Jul 17, 2020

Axios Markets

By Dion Rabouin
Dion Rabouin

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🎙"All money is a matter of belief." - See who said it and why it matters at the bottom.

1 big thing: Jobs market poised to reverse May and June gains

Data: Department of Labor; Chart: Danielle Alberti/Axios

Nearly four months after the coronavirus pandemic began to rock the economy, the number of people filing claims for unemployment insurance because of COVID-19-related job losses is increasing.

By the numbers: Applicants for the newly created Pandemic Unemployment Assistance program have risen consistently since the week ending April 11 when the government first started reporting claims figures.

  • It is now hovering at around 1 million new claims a week, while the number of continued claims, or people approved for and receiving aid under the program, rose to 14.3 million for the week ending July 4.
  • Pandemic Unemployment Emergency Compensation — a separate program that provides additional benefits to individuals who previously collected state or federal unemployment compensation but exhausted those benefits — is rising toward 1 million weekly claims, with new claims touching more than 936,000 for the week ending June 27.

Why it matters: The increases in pandemic-specific unemployment claims started well before the recent surge of coronavirus infections.

  • That suggests the job losses were the result of firms laying off workers because of lost business rather than government-mandated closures or caution due to the virus.
  • That likely means a significant increase in claims is coming as more municipalities lock down to prevent further spread of the virus.

The big picture: A total of 32 million people were receiving unemployment benefits, according to the latest total from the Department of Labor.

  • But those numbers were two weeks behind in counting the number of people approved for traditional unemployment benefits and three weeks delayed for PUA and PUEC recipients.
  • Including traditional and PUA unemployment claims, another 2.4 million people filed first-time jobless claims for the week ending July 11.

Between the lines: Jobless claims are still more than double the worst weeks in U.S. history.

  • The previous record high was 695,000, set in 1982.
  • The U.S. has now seen 17 straight weeks of claims totaling over 1 million.

What's next: “The risk of a surprise drop in employment in July is rising, pointing to a rollercoaster recovery as the labor market starts to turn down again,” Glassdoor senior economist Daniel Zhao told Yahoo Finance.

Of note: This week's unadjusted claims number shows an increase of almost 109,000 from the prior week, while the seasonally adjusted figure shows unemployment claims down 10,000 from the prior week's level.

  • Seasonal adjustments are typically used to smooth out data, but have caused significant changes in numbers and sometimes even turned employment losses into gains since the waves of mass job losses started in March.
2. Catch up quick

The average 30-year mortgage fell to 2.98%, according to mortgage-finance giant Freddie Mac, the lowest level in almost 50 years of record keeping. (WSJ)

An unpublished report from the White House's Coronavirus Task Force suggests at least 18 states, including California, Florida, Georgia and Texas, should implement stricter public health orders such as mandating masks and limiting gatherings to 10 people or less. (Center for Public Integrity)

An investigation by the California state fire department found that equipment owned by PG&E sparked last year’s Kincade Fire, which forced thousands of Northern Californians from their homes. (L.A. Times)

3. Schwab earnings point to trouble for zero-fee brokerages
Data: FactSet; Chart: Axios Visuals

Brokerage firm Charles Schwab's earnings report Thursday sent the company's stock down more than 2%, but the numbers in the report also called into question the sustainability of the zero-fee model it has pioneered.

What happened: Schwab now manages a record $4.11 trillion in client assets from 14.1 million accounts, having added 1.62 million new clients during the quarter, but still managed to see weak revenue and net income numbers.

  • Net income for the first half of 2020 fell 23% to $1.46 billion, down from $1.9 billion a year earlier.
  • Revenue dropped 9% to $2.45 billion from $2.62 billion in the first quarter and $2.68 billion in Q2 2019, according to CNBC.

Flashback: In an effort to take on upstarts like Robinhood, Schwab slashed its trading commissions to zero in October, forcing then-rivals E-Trade, Interactive Brokers and TD Ameritrade to follow suit in a matter of weeks.

What they're saying: “As the impact of the Fed’s dramatic monetary easing during March extended across the yield curve, the further compression in asset returns outweighed growth in client cash sweep balances from both ongoing asset gathering and the USAA acquisition,” Schwab CFO Peter Crawford said.

Yes, but: The Fed has said it expects to keep interest rates low through at least 2022 and many asset managers expect rock-bottom interest rates and anemic inflation even after that.

What to watch: If Charles Schwab is making less money after increasing its assets under management to $4.11 trillion and adding 1.6 million clients, how can any online brokerage increase profits under the zero-fee model?

Of note: Schwab also acquired USAA’s brokerage portfolio for $1.8 billion in May and is undergoing Department of Justice antitrust review for its purchase of TD Ameritrade.

4. Distress ratio falls again in June
Data: S&P Global; Chart: Axios Visuals

The number of bonds trading at distressed levels has continued to fall since the Fed stepped in with its QE infinity program and promise to buy hundreds of billions of dollars in corporate debt.

Why it matters: The recovery has disproportionately benefited sectors where the Fed has shown it is willing to intervene, as companies with weak credit ratings have issued far less debt this year and still face elevated default risk.

What's happening: The U.S. distress ratio — the percentage of speculative grade issuers trading 1,000 basis points above comparable Treasury yields — declined to 12.7% as of June 19 from 22.8% as of May 6, S&P Global reports.

  • S&P notes that investment-grade issuance has reached all-time highs this year, though issuance at the lower rating categories is still limited.

What they're saying: "The steep global recession and sudden and deep market dislocation have taken a heavy toll on speculative-grade issuers' revenues and access to funding sources," Sudeep Kesh, head of S&P Global Credit Markets Research, said in a note to clients.

  • "Due to central banks' and governments' rapid and sizable support programs, credit markets have since reopened, but access remains limited for riskier issuers rated 'B-' and below."
  • Oil and gas has the highest distress ratio of any sector at 40.2%, with $34.3 billion in distressed debt outstanding, or 29% of the total distressed debt, per S&P's data.
6. Netflix delivers earnings miss and weak Q3 guidance

Axios' Sara Fischer writes: Netflix's stock fell more than 12% in after-hours trading on Thursday after the entertainment giant said it missed analyst expectations on earnings-per-share and added fewer subscribers than expected during the second quarter.

Why it matters: Netflix was supposed to be a safe bet for investors this quarter. Third-party measurement companies like Nielsen and Parrot Analytics suggested throughout the quarter that the entertainment giant was pulling ahead of competitors in the U.S. in terms of consumer engagement during the pandemic.

Driving the news: Netflix also named chief content officer Ted Sarandos as co-CEO of the company, alongside chief executive Reed Hastings, in its earnings release.

  • Hastings and Sarandos have worked together for many years and have known each other for over two decades.
  • Hastings said he does not anticipate that day-to-day operations at Netflix will change much.

The big picture: Executives said in a shareholder letter that growth slowed this quarter due to the easing of lockdown restrictions and the initial shock of the coronavirus pandemic wearing down. Netflix also alluded to new competition from TikTok, the short-form video app owned by Chinese company ByteDance.

By the numbers, per CNBC:

  • Earnings per share (EPS): $1.59 vs. $1.81 expected, according to Refinitiv survey of analysts.
  • Revenue: $6.15 billion vs. $6.08 billion, per Refinitiv.
  • Global paid net subscriber additions: 10.09 million vs. 8.26 million expected, according to FactSet.

Go deeper:

Dion Rabouin

Thanks for reading!

Quote: "All money is a matter of belief."

Why it matters: On July 17, 1790, the "Father of Economics" Adam Smith died.

  • Smith was an economist, philosopher and author who wrote two classics — "The Theory of Moral Sentiments" and "An Inquiry into the Nature and Causes of the Wealth of Nations" aka "The Wealth of Nations," considered the first modern work of economics.