Jun 12, 2020

Axios Markets

By Dion Rabouin
Dion Rabouin

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🚨 Situational awareness: The IMF's upcoming economic growth projections “will be, very likely, worse than what we had” in April, chief economist Gita Gopinath said. (Bloomberg)

🎙 “It is said that no one truly knows a nation until one has been inside its jails. A nation should not be judged by how it treats its highest citizens, but its lowest ones.” - See who said it and why it matters at the bottom.

1 big thing: The truth about the May jobs report

Photo: Marcelo Hernandez/Getty Images

The responses of less than 41,000 people were used to determine a major part of last month's U.S. unemployment rate, the Bureau of Labor Statistics tells Axios.

Why it matters: That's the lowest number in modern history and is one of many unusual developments in government data collection that have been impacting important readings for months.

What it means: The surprises in May's nonfarm payrolls report, which found there were only 21 million unemployed while 30 million Americans were collecting unemployment insurance benefits, were largely the result of oddities in data collection.

  • A portion of the jobs report is determined by a household survey in which government workers interview people at their homes and determine whether any person over the age of 16 is "employed, unemployed, or not in the labor force" — the only three possible designations.

What's happening: The coronavirus pandemic has "depressed" survey responses since March, as BLS stopped conducting in-person meetings, restricting its ability to reach new households, Julie Hatch Maxfield, BLS associate commissioner for employment and unemployment statistics, tells Axios.

  • "The first month of the sample we get a lot of information and that sets up the whole thing going forward," she says.
  • This has taken the response rate from 82% in January to 73% in March to 67% in May.
  • "Response rates probably will be depressed even when interviewers go back into the field," Maxfield notes.

What else: In May, BLS identified 9 million people who had lost their jobs but were counted as "not in the labor force" rather than unemployed because they hadn't been searching for a job in the last four weeks due to the pandemic.

  • If those people were considered unemployed it would have taken the unemployment rate to 17.9%.
  • A similar calculation would have put the unemployment rate at 19.8% in April and 7.5% in March, BLS says in a report about the coronavirus pandemic's impact on its data.
  • A separate "misclassification error" categorized millions of workers who had been absent and likely lost their jobs as employed.
  • Additionally, workers who were paid by their employer for any part of the pay period including the 12th of the month were counted as employed, even if they weren't actually at their jobs.

The bottom line: We may never know how many people lost their jobs as a result of the coronavirus pandemic.

  • However, according to BLS, both the number of unemployment insurance claims and the number of unemployed people appear to have peaked in April and are declining.
Bonus chart: The state of unemployment (claims)
Data: U.S. Department of Labor; Chart: Andrew Witherspoon/Axios

Another 1.5 million Americans applied for first-time traditional unemployment insurance benefits last week, and 700,000 more applied for benefits under the Pandemic Unemployment Assistance (PUA) program.

  • Combined with a decline in the number of people in the U.S. who are receiving benefits, total claims have dropped to 35.4 million from 37.2 million last week.

ICYMI: The CARES Act allowed millions of people who had been impacted by the coronavirus pandemic but previously would not have qualified for unemployment insurance — the self-employed, people who had quit their job, those who had offers of employment but had not yet started a job — to qualify for PUA benefits.

  • Tens of millions have been approved for benefits under PUA, but many are not considered unemployed by BLS standards.
2. Catch up quick

Grocery delivery company Instacart said it raised $225 million in new venture capital funding at a $13.7 billion valuation. (Axios)

Sony announced the release of its newest game console, the PlayStation 5. (Sony)

JD.com's Hong Kong offering was 179 times oversubscribed and the company is expected to get $3.9 billion from the IPO with the stock beginning to trade on June 18. (SCMP)

Data firm Palantir plans to file for an IPO in the coming weeks and could start trading as early as the fall, according to anonymous sources. (Bloomberg)

DoorDash plans to sell hundreds of millions of dollars in equity to T Rowe Price, Fidelity and others in a deal valuing it at $15 billion. (WSJ)

3. Hertz looks to cash in on its newfound stock market fame
A tweet from Barbarian Capital showing the legal filings to the SEC to allow the sale of new stock

Bankruptcy court Judge Mary Walrath set a hearing for today to determine whether bankrupt rental-car company Hertz can issue nearly 250 million new shares of common stock it hopes will fetch around $1 billion.

  • Shares of bankrupt companies are typically worthless, except in rare instances where a company can repay its debt in full and money is left over for equity holders.
  • But Hertz has become a darling of the stock market in recent weeks with its shares rallying from 56 cents on May 26 to $5.53 on Monday (before falling back to $2.06 Thursday).
  • It may be the finest test of the greater fool theory ever conducted.

What they're saying: “The recent market prices of and the trading volumes in Hertz’s common stock potentially present a unique opportunity," the company’s lawyers said in a filing.

What others are saying: Jared Ellias, a law professor at UC Hastings College of Law, saw things slightly differently.

"This is outrageous. These directors likely know that the stock is worthless and instead of trying to stop uninformed investors from gambling on a dead stock, they are selling into the market."
Jared Ellias on Twitter

Of note: Hertz trades on the New York Stock Exchange, which has moved to delist the company.

4. Cities hit hardest by coronavirus saw huge drops in local commerce
Adapted from JPMorgan Chase Institute; Chart: Axios Visuals

Axios' Kim Hart writes: The sudden economic shock from coronavirus stay-at-home orders caused a stunning drop in local commerce in cities across the country, with San Francisco seeing the heaviest decline, followed by Chicago, New York and Detroit.

How it works: The JPMorgan Chase Institute analyzed a subset of credit card transactions typical of everyday goods and services bought and sold at the local level to create a "local commerce" economic view.

What they found: Local commerce spend declines were fairly uniform across neighborhoods with a wide variation of household median income. The only two categories that showed growth overall were grocery stores and pharmacies, with online spend on groceries nearly doubling.

But in low-income neighborhoods, local commerce spend plummeted much further into negative territory.

  • Lower-income neighborhoods saw a disproportionate share of severe spending declines over 15%, with 11.5% of neighborhoods in the lowest-income bracket experiencing severe spending declines.
  • Consumers in low-income neighborhoods were less likely to order groceries online and more likely to travel farther to reach grocery stores, increasing time away from home and the risk of getting sick.

The bottom line: The data points to what we already know — that the pandemic and its economic shocks disproportionately hurt those who could least afford it.

5. Stocks go down

The Dow fell 1,861 points Thursday, the fourth worst one-day point drop on record, and the S&P 500 and the Nasdaq sank 5.9% and 5.3%, respectively. It was the worst one-day decline for the major averages since March 16.

Why it happened: Various media reports have pointed to an increase in COVID-19 cases and deaths (which had been happening for at least a week) and the Fed's dour economic outlook at its June policy meeting (which was little changed from its dour economic outlook in April).

  • But no one really knows.

Why it matters: It could mark the end of a rally that has seen the S&P rise more than 40% in the best 50-day stretch in history and the Nasdaq hit an all-time high above 10,000 points.

  • Or it could not.

The big picture: It was just one day.

Dion Rabouin

Thanks for reading!

Quote: “It is said that no one truly knows a nation until one has been inside its jails. A nation should not be judged by how it treats its highest citizens, but its lowest ones.”

Why it matters: On June 12, 1964, Nelson Mandela was sentenced to life in prison in South Africa. He served 27 years and soon after being freed was elected the first black president of the country in the first fully free elections in 1994.

  • For his activism, he has received more than 250 honors, including the Nobel Peace Prize, the U.S. Presidential Medal of Freedom and the Soviet Order of Lenin.

Bonus Mandela quote for the weekend: "I have discovered the secret that after climbing a great hill, one only finds that there are many more hills to climb. I have taken a moment here to rest, to steal a view of the glorious vista that surrounds me, to look back on the distance I have come. But I can only rest for a moment, for with freedom come responsibilities, and I dare not linger, for my long walk is not ended.”