Heisenberg Report

The Big Boot

It was nobody’s idea of a “good” day.

The worst economic downturn since the Great Depression was confirmed. Jobless claims rose for a second consecutive week. Donald Trump raised eyebrows by suggesting the election should be delayed. And lawmakers on Capitol Hill appeared no closer to a deal on additional virus relief, even as extra federal unemployment benefits lapse, leaving millions of jobless Americans to ponder a sharp reduction in government assistance.

The figure (below) is from the GDP report, and it shows that household spending on services plunged by nearly 44% annualized in the second quarter. This underscores the scope of the damage done to America’s services sector, which bore the brunt of the economic hit from the pandemic. On Wednesday, Jerome Powell warned that many of those jobs may not come back — or at least not anytime soon.

Although the jobless claims data did show a sizable decline in the total number of Americans claiming some form of benefits, that figure lags initial claims by two weeks and continuing claims by a week, which means it too should move higher going forward.

“This reinforces our nervousness that the COVID-19 fear factor, states reversing course on re-openings leading to job losses, and the likelihood of a significant cut to the level of unemployment benefits [together] mean the upcoming data flow may not point to as vigorous a recovery as markets are pricing”, ING’s James Knightley cautioned.

Meanwhile, the feared wave of white collar layoffs is becoming a reality. Walmart has laid off “hundreds of workers in units including store planning, logistics, merchandising and real estate”, Bloomberg reported Thursday, adding that some of the condemned were informed via Zoom calls.

Apparently, the affected employees will be paid through the end of the year. Walmart would say only that the company is “continuing on our journey to create an omni-channel organization within our US business and we’re making some additional changes this week”. How’s that for euphemistic spin?

This is notable not just because it marks a continuation of the trend in layoffs moving up the corporate ladder, but also because Walmart was a pandemic “winner”, so to speak. Bloomberg cites Facebook messages and other online posts by some of those who lost jobs. “20 years, good performance…but given the big boot today”, one anonymous employee apparently said. “Just laid off, 26 years with Walmart”, another sighed.

Stocks recovered some of the steep losses seen at the cash open, but Friday hangs on mega-cap tech earnings, which came in ahead of estimates. Treasurys clung to early gains into the afternoon, even as equities fought back. 10-year yields fell to 0.536%, brushing up against levels which may trigger convexity flows, Bloomberg’s Edward Bolingbroke notes.

“Risk assets have fared well this week despite the absence of a dovish surprise from the FOMC and the astonishingly dismal growth figures”, BMO’s Ian Lyngen wrote, in an afternoon note. “It’s tempting to suggest there is a degree of disbelief in the severity of the contraction; although, it’s better characterized as a lack of context for the magnitude of the decline”, he went on to say, adding that “there is also the assumption that while the start of the recession appears to dwarf the Great Depression, the reopening related bounce will recast the nature of the stats”.

That’s an incisive take that neatly encapsulates the psychology of the situation.

Unfortunately, there are pressing questions about the extent to which the services sector can stage a durable rebound in the back half of the year, given possible changes in consumption habits. Reports indicate that while businesses are reopening (represented by negative numbers on the black line in the figure), the percentage of small- and medium-sized firms closing their doors permanently is rising.

But, again, none of this has served to meaningfully derail risk assets. That’s a testament to the market’s faith in the Fed and the notion that monetary policy’s capacity to facilitate benign outcomes knows no bounds.

“Hindsight being 20/20, could it really have been that simple on the 2020 version of the ‘Fed rides to the rescue’ trade yet again?”, Nomura’s Charlie McElligott asked, in a Thursday note, citing huge returns for virtually all assets since the Fed’s emergency actions on March 15. “The answer seems to be a resounding ‘YES’”, he went on to say.

Perhaps not surprisingly in that regard, investment grade credit funds raked in another $7.9 billion in the week through Wednesday, Lipper data showed.

It was the 16th consecutive weekly inflow for high grade. Junk funds took in nearly $300 million, down from last week’s $3.9 billion haul, but an inflow nevertheless.

On Lipper’s data, IG funds are just ~$8 billion away from recovering the entirety of the exodus seen during the crisis weeks.

Oh, and if you were wondering whether the Fed bought Walmart debt as part of its corporate bond-buying program, the answer is yes (the table is below, for those who may have missed the unveil last month). Apparently, those purchases were not enough to save the folks who were let go over the past several weeks.