New Week Dawns With West Wing Worries, Fed-Driven Markets And Depression Dynamics

The new week began on a somewhat inauspicious note, and in that regard, I suppose it’s déjà vu all over again.

It feels like every week begins with trepidation, probably because we’re living through a modern day depression brought about by what Donald Trump this month described as “a great and powerful plague”.

That “plague” is now spreading through the West Wing. According to at least one source who spoke to Jennifer Jacobs, Mike Pence has joined Tony Fauci, Robert Redfield and Stephen Hahn in self-isolation as the fallout from Katie Miller’s positive test continues. Miller – who is, of course, married to Stephen Miller and serves as the spokeswoman for the coronavirus task force – was the second person close to the president and vice president to test positive in the space of a week. Trump’s valet also has the virus. Pence tested negative as late as Sunday, and it should be noted there was some ambiguity about his plans.

Assuming Pence does eventually decide to take precautionary measures, it would mean that the vice president, the head of the CDC, the FDA chief and Fauci are all operating under virus protocol of some kind. As far as anyone knows, Trump is still refusing to wear a mask regularly.

Later, Bloomberg’s Jacobs said two joint chiefs “missed Saturday’s meeting with Trump because of coronavirus scares”. “Navy’s Michael Gilday has a family member who tested positive”, she said, adding that “Joseph Lengyel, chief of National Guard bureau, tested positive Saturday but a later test was negative”.

Boris Johnson struck a decidedly serious tone on Sunday while addressing his countrymen and women about the path forward. I suppose one tends to lose the witty sarcasm after a brush with death.

“This is not the time simply to end the lockdown this week”, Johnson told the UK, in a televised address. “[We’re] taking the first careful steps to modify our measures”, he explained, on the way to cautioning that allowing a second wave to devastate the country after the sacrifices everyone has already made “would be madness”. His message was starkly opposed to that conveyed by Trump last Tuesday.

Meanwhile, Andrew Cuomo said New York had the fewest daily deaths – 207 – since late March, but the total number of children exhibiting symptoms of a mysterious new pediatric disease linked to COVID-19 rose to 85. As its name suggests, “multisystem inflammatory syndrome” causes inflammation and, to quote Cuomo, it’s “every mother’s nightmare”. Symptoms include, but are not limited to, fever, rash, abdominal pain and vomiting.

So, even as key trends in New York’s epidemic continue to show progress (figure below), the news isn’t what one would call “good”.

All of that casts a bit of a pall over reopenings across multiple states. Tentative signs that the figurative and literal shutters are lifting have served to embolden some market participants in recent days, but most understand that the restart of economic life will have consequences for case rates and fatalities. The question is how severe those consequences will be.

“In the span of a mere six weeks, the S&P 500 soared by 30% as investors shifted gears from the depths of despair while putting the pedal to the metal on Fed policy deluges, turning footloose and fancy-free, showing few doubts about the duration of the recession and the eventual pace of economic recovery”, Axicorp’s Stephen Innes said Sunday, noting that although there may well be a reality check in the cards, “in the meantime, easy liquidity, the amount of available Fed firepower [and] cash on the sidelines continues to suggest it’s a matter of time before Wall Street gets stopped into equities rather than getting stopped out”.

On the data front, NFIB small business optimism (or, in this case, pessimism), CPI, retail sales, Empire manufacturing and industrial production, are all on deck stateside. Powell will speak on the economy Wednesday after the market began pricing in negative rates last week. As a reminder, NFIB, IP, Empire manufacturing and retail sales were all a disaster last month.

“We expect substantial drops in both growth and inflation data”, SocGen said over the weekend. “Consumer spending and industrial output are due for another heavy fall in April following March’s large losses [and] May shouldn’t offer much of a bounce”, the bank added, noting that “phased re-openings and ongoing social distancing are hampering gains, but hopefully the re-openings will halt the major declines”.

Commenting on the general state of things in a Sunday evening note, JonesTrading’s Mike O’Rourke struck a downbeat tone.

“We continue to believe that this is the result of liquidity fueled and price insensitive index model driven by investors chasing exposures, while institutional active managers move to the sidelines due to the expensive valuations and uncertain economic outlook”, he remarked. “In summary, we have reentered the Fed driven liquidity environment that has neutered the market’s pricing mechanism and price discovery”.