Jul 29, 2020

Axios Markets

By Dion Rabouin
Dion Rabouin

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🚨Situational awareness: Today at 2 pm ET, I'm hosting a Twitter chat with The Atlantic's Jemele Hill (@jemelehill) and Brookings' Andre Perry (@andreperryedu) on the myths of the racial wealth gap

🎙"I've always shied away from conventional wisdom, though I know the power of it." - See who said it and why it matters at the bottom.

1 big thing: The urgency of March is gone

Illustration: Aïda Amer/Axios

The fight in Congress over the next round of coronavirus relief legislation is shaping up to be a long one and that's bad news for the economy and the stock market.

Why it matters: Assistance from the government and the Fed has been an integral part of the stock market's rally since March 23.

The big picture: And, with upwards of 32 million people receiving unemployment benefits and record bankruptcies and business closures expected (as well as a possible wave of evictions from newly unemployed renters), the latest fight on Capitol Hill carries significant weight.

What's happening: The rebound and relative calm in financial markets have seemingly unraveled the spirit of unity and urgency that pushed through the $2.2 trillion CARES Act in March.

  • The House, Senate and White House remain far apart on a final bill that was supposed to be put to a vote before the end of this week, Axios' Alayna Treene and Marisa Fernandez reported Tuesday.

Between the lines: “It’s a mess. I can’t figure out what this bill’s about," Sen. Josh Hawley (R-Mo.) said yesterday.

  • "We have no idea what the final bill will be, and we’ll be the last to know,” Hawley added, suggesting the White House, not Senate leadership, would be negotiating with House Democrats.

What we're hearing: The U.S. economy is "still in a really bad place," Claudia Sahm, director of macroeconomic policy at the Washington Center for Equitable Growth, tells Axios.

  • "The CARES Act was written and designed for us to be back on our feet in July. That was a mistake, to think that the world would be better. It is not and now [Congress] needs to do more and they need to do a lot more."
  • $4 trillion in aid is closer to what's needed than the Senate's $1 trillion proposal, she says.

By the numbers: The extra $600 in weekly unemployment insurance benefits that effectively expired Saturday has been called the most effective part of the CARES Act as it helped maintain Americans' income and spending despite a tsunami of job losses.

  • The Bureau of Economic Analysis found the enhanced benefits increased incomes by $842 billion in May, on an annual basis.

The last word: "There’s plenty of evidence that economic recovery has stalled, and may have taken a step backward," Michael R. Strain, an economist at the American Enterprise Institute, wrote in a Bloomberg op-ed Monday.

  • "The alternative to additional recovery measures isn’t just less federal spending. It is also greater and deeper damage to workers, households and the economy overall."
Bonus content: Stumbling block to more stimulus

The latest survey from the Peterson Institute shows 80% of voters' concern about the national debt has increased over the past few years, up from 78% last month.

  • And 75% of voters now believe the national debt should be among the president and Congress’ top three priorities, up from 70% in June.

Why it matters: With the nation's budget deficit already expected to near $4 trillion for 2020 and consequential elections just 97 days away, newfound worry about deficit spending could create another significant hurdle to getting a bill passed.

2. Catch up quick

The Fed is not expected to announce a major policy shift at its meeting today but investors will be closely watching its forward guidance. (Bloomberg)

The CEOs of Apple, Amazon, Facebook and Google will testify before Congress today at noon. (Axios)

MacKenzie Scott, former wife of Jeff Bezos, listed 116 organizations to which she plans to donate $1.7 billion, led by groups dedicated to racial equity, gender equity and economic mobility. (Medium)

Moderna is pitching clients on pricing its COVID-19 vaccine at around $50–$60 per dose, which is generating concern and difficulties in negotiations, given other companies have pledged much lower prices. (FT)

3. Treasury demand high despite record issuance and lower yields
Data: Investing.com; Chart: Axios Visuals

Bond investors have been snapping up U.S. government debt in recent weeks, pushing yields back toward record lows.

Driving the news: Tuesday's auction of 7-year Treasury notes continued a trend of increased bids and lower yields.

  • It followed an auction of $48 billion of 2-year notes at a high yield of 0.155%, and $49 billion of 5-year notes at a high yield of 0.288%.
  • These auctions represent both the lowest yields ever for each maturity and the largest amounts ever, according to data from BMO Capital Markets rates strategist Ben Jeffery.

Why it matters: Despite the increasing size of the Treasury issuance to deal with the growing U.S. budget deficit, investor appetite has increased, suggesting strong investors demand for safe-haven assets.

Stay woke: Declining yields may also be helping drive down the value of the dollar, which is on pace for its worst monthly performance in a decade.

4. PPP saved about 13.6 million jobs, not 51 million, study finds

The Paycheck Protection Program used $520 billion worth of taxpayer funds to save around 13.6 million jobs, according to estimates of available data from S&P Global U.S. chief economist Beth Ann Bovino.

Why it matters: That comes out to $38,235 per job over an eight-week period.

  • It's also about one quarter of the "more than 51 million jobs" Small Business Administration representatives said were saved in an op-ed last week.

Details: Bovino's reporting is based on Census calculations of small businesses and the size of the workforce, rather than specific recipients of the program, she tells Axios.

  • Of the 5 million loans made, 81% of recipients were non-employers and 19% were small businesses averaging 10 employees.

Between the lines: Bovino assumed "that these small businesses would not have survived at the same pre-virus capacity, if not for the loan."

  • "However, that is an open question, as it’s not clear whether all of the loan recipients needed a loan in the first place."

Flashback: The efficacy of the program has faced serious questions, with a June study for the National Bureau of Economic Research concluding that the PPP had "little material impact on employment at small businesses."

  • While not ruling out "a small positive employment effect (approximately 3–4 percentage points on employment rates)," the authors noted that it was "clear that the program did not restore the vast majority of jobs that were lost following the COVID shock."

One level deeper: A recent survey by the National Federation of Independent Business found that about 22% of firms that received PPP money have fired workers or expect to lay off at least one after the loan term expires.

5. Silver becomes 2020's top major asset
Data: FactSet; Chart: Axios Visuals

Silver is the top-performing major asset of 2020, displacing orange juice, according to a WSJ analysis, after a gain of nearly 34% since July 1.

What's happening: The rally has been boosted by a fast-falling U.S. dollar, concern about the U.S. economy amid the coronavirus pandemic, and increasing tension in the U.S.-China trade war, analysts say.

  • The combination of unprecedented government and central bank stimulus measures around the globe and fears about further growth have investors betting big on precious metals.
  • Copper and aluminum also have been well bid in recent weeks.

Of note: Trading volume in silver rose to its highest since September 2019 last week.

6. Earnings are looking much less bad

S&P 500 companies have beaten earnings estimates at a higher pace than usual in the second quarter, Deutsche Bank analysts point out in a recent note to clients.

  • That suggests businesses may have rebounded more strongly than originally thought from the coronavirus pandemic in May and June, they argue.

By the numbers: With 129 companies (32% of S&P 500 market cap) reporting, 85% of companies have beaten the bottom-up analyst consensus, well above the historical rate of 73%. Further, five sectors have so far seen all companies beat, while another three have beat rates above 90%.

  • Companies that have reported have beat by 14% in aggregate, while the median company beat by 12%. These are also well above the average over the past 5 years of 4.9% and over the longer term of 3.4%.

The bottom line: The numbers suggest earnings may be much better than FactSet's current expectation for a 42.4% decline in Q2.

  • However, the numbers still point to a 33% decline, Deutsche notes, with the median company delivering a 21% fall.
Dion Rabouin

Thanks for reading!

Quote: "I've always shied away from conventional wisdom, though I know the power of it."

Why it matters: On July 29, 1938, decorated broadcast anchor and longtime host of ABC's "World News Tonight" Peter Jennings was born.

  • Jennings was one of the Big Three news anchors, along with Tom Brokaw of NBC and Dan Rather of CBS, who dominated American evening news from the early 1980s until the early 2000s.