Tug Of War.

The “tug of war” between two divergent narratives about the likely trajectory of the reopening push and, in turn, the economy, was on display Tuesday, as stimulus hopes and upbeat retail sales data clashed with more evidence to support the “second wave” characterization of new virus flare-ups.

Beijing raised its COVID-19 response level to the second highest as the city rushes to contain an outbreak tied to a food and vegetable supply center. Schools will be shut and online courses restored, while college students will stop returning to campuses.

Meanwhile, in the US, Texas hospitalizations jumped 8.3% to 2,518, a record, and the largest daily jump in more than a week. The trendline is not encouraging.

Florida hospitalizations are rising as well, and the state saw a 3.6% increase in cases, considerably higher than the seven-day average. On a rolling, seven-day basis, Florida is now experiencing a record pace of infections.

This is clearly disconcerting, although how foreboding it is for markets depends on your inclination to believe that local officials will countenance the resumption of lockdown protocols, something the White House is keen to avoid at almost all costs.

At the same time, a potential breakthrough on the therapeutic front may have inoculated markets from incurring further damage from the increasingly dour headlines. Dexamethasone, a widely-used steroid, apparently has the potential to save lives when used by gravely ill COVID-19 patients. Scientists called the study results a “major breakthrough” in the pandemic.

One interesting juxtaposition in the US economy is between industrial production and retail sales. While the latter rebounded sharply in May, blowing through expectations, the former was more subdued.

Last month, factory output plunged the most in more than 100 years. May’s 1.4% increase was less than half of the bounce seen by economists.

“This morning’s retail sales report was fantastic, but the industrial production report highlights the fact that not every part of the economy will respond in the same way to the re-opening programs”, ING said.

Indeed. And what’s particularly notable is that the US experience is the mirror image of the Chinese recovery. In China, industrial production bounced strongly, while retail sales have struggled to recover.

“As already reflected in the high-frequency indicators, the recovery in [Chinese] industrial production continued to gain traction” in May, SocGen’s Wei Yao said, of China’s activity data, which missed estimates slightly, but not by enough to rattle markets earlier this week.

“A broad-based acceleration can be observed in all the major subsectors, namely mining, manufacturing and utilities”, she added, before commenting on the retail sales figures. “Despite the rampant growth in housing sales, general consumer spending has recovered much more slowly”, she said, calling private demand in China “lackluster” and “sluggish”.

It’s an interesting compare/contrast exercise. I suppose the bright side for the US economy is that America runs on consumption, not manufacturing, and consumers were clearly itching to get back out and spend according to May’s numbers.

In any case, the world’s two largest economies are now both grappling with concerns about a second virus wave, and one imagines it’s just a matter of time before Washington and Beijing are back at each other’s throats over the hodgepodge of foreign policy issues plaguing bilateral relations. We are, after all, in a new cold war.