- Hong Kong tensions remain high ahead of today’s call for a general strike
- Fed’s Beige Book will provide some details on the extent of the pandemic’s economic damage
- Treasury market set to absorb record-sized 5-year T-note auction
Hong Kong tensions remain high ahead of today’s call for a general strike — There are expected to be widespread protests in Hong Kong today after pro-democracy groups and the Hong Confederation of Trade Unions called for a general strike. Hong Kong police are planning to be out in force trying to control the protests, which are taking place as Hong Kong’s legislature considers a bill that would make it a crime to disrespect China’s national anthem.
Any harsh crackdown by the police on protesters today may increase the determination of the U.S. to impose sanctions on China. The Trump administration on Tuesday threatened to impose sanctions on China as retaliation for China’s announcement last Friday that it will by-pass Hong Kong’s legislature to implement a new security law for Hong Kong. President Trump on Tuesday said he expects to respond by the end of this week.
The U.S. stock market Tuesday afternoon trimmed its gains after Bloomberg reported that the Trump administration is considering a range of sanctions to punish China for the new Hong Kong security law. Bloomberg said that the Trump administration could impose sanctions on Chinese officials and businesses involved in implementing the new national security law, or could impose visa restrictions on Chinese Communist Party officials.
Also, the State Department is overdue on its certification of Hong Kong’s autonomy, as required by last year’s Hong Kong Human Rights and Democracy Act. If the State Department does not make that certification, then the Trump Administration could decide to end Hong Kong’s special trade status.
China has so far refrained from announcing any retaliation for U.S. actions in recent weeks. The Trump administration this past Saturday blacklisted 33 more Chinese companies by putting them on the Treasury’s Entity List, thus barring U.S. companies from dealing with those companies. That followed the Trump administration’s move on May 15 to impose more restrictions on global chip companies for selling chips to Huawei.
The most likely avenue for any Chinese retaliation would be for China to put some well-known U.S. companies such as Apple and Qualcomm on its new “unreliable entities” list. Companies on that list are likely to face investigations and restrictions on their sales in China.
Meanwhile, the US/China phase-one trade agreement so far remains intact despite the tensions over Chinese tech companies and Hong Kong security laws. China says it will live up to the agreement, and President Trump needs Chinese purchases of U.S. ag products to bolster his political support ahead of November’s election. Still, Mr. Trump could decide to reignite the US/Chinese trade war in the lead-up to the election if he is upset about below-target Chinese purchases of U.S. goods or if the Hong Kong situation deteriorates further.
The Hang Seng index on Tuesday rallied by +1.88%, adding to Monday’s small +0.10% increase. However, the Hang Seng hasn’t come close to reversing last Friday’s sharp -5.56% sell-off, which was sparked by the initial news that China planned to by-pass the Hong Kong legislature in implementing the new security law.
Fed’s Beige Book will provide some details on the extent of the pandemic’s economic damage — The Fed today will release its Beige Book report on economic conditions in the various Fed districts around the country. The report will provide some details on the extent of the economic devastation being caused by the pandemic and the economic shutdowns. The only good news is that today’s Beige Book will likely cover the worst period of the pandemic. The situation should improve in coming weeks as states progressively reopen, as long as there isn’t a second covid-19 wave that forces some areas to shut down a second time.
The markets are getting a better handle on how bad the economic damage will be from the pandemic. The consensus is for U.S. real GDP growth in Q2 to plunge by -34.2% (q/q annualized), which translates to a quarter-on-quarter drop of -9.9% q/q. That would produce a peak-to-trough drop of -11.3% in the first half of 2020 after being combined with the -1.2% q/q drop seen in Q1.
A peak-to-trough decline in U.S. GDP of -11.3% would be more than double the -4.0% decline seen during the Great Recession and would be a larger drop than the common definition of a depression of -10%. However, a peak-to-trough drop of -11.3% would be substantially less than the plunge of -26% seen during the Great Depression. The consensus is for U.S. GDP to rise by +15.0% in Q3 and +7.9% in Q4.
Treasury market set to absorb record-sized 5-year T-note auction — The Treasury today will continue this week’s $147 billion T-note onslaught. The Treasury today will sell $45 billion of 5-year T-notes and $20 billion of 2-year floating-rate notes. The Treasury will then finish this week’s package by selling $38 billion of 7-year T-notes on Thursday. Today’s 5-year T-note issue was trading at 0.35% in when-issued trading late yesterday afternoon.
The $45 billion size of today’s 5-year T-note auction is up by $2 billion from April’s $43 billion 5-year auction and up by $4 billion (+10%) from the $41 billion size that prevailed in 2019 and early 2020. The Treasury has said that it expects to sell $3 trillion of new debt in Q2 due in part to pandemic expenses. The national debt is currently at $25.4 trillion, which is more than triple the $8 trillion level seen before the Great Recession.
