Jun 4, 2020

Axios Markets

By Dion Rabouin
Dion Rabouin

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🎙 “Got in a little hometown jam, so they put a rifle in my hand. Sent me off to a foreign land to go and kill the yellow man.” - You know who said it, see why it matters at the bottom.

1 big thing: The risk rally continues

Illustration: Sarah Grillo/Axios

Risk assets have jumped over the past week and continued their rally on Wednesday, with the S&P 500 gaining for a fourth straight day and posting its highest close since March 4, while the Nasdaq ended the day just 1.4% below its all-time high.

What it means: If it hadn't been evident before, Wednesday's market action made clear that the bulls are back in charge.

What happened: It wasn't just stocks that rallied, though.

  • The dollar, which had been benefiting from global risk aversion, fell to its lowest in nearly three months against a basket of major global currencies and slipped to monthslong lows versus risk-on plays like the Australian dollar and emerging market currencies.
  • Treasury prices weakened with the yield curve steepening.
  • Oil jumped to its highest since early March.
  • Gold fell by nearly 2%, hitting its lowest since mid-May.
  • Equities gained broadly, as airlines, credit cards, banks, apparel, homebuilders, machinery and rail stocks led the way.

But why? Explanations for markets' ebullient behavior in the face of a U.S. economy that looks to be coming apart at the seams — as corporate bankruptcies, trade tensions and widespread unrest have grown — were varied.

There has been improving economic data. "Statistical evidence that April was the bottom comes from initial and continuing jobless claims, ADP payrolls, PMI surveys and probably this Friday's nonfarm payrolls report," Joseph Trevisani, senior analyst at FXStreet, tells Axios. "Equities are convinced."

  • ADP’s private payroll report showed 2.76 million people lost their jobs in May, which was far less than the 8.75 million estimate.
  • Continued jobless claims declined by 3.9 million to just over 19 million.
  • Data from the Institute for Supply Management showed the U.S. services sector contracted less than expected, rebounding from an 11-year low.

Many also believe the market has simply become a representation of extraordinary monetary policy by the Fed, which has pushed into almost every corner of the bond market and increased its balance sheet of bond holdings to over $7 trillion, more than 10 times what it was in 2007.

  • "What the Fed has done has kept the lifeblood of low-cost corporate financing flowing," says Nela Richardson, investment strategist at Edward Jones. "That's what the market is largely responding to."

What's next? Good question. "I don't think standard economic models are much good at forecasting right now," Nobel Prize-winning economist Robert Shiller told CNN Business.

Bonus chart: Worst. Earnings. Ever.

Data: FactSet; Chart: Axios Visuals

In addition to largely ignoring economic data, the stock market's rally is defying cratering earnings per share estimates.

By the numbers: During the first five months of 2020 the bottom-up earnings per share estimate for S&P 500 companies — an aggregation of the median 2020 EPS estimates for all the companies in the index from FactSet — has fallen by 28% (to $128.03 from $177.82).

  • That's the lowest EPS estimates have been in the history of FactSet's data, which goes back to 1992.
  • During the past five years, the average decline in the annual EPS estimate during the first five months of a year has been 1.3%, and for the past 20 years, the average decline for the first five months of a year has been 2.4%.

What's happening: "The market is broken," Joe Brusuelas, chief economist at RSM International, said in an interview with CNN Business.

  • "It no longer reflects a forward outlook that is truly aligned in the real economy," he said. "That's a problem because, at some point, the public will say these markets are rigged."

On the other side: Barry Knapp, managing partner at Ironsides Macroeconomics, argues that valuations are simply useless in the current climate.

  • “It’s the beginning of a new business cycle. You shouldn’t get all beared up, and you’re not supposed to focus on valuations," he told CNBC. "This is the early stage of the business cycle."
2. Catch up quick

The Fed will expand its Municipal Liquidity Facility, allowing every US state to have at least two cities or counties eligible to directly issue notes to the MLF no matter the population and allows issuers like public transit, airports, toll facilities, and utilities to directly use the facility. (Federal Reserve)

The ECB is expected to announce an additional $560 billion of bond buying for the pandemic purchase program at its meeting today. (Bloomberg)

The Trump administration barred Chinese passenger carriers from flying to the United States starting on June 16. (Reuters)

The Senate voted unanimously to loosen rules for the Paycheck Protection Program, allowing businesses 24 weeks to use funds and requiring only 60% of a loan be used for payroll to qualify for loan forgiveness. (Axios)

Another 1.8 million Americans are projected to have filed initial claims for unemployment benefits last week. (MarketWatch)

3. Diverging services data suggest U.S. recovery may be overblown

Data: Investing.com; Chart: Axios Visuals

ISM's stronger-than-expected reading of U.S. services sector data grabbed headlines, but IHS Markit's index told a different story.

Flashback: In December, similar divergence popped up in the two indexes' manufacturing reports, but with ISM's data showing much weaker numbers — the worst manufacturing report in a decade.

  • As I wrote then, "One reason for this divergence, highlighted by IHS Markit's chief business economist Chris Williamson in a recent blog, may be that IHS explicitly tells respondents to 'confine their reporting to US facilities/factories.'"
  • "ISM data could therefore be more heavily influenced by global conditions facing ... US-owned companies than the IHS Markit data," Williamson writes.

What it means: A similar phenomenon may be happening with the services sector — ISM's gauge may be stronger because multinational companies are seeing improved business overseas and translating that into their responses for the U.S. survey.

State of play: The JPMorgan Global business survey data (compiled by IHS Markit) showed a record surge of just over 10 index points in May.

  • China saw especially strong output growth with the combined manufacturing and service sectors rising at the fastest rate since January 2011, making it the only country on Earth to see its readings in positive territory.
4. The white-collar job losses are coming

Close to six million jobs are at risk of being lost in coming months as a second wave of coronavirus-induced layoffs is headed for the U.S., according to a new report from Bloomberg Economics.

What's happening: The job cuts are expected to include higher-paid supervisors in sectors where frontline workers have been hit first, such as restaurants and hotels. It also includes the knock-on effects to connected industries such as professional services, finance and real estate.

  • “It will get worse before it gets better—white-collar workers will now bear the brunt,” said Yelena Shulyatyeva, senior U.S. economist at Bloomberg Economics. “Even if states and businesses reopen, we’re likely to see this second wave of losses,” since the labor market tends to lag economic activity, she said.

Don't sleep: The expectation for white-collar job losses tracks with surveys of top executives from accounting firm PwC that I wrote about in May, which found 31% of CFOs thought layoffs would occur in the next month, double the percentage who expected to lay off employees at the end of March.

Go deeper: Next Wave of U.S. Job Cuts Targets Millions of Higher-Paid Workers

Dion Rabouin

Thanks for reading!

Quote: “Got in a little hometown jam, so they put a rifle in my hand. Sent me off to a foreign land to go and kill the yellow man.”

Why it matters: Bruce Springsteen's seventh studio album "Born in the U.S.A." was released on June 4, 1984, featuring the title track about the journey of a Vietnam war veteran.

"One of the problems in the United States is that “united in our prejudices we stand,” you know? What unites people, very often, is their fear. What unites white people in some places is their fear of black people. What unites guys is maybe a denigrating attitude toward women – or sometimes maybe women have an attitude toward men. And these things are then in turn exploited by politicians, which turns into fear – knee-jerk fear of the Russians or of whatever ism is out there. Or in a very subtle kind of indirect way – like some of our economic policies are a real indirect kind of racism, in which the people that get affected most are black people who are at the lower end of the economic spectrum. And I think somewhere inside, people know this – I really do. They don’t fess up to it, but somewhere inside there’s a real meanness in using things this way."