Jun 2, 2020

Axios Markets

By Dion Rabouin
Dion Rabouin

Good morning! Was this email forwarded to you? Sign up here. (Today's Smart Brevity count: 1,109 words, 4 minutes.)

🎙 “You come at the king, you best not miss.” - See who said it and why it matters at the bottom.

1 big thing: Coronavirus could lower GDP by $15.7T

Reproduced from Congressional Budget Office; Chart: Axios Visuals

The CBO released projections Monday for U.S. nominal GDP to be lower by $15.7 trillion over the next decade than its estimate in January as a result of the coronavirus pandemic.

  • It predicts that when adjusted for inflation GDP will be $7.9 trillion lower over the next decade and down by $790 billion in the second quarter of this year — a 37.7% quarterly contraction.

Why it matters: “Slower growth means higher unemployment, lower wages, and less income for people," Adam Ozimek, chief economist at Upwork, told the Washington Post. "What we are looking at is another decade of that."

  • The report is an expansion of the CBO's forecast released last month that projected unemployment above 11% for the rest of 2020 and severe economic decline over the next two years.
  • The update shows expectations for the virus' impact to depress growth for much longer.

Between the lines: According to the projections, unemployment remains above 9% until the third quarter of next year and above 6% through 2026. It predicts the unemployment rate will not return to 2019's record low levels within the next 10 years.

  • That means millions of jobs will be permanently lost.

How it works: "The two largest differences between the two forecasts result from the economic effects of the COVID-19 pandemic in reducing output and the legislation enacted between January and early May in response, which partly offsets that reduction," CBO said in its report.

  • The pandemic is expected to cut consumer spending and force the closure of more businesses, weighing on the country's growth.

Yes, but: The projections are for the economy's growth absent more spending from Congress or policy shifts from the Fed and both bodies appear unlikely to stand on the sidelines for the next decade.

  • “Immediate action is needed to protect lives and livelihoods during this unprecedented moment of catastrophe," House Speaker Nancy Pelosi said in a statement Friday.
  • Fed chair Jerome Powell has repeatedly urged that the central bank is "committed to doing everything we can as long as we need to."

The last word: Further reductions in economic output will result from stagnating inflation, the agency said, expecting it "to be weaker as a result of the pandemic."

  • Long-term depressed inflation had been a problem confounding policymakers long before the coronavirus hit.
Bonus chart: The black unemployment situation

Adapted from EPI analysis of Bureau of Labor Statistics data; Chart: Andrew Witherspoon/Axios

As is often the case, the staggering job losses in the coronavirus-driven recession have been worse for black workers.

By the numbers: According to a new report from the Economic Policy Institute, titled "Racism and economic inequality have predisposed black workers be most hurt by coronavirus pandemic," more than one in six black workers lost their jobs between February and April.

  • Further, their study finds that as of April, less than half of the adult black population was employed.

The big picture: "While the economic devastation is widespread, as we show in this report, black workers are less able to weather such a storm because they have fewer earners in their families, lower incomes, and lower liquid wealth than white workers," write Valerie Wilson, director of EPI’s program on race, ethnicity and the economy, and senior economist Elise Gould.

2. Catch up quick

There were further protests over the death of George Floyd by police officers after several cities issued or extended curfews and President Trump said he would deploy U.S. troops if cities or states "refuse to take actions necessary." (Axios)

Chinese government officials have discussed the idea of the U.S. cutting China off from the U.S. dollar payments system as a "nuclear option" in response to Beijing's plan to impose a new security law in Hong Kong. (SCMP)

A group of civil rights organizations who met with Facebook CEO Mark Zuckerberg said they were "disappointed and stunned by Mark's incomprehensible explanations for allowing the Trump posts to remain up." (Axios)

Starbucks is further cutting hours for its employees, and encouraging workers to take unpaid leave until September, as the company cuts back operations at its U.S. stores and to reflect expectations that sales won't recover from the coronavirus until at least this fall. (WSJ)

3. The unmoving yield curve

Data: U.S. Department of the Treasury; Chart: Andrew Witherspoon/Axios

The S&P 500 has gained 24% since April 1, but U.S. Treasuries have been almost entirely unmoved.

Why it matters: Since the Fed announced its QE4ever program (also known as QEinfinity) on March 23, the U.S. Treasury market has been effectively corralled.

Details: After moving from 1.88% on Jan. 2 to 0.62% on April 1, pricing in expected economic deterioration, the yield on the benchmark 10-year Treasury note has not closed above 0.77% or below 0.61% since.

4. Companies sold record amount of their own stock in May

U.S. public companies sold more than $60 billion of their own stock last month, the largest monthly total ever.

Why it matters: Like the record $1 trillion of corporate debt issued so far this year, the equity sales show companies are looking to raise cash. But it also indicates many are dubious of the market's nearly 40% rally since March 23 and are cashing out ahead of a possible pullback.

What they're saying: “Issuers that have seen their stock prices recover are now also taking the perspective that they don’t want to miss this window in case this rebound is short-lived,” Santosh Sreenivasan, head of equity-linked capital markets for the Americas at JPMorgan, told Reuters.

  • Ryan Parrish, head of Americas equity capital markets syndicate at Bank of America, added: “We’re talking to a lot of companies around the fact that the market is here, you don’t know what lies in the economy to come."
  • “If you even remotely have a need you should get it done now.”

Between the lines: It hasn't just been companies with stock prices that have rebounded fully that are participating in the equity issuance bonanza.

  • Southwest Airlines and cruise operator Carnival issued new stock during the month, even as share prices remain 40% and 70% below January levels, respectively.
  • At their low points during the month, Southwest's stock was 65% below its Jan. 2 level and Carnival's was 75% lower.
5. Brands take a stand

Data: Morning Consult; Note: ±2% margin of error; Chart: Axios Visuals

Twitter, Google, Nike and Netflix are among the dozens of brands over the past two days that have taken public stances in favor of Americans protesting racial inequality, Axios' Sara Fischer writes.

  • Some companies have changed their logos in solidarity with the movement and put out statements, while others have pledged money in support of efforts to address social injustice.

Why it matters: Data shows that brands have less to lose when speaking out on issues such as civil rights and gay rights than they would when speaking out against other hot-button issues, like abortion or guns.

  • Other studies have shown that brands with the best reputations among consumers are ones that stand up for issues, regardless of whether those issues are considered liberal or progressive.

Be smart: Brands that don't speak up face a grim reality, not just from their consumers, but also their employees.

  • Dozens of Facebook employees staged a "virtual walkout" Monday over the company's decision not to take action against President Trump's provocative messages in the face of nationwide protests against police violence, the New York Times reports.
Dion Rabouin

Thanks for reading!

Quote: "You come at the king, you best not miss."

Why it matters: The greatest television show in the history of television, "The Wire," debuted on HBO June 2, 2002. The line was delivered by Omar Little, the greatest character in the history of television. This is not up for debate.