Door Number Three

“The presidential election is slowly turning into a hot topic among our clients as peak corona fears are clearly behind in Europe, while the jury is still out on whether a new fatality spike will lead fearmongers back into the driver’s seat in the US”, Andreas Steno Larsen writes, in his traditional week ahead outlook piece.

While the US election may just now be climbing the list of “hot topics” for Nordea’s clients, it’s all the rage stateside. Things got more bizarre over the holiday weekend courtesy of not one, but two disturbing speeches from Donald Trump, who celebrated the nation’s independence by describing a biblical struggle with what he called “Marxists” and “anarchists”.

The president’s poll numbers are not good. The RCP average has Biden with a 9 point lead, but as we learned in 2016, it’s not necessarily wise to bet the house on the polls.

“Most people we speak to refuse to rule out Trump ahead of the election, and even [say] they see him as the favorite despite Biden’s strong polling”, Nordea’s Steno Larsen highlights, adding that “it’s even trickier to find a political strategist that really trusts the opinion polls, probably as they were ‘taught by injury’ after almost everyone declared the race over even before the balloting had started in 2016”.

And yet, something feels a bit different this time around. The economy is obviously in shambles, and the rebound is in jeopardy by new lockdown protocols implemented across multiple states where COVID cases are rising.

Indeed, as Goldman wrote Saturday afternoon, “over the past two weeks, states representing about 60% of the US population have responded to the worsening virus situation by pausing or reversing their re-opening plans”.

Read more: Goldman – US Recovery To ‘Stall’ Amid ‘Dramatic’ Virus Surge

Additional color from Goldman’s piece finds the bank discussing the extent to which states meet the CDC’s gating criteria for re-opening.

“Although most states have a positive test rate below 10% and maintain adequate available hospital capacity, the number of new cases and the prevalence of COVID-like illness symptoms are rising in states containing most of the US population”, the bank writes, before suggesting that “the worrisome trend in these early indicators signals that lagging indicators like hospital capacity might deteriorate further in coming weeks”.

In case you’re curious, Goldman goes on to note that five states representing 15% of the population don’t meet any of the CDC’s gating criteria for re-opening, while 11 states satisfy just one. There are only three states in the country that meet all four.

The facts are just the facts. This is not going well, which is why the administration is reportedly poised to pivot to a strategy that entails encouraging Americans to “live with” the virus, which the White House is prepared to concede will stick around for the foreseeable future.

Goldman’s projections for the economy aren’t particularly dour versus their previous projections (i.e., the downgrades aren’t large), and the bank does say there is “indeed a high bar for states to shut down large portions of their economies again”. That said, when hospital capacity becomes constrained, state and local officials have little choice in the matter.

For example, Harris County Chief Lina Hidalgo told ABC that although Texas governor Greg Abbott’s latest measures (including a mask mandate) are helpful, he will not grant her the authority she needs to bring the crisis under control in the Houston area.


“As long as we’re doing as little as possible and hoping for the best, we’re always going to be chasing this thing”, Hidalgo said. “Folks need to stay home and I need the authority to enforce it”.

It’s important to note that it doesn’t have to be this way. A simple comparison of the same Google mobility data across countries for retail, transit, and work, shows Canada, Spain, Italy, Germany, and France, all returning to similar levels of activity (left pane), while the US is a veritable outlier on daily new cases (right pane).

Again, this isn’t about politics. This is about observable facts. We can, of course, argue about what statistics should “matter”, but we have to at least ask why it is that the US is the only developed country where the re-opening process has been accompanied by a massive surge in daily infections.

In any case, this is a potential stumbling block for the economy, and thereby for the GOP in the election.

The US data calendar is light this week, which isn’t necessarily a positive development. This will be a crucial stretch when it comes to whether recent case surges will begin to manifest in that most macabre of all lagging indicators — deaths.

ISM non-manufacturing and jobless claims are on deck, and with claims showing a marked tendency to disappoint (initial claims have stopped falling, and continuing claims rose last week), it’s possible that this will be a stretch devoid of positive surprises on the economic front. If that’s set against negative COVID developments, it could make for a less-than-bullish backdrop, even as some technical/flow catalysts argue for upside.

Absent the good vibes from ongoing data surprises, the virus news (for good or bad) will hit in a vacuum.

“After three weeks of push and pull between robust current cyclical data and the increased focus on downside risks from deteriorating US virus news, the market could be moving into ‘Let’s make a deal’ mode, but still unsure what door to pick”, AxiCorp’s Stephen Innes said over the weekend.

Here’s some additional color from Innes, excerpted from a pair of notes:

Behind door number one sits the all-in trade from a vaccine discovery. Behind door number two lies the relatively optimistic economic outcome. But it’s door number three where the prophet of doom sits reminding us the virus risk will lead to a more significant growth hit in Q3.

Most rational views are not banking on a medical breakthrough anytime soon. But the most likely Alka-Seltzer moment will come when signs that the infection spread in critical hotspots is no longer accelerating. And with stricter lockdown and face mask measure being taken across the Sun Belt states, there is an excellent chance we could see those curves flattening by mid-July. 

The global economic data and positive coverage on potential COVID-19 vaccines and treatments represent a rotating whirligig of positive news that is overwhelming gnarly headline flows around the daily virus case counts in the US.

And the latitude and speed of the global monetary policy response also raise the bar for when negative pandemic news hurts risk appetite.

This tug-of-war between deteriorating virus news flow and improving data is the subject of nearly every macro note one cares to consult. And yet, as mentioned here last week, news of rising caseloads is seemingly losing its ability to impact sentiment in the absence of evidence to suggest higher fatalities are in the offing.

The economic “‘upside surprise’ impulse off the ‘shock’ low bar is without precedent” and serves as a growth-positive “macro factor catalyst running in the background”, Nomura’s Charlie McElligott said Friday.

“Narrative-wise, it does seem to me that… constructive [COVID] dynamics are receiving increasing buy-side acknowledgement” which is “likely why the ‘case growth’ headlines have stopped having” as much of a “negative market impact”, he added.

Now, who’s ready for a left-field China escalation?

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5 thoughts on “Door Number Three

    1. Shanghai has outperformed other major markets around the world by a substantial margin over just about every time frame over the last 12 months.

      It is little wonder that the CCP has been rather calm and measured with regards to escalating US rhetoric and sanctions. Given the post lockdown economic background, I doubt that there are many governments around the world that are in as rush to start economic warfare against China over human rights abuses in Xinjiang or the abrogation of political freedoms in Hong Kong.

      In addition, as poorly as China’s aggressive moves in the South China Sea and the Himalayas might be playing in neighboring countries, I suspect that the racist incitement from the White House is potentially just as unappealing (if not more so) in many parts of the world.

  1. “We have to at least ask why it is that the US is the only developed country where the re-opening process has been accompanied by a massive surge in daily infections.”

    The answer to the question revolves around the assumption that the US functions as a developed country. Increasingly, it does not.

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