Jul 2, 2020

Axios Markets

By Dion Rabouin
Dion Rabouin

🌞 Happy almost long weekend. I've got the keys today, while Dion enjoys a day off.

  • If this email was forwarded to you, sign up here. (Today's Smart Brevity count: 1,286 words, or a 4.8-minute read.)
  • 💬 "We have come now to a time of testing. We must not fail." - See who said it and why it matters at the end of the newsletter.
1 big thing: The crushing blow awaiting government workers

Illustration: Eniola Odetunde/Axios

State and local government jobs are being gutted, even as the labor market shows signs of a slight recovery.

Why it matters: The coronavirus pandemic blew a hole in state and local government budgets. A slew of states cut spending and jobs — with more planned layoffs announced this week as states try to balance budgets.

  • Even more could be coming as states face more pressure from spiking caseloads and people hunkering back down.

Driving the news: In Maryland, layoffs, furloughs and pay cuts could come as soon as next month, Gov. Larry Hogan said on Wednesday.

  • In New York City, 22,000 government jobs are at risk, Mayor Bill de Blasio said last week.
  • Missouri's state budget director also warned this week of looming job cuts for public sector workers in the state.

Where it stands: Already, nearly two decades worth of public sector jobs have been erased in three months as of May — easily bypassing declines seen during the financial crisis, per Pew Research.

What's going on: Expenses are soaring. Revenues are plunging.

  • Municipalities are seeing less money flow in from sales tax as residents shelter-in-place. In some states, tax deadlines were pushed back at the onset of the coronavirus crisis, and income tax collection is taking a hit as people lose work.
  • In the face of the coronavirus, supporting communities who are getting sick, plus those who need unemployment benefits is expensive.
  • Moody's said last week state and local governments may need as much as $500 billion over two years in federal aid to stay afloat. (That's actually less than the $875 billion set aside for municipalities in the coronavirus relief bill passed by the House in May.)

Between the lines: The Federal Reserve offered cash-strapped state and local governments a rescue float to help manage cash flow pressures. But only one — out of over 250 eligible states, cities and counties — has taken it so far: Illinois.

The slow uptake of the Fed facility is by design. The credit markets seized up at the onset of the coronavirus panic. But the "municipal bond market is much improved from March and certainly operating more efficiently" since the Fed announced it would take action, says Rachel Perlman, who heads up municipal sales at Boenning & Scattergood, an asset management firm.

  • It's cheaper for municipalities to borrow elsewhere. The interest rates set by the Fed's facility are "higher than in more traditional public or private markets for borrowings," analysts at rating agency Fitch wrote last month.

What they're saying: "As with all of our facilities, they're not intended to be primary, they're intended to be backstops," Tom Barkin, head of the Richmond Fed, said in an interview with Axios earlier this week.

  • But so far municipalities aren't issuing any more debt than usual.
  • "The visible supply of [municipal bonds] coming to the market in the next 30 days has been steadily declining since the middle of April and is currently close to its 2019 average," Cooper Howard, who analyzes the municipal bond market at Charles Schwab, tells Axios.
  • More debt, though, would add to their future liabilities, Howard says.
  • Per the WSJ, citing data from Municipal Market Analytics: “Ten municipal borrowers defaulted for the first time in May and another 10 in June, the highest for those months since 2012, when borrowers were still absorbing hits from the 2008 financial crisis.”

The bottom line: The resurgence of coronavirus cases and reimposed lockdowns could push local governments over the edge.

  • "More layoffs are coming, as pandemic-related revenue crashes leave many cities and states billions of dollars in the red," Mark Muro, a policy director at the Brookings Institution, wrote this week.
2. Catch up quick

U.S. daily coronavirus cases topped 50,000 for the first time on Wednesday, as Texas, Georgia, North Carolina and Tennessee set single-day case records.

Economists, who have been humbled as of late, expect the June jobs report released at 8:30am ET to show 3.1 million jobs added, with the unemployment rate falling to a still-high 12.5%. (Bloomberg)

Embattled utility PG&E officially exited Chapter 11 bankruptcy on Wednesday, after a year and a half. It was the biggest utility bankruptcy in U.S. history. (New York Times)

3. The earnings looking glass
Data: FactSet; Estimates reflect an aggregate of analyst S&P 500 company EPS estimates as of June 29; Chart: Andrew Witherspoon/Axios

By the end of next year, corporate earnings may have recovered from the anticipated pandemic-induced slump — at least if analysts are right.

What's going on: EPS forecasts for this year have plunged to $128 per share from the $161 expected before the pandemic hit, according to FactSet.

  • Within the last month, earnings expectations for next year have remained steady. Meantime, expectations for 2o22 have actually edged higher within that same time period.
  • Projections for both are still way below where they were at the beginning of 2020 when it looked as though the economy would continue to hum along.

The bottom line: Prospects of a V-shaped recovery are all but dead — except (so far) in the eyes of analysts projecting S&P 500 EPS.

  • “Analysts are expecting a ‘V’ shaped recovery in corporate earnings, and Q2 is supposed to be the nadir,” Nicholas Colas, co-founder of DataTrek Research, said in a note this week.
4. Who's getting unemployment benefits in July?

Workers of color, women and the lowest-income people are more likely to be relying on unemployment benefits this month, according to projections released by the Congressional Budget Office (CBO) on Wednesday.

Why it matters: The weekly unemployment claims report doesn't have a demographic breakdown of who's receiving unemployment aid.

  • The CBO's estimates, done by extrapolating from other government jobs data, mirror other data that show the unevenness of whose employment situations have been uprooted by the coronavirus crisis. It also shows who's relying most on unemployment benefits.

By the numbers: 10% of white workers in the labor force are estimated to receive unemployment insurance benefits this month. That figure is 4 percentage points higher for Hispanics (and equally higher for other nonwhite workers). It's about 6 percentage points higher for Black workers.

  • By sex: 13% of women in the labor force will receive benefits, more than the 11% of men who are estimated to receive it this month.
  • By household income: Roughly 17% of the labor force that's in the lowest income quartile is expected to get unemployment benefits, a bigger fraction than all other earnings groups.

Between the lines: The CBO data also estimates that 76% of jobless workers will receive unemployment insurance this month — a sign that benefits will keep them afloat as they endure lost working income. But the more generous unemployment payments are set to expire before the end of the month.

  • 81% of unemployed Black Americans, 71% of Hispanics who are jobless and 78% of unemployed whites are projected to receive unemployment.
  • Among the least educated unemployed workers, only 60% are expected to receive unemployment benefits "because a relatively large fraction of people in that group will not qualify for such benefits (in part because of their citizenship status)," the CBO says.

Of note: The estimates — done at the request of Rep. Richard Neal (D-Mass.) — also don't take into account self-employed workers, who are newly eligible for unemployment insurance since the passage of the federal stimulus bill.

5. Why shares of Amgen hit an all-time high
Expand chart
Data: FactSet; Chart: Axios Visuals

Axios' Bob Herman writes: A federal appeals court has upheld Amgen's patents tied to its blockbuster arthritis drug Enbrel, a decision that will block biosimilar competition until 2029. The FDA approved the first biosimilar to Enbrel in 2016.

The big picture: Amgen is heavily reliant on Enbrel, which brings in more than $5 billion in revenue per year. The news sent shares of Amgen soaring 8% on Wednesday.

  • Now, the company — which has spent more money on stock buybacks than drug research since 2016 — has almost another decade of monopoly control over the drug, which has a net price of roughly $44,000 for a year of treatment.
Dion Rabouin

🇺🇸 Have a great weekend. U.S. markets are closed tomorrow and the newsletter is taking a break. Dion will be back here to greet you on Monday.

Quote: We have come now to a time of testing. We must not fail.”

Why it matters: Lyndon Johnson said this in a televised address 56 years ago today —when the Civil Rights Act of 1964 was signed into law. The culmination of a proposal by his predecessor John F. Kennedy ended the era of legal racial segregation and outlawed discrimination on the basis of race, sex, religion and national origin.

  • But as historian and author Ibram X. Kendi wrote in 2017: "Racial disparity ... was reinforced and reproduced in new forms" after the passage of the law.