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Next forum date: Monday 13 July 2020
This week saw the number of COVID-19 related deaths surpass the tragic landmark of 500,000.
A swathe of articles (see reading list) continues to highlight that, looking at contagiousness, symptoms, immunity, vaccine and stability, there is still a lot that is not understood about the virus, even as a consensus about how to deal with it has clearly emerged. From an economic and sociological standpoint, it is hard to reject the idea that the ongoing normalisation in economic statistics is being confused with a return to normal, pre-COVID conditions.
The release in the US nonfarm payrolls is a good case in point. The 4.8 million increase in June payrolls shows that around one-third of jobs lost so far in the pandemic has been recovered over the last two months.
The leisure and hospitality sector has contributed a large share of the increase with 2.1 million jobs created over the past two months (bars and restaurants alone saw an increase of 1.5 million). However, the broader picture remains far more subtle than that suggested by the welcome reopening of your favourite watering hole. For example, the June payroll report looks at employment trends up to the week of 12 June and it does not capture the more recent spikes in COVID-19 cases in Arizona/California/Florida/Texas. As a result, July is likely to show a more subdued momentum on the road to recovery.
The unemployment report also underlined how the current environment remains significantly worse than previous recessions. As unemployment soared, almost all of those who had lost their job reported being ‘on temporary layoff’. So far, unemployment among this group has dropped from 18m to 11m while the number of people who report being ‘permanently laid off’ has actually increased by 1.6m since February with a +600k number in June after +300k in May. The bottom line is that there is a high risk of these ‘temporary’ lay-offs becoming crystallised into permanent ones particularly as generous government income support programmes are tapered over the coming months.
There are also more benign clues that the current pandemic is altering people’s habits and accelerating change. The sharp rebound in pending home sales (+40% MoM) in June is perhaps an indication that people are re-evaluating some of their life choices. Drops in rental prices in large cities such as New York and San Francisco (https://www.zumper.com/blog/rental-price-data/) is a further corroborating piece of evidence.
Europe is increasingly emerging as a rare bright spot in terms of validating a more confident recovery, even if only in terms of economic numbers. June data for German retail sales and May figures for French consumer spending surpassed expectations and point clearly at a more buoyant, pent-up willingness to approach the summer season with renewed optimism (and an updated wardrobe).
This morning China’s services PMI reached the highest level in a decade, an impressive recovery even factoring in some scepticism about the accuracy of these surveys in the current climate.
More ominously, however, data continue to validate previously highlighted trends pointing at contracting consumer incomes and clear deleveraging forces taking hold of households. In the UK, June consensus forecasts of consumer credit were way off the mark (-4.6bn vs -2.5bn expected) pointing to a significantly more muted normalisation since May’s trough.
This theme is going to be a particularly important one to follow going forward. The combination of falling incomes, higher precautionary savings, higher unemployment, low interest rates and higher government debt monetised by central banks has the potential to become increasingly toxic for the economy and the corporate sector in particular.
So far, aggregate bankruptcy data in many countries have dropped to record lows due to a mixture of temporary government support and possible shutdowns in the bureaucratic process.
However, no day seems to pass by without some large company going under. Hertz has been the most recognisable (and largest) case to date, but NPC (operator of Wendy’s and Pizza Hut restaurants), JC Penny and Chesapeke Energy are some of the other high-profile US businesses to undergo a similar fate. Outside the US, Victoria’s Secret, Intu, Avianca, Latam Airlines and Cirque du Soleil are other household names that have also sought bankruptcy proceedings over the past weeks (https://fortune.com/2020/06/29/companies-filing-bankruptcy-2020-during-coronavirus-pandemic-covid-19-economy-industries/).
Besides hitting cash flow constrained and leveraged balance sheets, periods of unexpected stress like the current one have the nasty habit of bringing to the surface the least savoury of corporate waste products: fraud. The German Wirecard case has been rightly pilloried, but it is likely that it will be followed by more examples just as Enron was by Worldcom and Nortel back in the early 2000s. With political uncertainty on the rise and many government programmes set to be slowly tapered off, the risks to the corporate sector appear to be just in the very first innings. For example, the chart below shows that US bankruptcies trends follow the US output gap (derived from the HLBW methodology) with a four-quarter lag.
June has also seen quite a large change in market dynamics. Our proprietary, market-based gauges of macro fundamentals, liquidity and inflation surprises have seen some notable changes in fortunes. In particular, the liquidity trade that has supported one of the sharpest ever recoveries in equity markets is showing signs of losing steam. At the same time, investors have continued to embrace a recovery in macro fundamentals, albeit at a pace lagging behind some of the more recent bullish market narrative. Finally, our inflation indicator suggests that markets are increasingly positioned for upside surprises to consumer prices in the medium term. Broadly speaking we would agree with this mood and have been recommending assets that have greater exposure to inflation, a neutral stance on macro fundamentals while flagging risks that the liquidity trade may have overextended itself [contact firstname.lastname@example.org for more information].
Before I sign off for the weekend, I want to flag a possibly slightly risqué, but light-hearted example about the importance of and challenges around the ability to adapt in the face of adversity. An intriguing article came to my attention about the measures that Amsterdam’s red light district is adopting in order to reopen to the public. As a friend astutely pointed out: “it didn’t get to be the world’s oldest profession without being able to adapt”. I could not help but reflect on these wise words particularly as another article, pointing out the struggles of parents juggling work and home-schooling duties, tripped a particularly live wire. Rather than harbouring sentiments of self-pity or resentment towards education professionals, perhaps a fact-finding mission to Amsterdam about how best to adapt might prove time better spent. Have a good weekend.
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