New Week, Same Virus

Markets will kick off the new week confronted with more disconcerting news flow around the virus, even as US equities are looking to build on gains that took the S&P to record highs on Friday.

Boris Johnson is self-isolating after an encounter with a lawmaker who later tested positive. Johnson was criticized in the earliest days of the pandemic for adopting a relatively nonchalant attitude towards the disease, before contracting it himself. Two weeks ago, Johnson ordered England back into lockdown as cases and fatalities spiked. The UK economy was among the hardest hit during the global downturn. As of Sunday, he was exhibiting no symptoms.

In the US, the situation is out of control. The country added more than a half-million new cases from Thursday through Saturday. Joe Biden is rushing to get ahead of the game before assuming office in January, and two members of his COVID-19 response team, as well as the incoming White House chief of staff, spoke to the media Sunday. Biden would only resort to a nationwide lockdown as a last resort, they said, noting that he prefers targeted measures that build on lessons learned during the spring and summer.

The current administration is distracted to the point of paralysis. Donald Trump spent Sunday tweeting all-caps retractions after accidentally admitting to an election loss in a previous tweet. I’m loath to quote him.

Meanwhile, Washington State banned indoor dining, closed gyms, shuttered indoor movie theaters, prohibited indoor wedding receptions, and said indoor retail can only operate at 25% capacity, among other highly restrictive new measures that will go into effect on Monday. Michigan also announced a three-week partial lockdown. Cases hit a record in New Jersey where hospitalizations and ICU patients rose.

On the bright side, Bill de Blasio said New York City schools won’t be closing — yet. On Friday, de Blasio warned that in-person learning may be halted as soon as Monday, but the city’s seven-day rolling average positivity rate ultimately remained below the 3% threshold.

On deck this week stateside is the latest read on retail sales, which you might recall remained robust in September. Of all top-tier economic data points, retail sales sticks out as having staged a “real” V-shaped recovery, where that means the total value of sales is above its pre-pandemic levels. Other purported “V-shaped” charts typically show the month-on-month change in a given data series, which can be deceptive.

For months, market participants have expressed palpable concern that consumption can only hold up so long given still elevated unemployment and weekly jobless claims running above pre-pandemic records. There’s been a readily observable shift in consumption to goods from services which has helped prop up sales, but that too could wane.

That said, jobless claims are on the brink of falling below the pre-COVID high hit in 1982 and the unemployment rate continues to surprise to the downside with each passing NFP report.

But labor market momentum has slowed, and gains are generally seen as fragile without additional support from Congress.

On Friday, Richard Curtin, chief economist for the University of Michigan’s consumer sentiment survey, warned that holiday shopping season could be at risk without additional fiscal stimulus.

“Job and income declines due to the COVID resurgence will diminish holiday purchases among lower-income households, especially since no extension in federal jobless benefits and other income supplements are expected before year-end,” he said, in the color that accompanied a below-consensus preliminary read on the headline sentiment gauge for November.

While there’s no need to be pessimistic for pessimism’s sake, I would gently suggest casting a wary eye at overtly rosy projections for holiday shopping season. Especially when you account for the distinct possibility that the unchecked spread of the virus in the US could lead to fewer in-person holiday gatherings, and thus a convenient excuse for people with no money to eschew the buying of gifts.

Also on deck in the US this week is a raft of housing data, which one imagines will remain generally upbeat in keeping with the “bubble” narrative which says that de-urbanization trends tied to the pandemic combined with record-low mortgage rates have the US housing market on the brink of overheating. IP is on the docket as well.

Unfortunately, it’s at least possible that Judy Shelton will get a confirmation vote this week. Most observers assumed her long-shot bid for a Fed Board seat was dead in the water, but this is one lame duck that might manage to swim. This should have always been a non-starter for too many reasons to count, not least of which is that Shelton is not remotely qualified. And even if you like her “out of consensus” views, you should note that those views don’t seem to be very enduring. Shelton variously argued for competitive easing from the Fed in a rather transparent attempt to curry favor with Trump, despite the fact that aggressive rate cuts, currency wars, and a tit-for-tat approach to monetary policy aren’t generally consistent with her equally terrifying designs on bringing back the gold standard.

Oh, and don’t sleep on Thursday’s rate decision out of Turkey. I realize that’s not on most US investors’ radar, but it’s a big deal. Recep Tayyip Erdogan swears he’s ready to adopt “bitter pill” policies if it means getting a handle on lira depreciation. Market participants, ever a gullible bunch, seem to believe him. If CBT doesn’t deliver a sizable rate hike under new leadership, recent euphoria in Turkish assets could be unwound rapidly.