• GB Davis

High Unemployment is More Structural than Cyclical / COVID Contrary to Current Consensus (5/8/20)


MACRO


  • First by way of quick follow-up on our ITA commentary from yesterday evening, overnight, "Italy's sovereign debt is scheduled to be rated by Moody's, which currently has Italian debt a single notch above 'junk'. We do not expect a downgrade, but the outlook is likely to be changed to 'negative'" *(Danske Bank via FXStreet)

  • Nordea believes that  "VERY low probability event that the GCC pulls the rug from under Bundesbank participance in the QE program."  I would lean with them here - BUT - as with the ITA Budget Approval process, this is not to say that as EU member participants, GER ought to wisely (indirectly) extract concessions from ITA should, separately: a) Bundesbank continue to participate in everything EU/ECB, as expected; and, b) deficits, declining revenue bases become a greater issue, front and center from here through ? 2024 (we've seen EU issues prognosticated beyond 2022 at this point, and more severe than the U.S. scenario envisoned)  At the same time, Nordea postulates that the ECB could simply stop buying GER Bunds - but - in reality - the ENTIRE civilized world would still be a net buyer - whether or not the ECB were to buy GER Bunds is irrelevant - what if BoE buys some? what if BoJ buys some? what if Swiss Accounts buy some? (more, that is)

  • Nordea, is commenting (via Chart graphic) that, "ECB is maybe not buying nearly enough to keep (ITA-GER Sovg) spreads fully contained - as we put forth yesterday evening.

  • ABN Amro on the tape indicating their view that ECB will have to increase QE by 500b add'l Euro in the not too distant future, and supporting the view we relayed yesterday from Moody's that BoE will announced 100b pound QE in June.

  • Is the Federal Reserve and QE distorting Credit Spreads and Asset Prices?  "Based on IMF measure, the analysts expect the US debt-to-GDP ratio to rise above 140% by 2021. In Europe, with stricter budget rules in place, they expect the ratio to be around 100%. CIO added that interest rates are too low to compensate for the pressure exerted by the newly created dollars. They expect $EURUSD to return to the 1.10-1.15 range only in the second half of the year UBS 3/6: When #Eurozone member states are unable to define common standards for traveling, reopening the economy, and supporting those subject to lockdowns, investors find it difficult to assess how investment opportunities will emerge, Flury and Rose said. Credit markets are not partying as intensively as equities, but they still look wildly mispriced compared to the severity of the economic shock that we are faced with currently. If central banks had not stepped in to manipulate the price of credit, we would likely have had >800 bps spreads in the 10yr BBB-Treasury space. We are not so sure that spreads will continue to compress, as the US Treasury is now once again out-issuing the Fed asset purchases (the opposite was the case all the way through April), which means that the relative support is abating. Spreads will remain wide(r) through the next few quarters in our view." (UBS via FX Street)

  • Some peeps calling for US Negative Rates as the end all solution out to 10 years - this is what the Nordea model says, while US Fed Funds futures markets for Negative Rates now showing late 4Q/early 1Q21 negative rates - WE ARE NOT there yet - ourselves.  We think QE can solve MOST of this issue w/o negative rates in the U.S. and will continue to refine that assessment as the data permits.

  • On the U.S. Jobs front:

  • The US jobs report for April is due this afternoon. We expect it to show a historical drop in employment of 25m (which is slightly more than the 21m consensus) and a rise in the unemployment rate to 15-20%. (Danske Bank via FXStreet)

  • The post-WW2 record for the unemployment rate: 10.8%. (Nov 1982) * Highest unemployment rate of the ‘08-‘09 financial crisis: 10%. (Oct 2009) * Consensus Dow Jones forecast for today’s report: 16%. * All-time record: 24.9%. (1933) 

  • Hedgeye notes that ADP Private Payrolls to -14.77% YoY in APR is the worst print AND fastest deceleration ever

  • Hedgeye indicates that 66% of accumulated job losses since federal lockdown are permanent.  FED says that after this Recession, the size of the Labor Force will be lower further supporting that such notion is not just 'not temporary' but permanent in a lower job domestic job base forever sort of way (who is going to pay the underfunded pensions? Money Printing Machine go brrrrrrrrr...) . . Hedgeye's take, which we tend to share, is such scenario is not priced in here.  

  • Drum Roll:  April U.S. nonfarm payrolls drop 20.5M, Unemployment rate rises to 14.7% while BLS indicates the actual unemployment rate might be nearly 20% (Something like 5.9 million restaurant jobs)

  • March consumer credit shrank by 3.4%, led by a 30.9% plummet in revolving debt as consumers stopped using their credit cards. The decrease in first-quarter real GDP was largely driven by the 7.6% decline in consumer spending, which subtracted 5.3% from the total GDP number.

  • Bain predicts a 20-35% contraction for personal luxury market (clothes, jewelry, watches, Hamptons homes)


  • Loan deferrals stacking up at Aussie banks: 100,000 in the past week including 50,000 home loans Total deferred loans due to COVID-19 now 643,000...worth $200 billion   

  • Class 8 Heavy Duty Truck Orders Crash To 25 Year Low In April.  Also, US vehicle sales slumped in April, falling to 8.8 million total vehicles sold. This was down 25% from March and 48% from April 2019 

  • Disney Shanghai to re-open, tickets sell-out for first day - but China does not have reported 20% unemployment and has a higher growth rate than U.S. and has more billionaires than the U.S.

RISK MARKETS

  • After a 35% rally from lows, equity markets appear to be taking their first real break. From a tech perspective,we continue to think 200-week moving average on #SP500 will provide strong support for a market that bottomed in March. That level is currently 2650 (Morgan Stanley via FX Street)

  • The forward 12-month P/E ratio for $SPX (20.3) was above 20.0 this week for the first time since April 2002 (Factset, week of 5/2)

  • $SPX is reporting its lowest (Y/Y) revenue growth in Q1 2020 (0.7%) since Q2 2016 (-0.2%) (Factset)  

  • BUT - EVEN MORE IMPORTANTLY: 8 of 11 $SPX sectors recorded a double-digit decline in their Q2 EPS estimate during the month of April (Factset)  

  • $SPX EPS estimate for Q2 declined by 28.4% in April while $SPX price increased by 12.7% during the same period.  The Q2 bottom-up EPS estimate (which is an aggregation of the median EPS estimates for all the companies in the index) declined by 28.4% (to $26.46 from $36.94) during this period. How significant is a 28.4% decline in the bottom-up EPS estimate during the first month of a quarter? How does this decrease compare to recent quarters?During the past five years (20 quarters), the average decline in the bottom-up EPS estimate during the first month of a quarter has been 1.4%. During the past 10 years (40 quarters), the average decline in the bottom-up EPS estimate during the first month of a quarter has been 1.5%. During the past 15 years (60 quarters), the average decline in the bottom-up EPS estimate during the first month of a quarter has been 1.9%. Thus, the decline in the bottom-up EPS estimate recorded during the first month of the second quarter was larger than the five-year average, the 10-year average, and the 15-year average.In fact, this marked the largest decline in the quarterly EPS estimate over the first month of a quarter since FactSet began tracking this data in Q1 2002. The previous record was -20.6%, which occurred in the first month of Q1 2009.At the sector level, all 11 sectors recorded a decline in their bottom-up EPS estimate during the first month of the quarter, led by the Energy (-471.9%), Consumer Discretionary (-78.8%), and Industrials (-61.9%) sectors. Overall, 10 sectors recorded a larger decrease in their bottom-up EPS estimate relative to their five-year average, 10-year average, and 15-year average. The Real Estate sector does not have five years of historical data available yet.In fact, seven of the 11 sectors recorded the largest decline in their quarterly EPS estimate over the first month of a quarter since FactSet began tracking this data in Q1 2002: Energy, Consumer Discretionary, Industrials, Communications Services, Health Care, Consumer Staples, and Real Estate.As the bottom-up EPS estimate for the index declined during the first month of the quarter, the value of the S&P 500 increased during this same period. From March 31 through April 30, the value of the index increased by 12.7% (to 2912.43 from 2584.59). The second quarter marked the 16th time in the past 20 quarters in which the bottom-up EPS estimate decreased during the first month of the quarter while the value of the index increased over this same period.

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