As the curtain closed on the second quarter, market participants were regaled by Jerome Powell, Steve Mnuchin, and Anthony Fauci, all of whom spoke to lawmakers on the last day of a truly historic first half.
All three men generally stuck to their respective scripts. For Fauci, the nation’s top infectious-disease expert, that meant warning a Senate panel that the rate of new coronavirus cases in the US could exceed 100,000 per day if the public doesn’t start taking things more seriously.
“The numbers speak for themselves”, Fauci said, bluntly. “Clearly we are not in total control right now”.
No, clearly not. And while fatalities remain relatively low, Fauci suggested it might not stay that way. “It is going to be very disturbing, I guarantee you”, he remarked, commenting on what the death toll would be were daily cases to continue along the current upward trajectory.
One thing he could not “guarantee”, though, is that a vaccine will be ready early next year. “[I’m] aspirationally hopeful”, he said.
Hospitalizations surged in Miami-Dade County and in California. ICU patients rose in tandem. Houston’s ICU capacity is stretched nearly to the limit.
“We are entering ‘crunch time’ on fatalities since they should start to rise in early July given the lead/lag structure versus new cases”, Nordea wrote Tuesday. “If fatalities don’t spike, then people will conclude that it’s probably spreading amongst a part of the population that is not as sensitive, that it is a result of increased testing, or that the virus has become less deadly as we move into the summer months”.
“The jury is still out”, the bank added. “The next 6-10 days will be crucial”.
As for Powell and Mnuchin, it was more of the same. Clearly, monetary policy is doing what it can, so at this point, it’s up to Mnuchin to help (or not) Congress move ahead with another virus relief bill. It’s either that, or risk a fiscal cliff scenario where enhanced unemployment benefits roll off at the same time taxes are due.
No one is quite sure how much of the snapback in the labor market is attributable to the Paycheck Protection Program, but one thing we do know is that if demand falters, it will be more difficult for businesses to retain employees brought back on payroll during May and June.
Mnuchin indicated the administration is keen to pass another piece of legislation by “the end of July”, but Mitch McConnell isn’t prepared to even consider the HEROES Act, Democrats’ $3.5 trillion bill.
There’s talk of a bipartisan infrastructure initiate (see here and here) and Trump is still keen on more tax cuts of some kind. Still, one can’t help but get the impression that Congress will revert to its usual glacial pace of legislating now that the immediate crisis is in the rearview.
Read more: Just Send The Checks.
As for markets, it was a quiet end to a blockbuster quarter.
Global equities had their best quarterly performance in more than a decade and US stocks surged the most for a quarter since 1998. Big-cap tech (which reclaimed record highs), rose nearly 30%.
IG credit logged a remarkable 9% gain. Junk bonds had their best quarter since September 2009. “While the Fed’s intervention boosted credit markets overall, junk-bond returns were primarily lifted by the energy sector”, Bloomberg’s Gowri Gurumurthy notes, adding that energy posted “record gains in the second quarter, with returns of almost 40% after a record loss of about 39% in the first quarter”. (What a ride.)
Speaking of energy and wild rides, WTI crude had its best quarter in 30 years, rising nearly 100% after being briefly worth (much) less than nothing. This week could bring another bearish inventory report, though, and questions around demand linger.
Gold, meanwhile, had its best quarter since 2016. Carefully-polished paperweights are flirting with $1,800 as a combination of deeply negative real rates and fiscal/monetary largesse embolden bulls.
The VIX hasn’t completely “normalized”. There’s a lot of uncertainty out there. [Fill in the blank with your favorite boilerplate soundbite]
In rates, the Fed is still generally getting what it wants (lower reals, breakevens drifting higher – see here), even as the dollar looks like it might want to reassert itself, which would be a decidedly unwelcome development.
It’s a cliché, I know, but as we head into the back half of the year, there’s no more apt way to describe the situation than “at a crossroads”.
Clearly, the virus hasn’t had its final say yet and may never leave us alone. There’s an election in November — or at least there’s one on the calendar. A Democratic sweep could usher in changes to tax policy. As socially desirable as you may think that is, it would likely prompt the market to reprice equities.
But let’s not get ahead of ourselves.
It’s a sleepy summer day here on the island I call home, and judging by today’s price action, I’m not the only one feeling somnolent.