- Markets wait to see if Trump administration launches an attack on any other Chinese software apps
- President Trump applies pressure to Congressional negotiators on pandemic bill by saying he will act unilaterally
- Markets should be able to absorb the U.S. Treasury’s $1 trillion of extra debt sales this quarter
- June U.S. factory orders expected to extend May’s recovery
Markets wait to see if Trump administration launches an attack on any other Chinese software apps — President Trump on Monday backed off on his threat to immediately shut down TikTok and gave the company until September 15 to see if it can be purchased by an American company. Microsoft’s CEO reportedly had a conversation with Mr. Trump and convinced the President to give Microsoft some time to negotiate an acquisition of TikTok.
The markets are nervous about the Trump administration’s apparent plan to shut down more Chinese software apps, which would further aggravate U.S./Chinese relations. Secretary of State Pompeo on Sunday said that the Trump administration will announce measures shortly against “a broad array” of Chinese-owned software companies that the U.S. believe pose a national-security risk. Mr. Pompeo specifically mentioned the WeChat app, which might be next on the administration’s list.
It remains to be seen whether Chinese officials will continue to absorb blows from the Trump administration without retaliating. China has long threatened to activate its “unreliable entities” list, by which U.S. companies such as Apple and others would see restrictions on their sales in China.
The U.S./Chinese phase-one trade deal so far remains intact. However, China is far behind on its promises to purchase U.S. goods, which means that Mr. Trump has a pretext to cancel the deal at any time and launch a new round of tariffs.
President Trump applies pressure to Congressional negotiators on pandemic bill by saying he will act unilaterally — President Trump on Monday said that if Congress does not come up with a pandemic bill, he will act unilaterally to renew the eviction shield and cut the payroll tax. The administration is also reportedly looking into whether there would be any way for Mr. Trump to order renewed bonus unemployment benefits without legislation.
Mr. Trump’s threat to cut or suspend the payroll tax undoubtedly lit at least a small fire under Congressional negotiators since neither party wants a payroll tax cut. A suspension of the payroll tax only helps people with jobs, not the some 30 million people that recently lost their jobs. A payroll tax suspension also threatens the viability of the Social Security and Medicare systems, which are already on thin ice.
There was a 2-hour Mnuchin-Meadows-Pelosi-Schumer meeting on Monday where little progress was reported. The negotiators are scheduled to meet again today.
The federal unemployment bonus of $600 per week expired last Friday for some 30 million people, which will reduce U.S. consumer income by about $18 billion per week and put a big dent in Q3 U.S. personal income and spending. Meanwhile, the federal protection against eviction expired on July 25, which means more people will now be getting evicted from rental properties financed by federally-guaranteed loans.
Democrats are pushing for an overall deal and are refusing to consider the Republicans’ proposal for a 1-week extension. The Senate is scheduled to leave for its August recess this Friday. The House is already on recess, but Speaker Pelosi said she will call the House back into session if there is a pandemic bill to pass.
Markets should be able to absorb the U.S. Treasury’s $1 trillion of extra debt sales this quarter — The Treasury market in Q3 will be forced to finance an additional $947 billion worth of debt to finance the federal government’s chronic budget deficit plus the extra pandemic expenses, according to the Treasury’s announcement on Monday. The total is likely to be even higher since the Treasury is assuming that the pandemic bill that is currently being negotiated will be only $1 trillion, when it is more likely to near $1.5-2.0 trillion to account for the Democrats’ larger demands.
The Treasury’s debt announcement came after Fitch last Friday already put the U.S. debt rating on negative watch, citing a “deterioration in U.S. public finances and the absence of a credible fiscal consolidating plan.” Fitch said that it expects general U.S. government debt to exceed 130% of GDP by 2021, which would clearly be in the red zone.
The good news is that the Treasury market should be able to easily absorb the Treasury’s new debt in Q3. There is strong demand for U.S. government debt because of (1) safe-haven demand due to the pandemic’s shock to the global economy, (2) expectations for the Fed to keep its funds rate target near zero for at least the next two years, (3) the Fed’s $120 billion QE program, which includes purchases of $80 billion of Treasury securities per month, and (4) strong demand for positive-yielding Treasury securities from overseas investors fleeing from $16 trillion of negative-yielding debt.
The huge supply of new Treasury debt, however, means there is some risk of rising yields if unexpected circumstances arise. For example, Treasury yields could suddenly see substantial upward pressure if an effective and widely-available vaccine becomes available that helps the world’s economy get back to normal faster than expected. Treasury yields would also see upward pressure if inflation pressures should unexpectedly emerge.
June U.S. factory orders expected to extend May’s recovery — The consensus is for today’s June factory orders report to show an increase of +5.0% m/m, adding to May’s +8.0% recovery. Even after the expected June increase, however, factory orders would still have to rise by a further +15% just to get back to the pre-pandemic level seen in February.
