolanovic wrote in a note Thursday. “We expect risky assets to continue to recover as economies reopen and given the unprecedented policy support, though we expect a moderation in the pace of gains.” (…)

Goldman attributes the market rise to a stabilization in virus infection rates and an improvement in measures of funding and liquidity stress. The firm has already said that equities price in macroeconomic performance over a two-year time horizon and investors may look past huge economic damage.

“Markets will continue to look through bad news about the depth of the economic downturn if they can continue to hold on to their view that a sizable chunk of the recent damage will be reversed by the end of next year,” strategists including Zach Pandl wrote in a note Tuesday.

And Morgan Stanley is also comfortable with the disparity between asset price performance and fundamentals, noting that markets tend to lead the economy and care more about rate of changes than absolute levels.

“Divergences between the market and economy are common at economic extremes,” wrote strategists including Andrew Sheets in a note Thursday. “Rate of change is key – a ‘U’ shaped recovery is fine, a ‘W’ is not.”

Measuring forward looking, SocGen’s Albert Edwards says this is insane (ZeroHedge)

J.P. Morgan

SentimenTrader notes that measures of investor pessimism are at or near all-time lows, normally a dependable contrarian signal. Jason goes on showing that individuals are selling this rally across the world and that hedge funds of all kinds, including market timers, also seem to be sidelined.

So…who’s actually doing all the buying? I dunno. It seems to be a broad mix of groups, adding back modestly to whatever they sold during the plunge. There doesn’t seem to be any single group that’s helping to drive prices higher, at least not a group that’s large enough to show an impact.