Jun 8, 2020

Axios Markets

By Dion Rabouin
Dion Rabouin

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🚨Tonight on “Axios on HBO”: 

  • Atlanta Mayor Keisha Lance Bottoms opens up about the protests in a rare, raw and heartfelt interview. (clip)
  • Rep. Val Demings “would say yes” to being Joe Biden’s running mate. (clip)
  • Presiding Bishop Michael Curry of the Episcopal Church explains “holy rage” and calls out Trump’s bible “photo op.”
  • Rep. James Clyburn tries to describe how he felt watching the video of George Floyd’s killing.
  • Plus Columbia University professor Robert Fullilove unpacks the health effects of racism.

Watch at 11 pm ET/PT on all HBO platforms.

🎙 “The means of defense against foreign danger have been always the instruments of tyranny at home." - See who said it and why it matters at the bottom.

1 big thing: The great data crisis

Illustration: Eniola Odetunde/Axios

Economists have long been disparaged for inaccurate predictions, but Friday's nonfarm payrolls report laid bare a new problem for the world's largest economy: questionable data.

Why it matters: Economic data is a crucial element in the movement of asset prices that determine what Americans pay for just about everything.

  • It's not just the stock market — the yield on U.S. Treasury bonds helps set rates for mortgages, student loans, credit cards and more.
  • Market moves also determine the value of assets like oil and the dollar, based largely on economic data.

Driving the news: The government's jobs report on Friday wasn't just much better than expected — showing the U.S. added 2.5 million jobs in May, 10 million more than economists predicted — it was full of inexplicable holes and numbers that contradicted other government readings.

  • To wit, as DRW Trading rates strategist Lou Brien points out, the Labor Department's unemployment insurance report showed that for the week ending May 16 there were 29,965,415 unemployed people receiving unemployment benefits.
  • The Labor Department's jobs report — which surveys individuals and businesses during the week of May 16 — found there were 20,985,000 unemployed people.
  • That would mean there were 9 million more people receiving unemployment benefits than there were unemployed people during the exact same survey week.

What they're saying: "Safe to say it is fair to be a bit skeptical of the numbers," Brien said in a note to clients.

Between the lines: The Labor Department also noted that only 35 states reported pandemic unemployment assistance numbers and just 22 reported claims for extended benefits during that week.

  • The extended benefits data was missing from the nation's second and fourth most populous states — Texas and Florida — suggesting the number of unemployed people is likely higher than the unemployment insurance data show, not lower by 9 million.

The big picture: Economic data is often incorrect or incomplete in its initial iterations, as it is based on human reporting and techniques as simple as making phone calls and filling out questionnaires.

  • What's different now is that the shock of the coronavirus pandemic is pushing the potential scale of error to previously unimaginable levels.
  • However, as Friday's trading action showed, the reports can still move markets.
Bonus content: Notes from the Bureau of Labor Statistics

The Labor Department's Bureau of Labor Statistics offered a bit of explanation for some of the irregularities in its numbers, pointing out that data collection for the jobs report was "affected by the coronavirus (COVID-19) pandemic."

How so: "Although [BLS regional data collection centers] were closed, about three-quarters of the interviewers at these centers worked remotely to collect data by telephone," BLS said in its May jobs report, also noting that no in-person surveys were taken during the month.

  • The pandemic led to a rate of responses to its survey of households that "was about 15 percentage points lower than in months prior to the pandemic."

There's more: The May nonfarm payrolls report included a “misclassification error” that would have made the unemployment rate "3 percentage points higher" than the reported 13.3%.

  • BLS said it was "investigating why this misclassification error continues to occur" as it's happened in the last three jobs reports.
2. Catch up quick

Drugmaker AstraZeneca has lost interest in a possible merger with Gilead Sciences that would have created the largest pharmaceutical giant ever, according to unnamed sources. (London Times)

Fed chair Jerome Powell is expected to say that the central bank’s emergency pandemic lending programs are just getting started at its policy meeting Wednesday. (Bloomberg)

OPEC, Russia and allies agreed to extend record oil production cuts until the end of July and demanded countries like Nigeria and Iraq that previously exceeded production quotas compensate with extra cuts from July to September. (Reuters)

3. Lack of social distancing rule makes American an outlier
Screenshot of a tweet I sent Saturday.

American Airlines is looking to pack more passengers onto flights in the coming months and unlike many peers has not instituted a seating cap to enforce social distancing.

  • That drive for more ticket sales at the possible expense of customer safety may be what's helping its stock outperform other major airlines that have put policies in place.

By the numbers: Over the past month American's stock has risen by nearly 90%, underpinned by a 41% gain on Thursday. Its stock price has nearly doubled since May 29.

  • Other airlines also have seen sizable gains but fall short of American's rise, with United, JetBlue, Southwest and Delta up 68%, 59%, 39% and 51%, respectively, since May 4.

What they're saying: "Our goal is to leave 50% of Main Cabin middle seats open, when possible, creating more space for customers," American said in response to my tweet pointing out that I had — again — been put on what appeared to be a completely full flight.

  • (American followed up in an email to say that my flight had 44 open seats, suggesting — again — that I believe their media relations team and not my lying eyes.)

State of play: The "when possible" policy sets American apart from other major airlines, which have instituted in-writing restrictions on flight capacity.

  • United has a policy to allow passengers to choose to rebook on a different flight or receive a travel credit when flights are 70% full.
  • Delta assures that its planes will fly no more than 60% full in main cabin.
  • JetBlue has a rule to leave middle seats open, unless families are traveling together.
  • Southwest has 20% reduction in available seat miles.

The big picture: The decision is resulting in short-term gain, but could leave the airline open to long-term pain in the form of lawsuits, an attorney specializing in negligence and liability told Axios last month.

Flashback: CNBC reported on May 27 that "American Airlines has started alerting travelers about crowded planes before their trips and allowing them to switch to other flights."

  • However, no announcement of that program could be found on American's website and customer service representatives tell Axios that no such policy exists.

What they're not saying: An American Airlines spokesperson did not respond to a request for comment on the policy's existence.

4. The market's unbalanced rebound

The Nasdaq hit a new record high on Friday and the S&P 500 and Dow are close to doing the same, but the rally has not been universal, Jason Zweig writes for WSJ.

What it means: "Most stocks are down this year, many by 20% or more. A few fortunate winners have generated big gains, fueling the misperception that losses have been minimal. The result is a market that isn’t as irrationally exuberant as it might appear."

  • "Overall, of the 3,470 stocks in the Wilshire 5000 index that traded between Dec. 31, 2019, and June 2, 73% had negative returns for the year to date."

The big picture: Large cap growth stocks are leading the way, Zweig says.

  • "In the first five months of this year, big growth stocks rose 6.1% while small, low-priced 'value' stocks lost 25.6%. That was the biggest gap in performance between them over any such period since early 1999 and the second widest on record back to 1986, according to AJO, a Philadelphia-based investment firm."

Between the lines: The returns are the latest example of the stock market's increasing consolidation among fewer companies, as the returns of companies like Microsoft and the FAANG stocks have powered overall markets higher.

Dion Rabouin

Thanks for reading!

Quote: "The means of defense against foreign danger have been always the instruments of tyranny at home.”

Why it matters: On June 8, 1789, James Madison introduced a proposed Bill of Rights in the U.S. House of Representatives.