Month: August 2020

Authored by Michael Markowski via RealInvestmentAdvice.copm,

The probability of a “V-shaped” economic recovery is very low.

For the second quarter of 2020, US GDP experienced its worst-ever contraction of 32%. The key question now is how fast will the economy recover?

Morgan Stanley has emphatically stated that the economy would climb back to its pre-pandemic February 2020 level by the fourth quarter of 2020. According to the Wall Street Journal as of July 26, 2020,  President Trump’s advisors were still predicting a V-shaped recovery. Its why two of the US’ three major stock indices rallied back to new highs.

Politicians and Wall Street investment firms are notorious for not being objective with their estimates and economic forecasts.  See “The Problem with Wall Street’s Forecasts”.  Therefore, my top priority had been to find a reliable and objective post-pandemic forecast for the US economy.

Three Cases

The data in the charts and tables below were obtained from a June 15, 2020, five-year forecast for the US economy by US public accounting firm Deloitte.   Based on Deloitte’s best-case scenarios:

• US economy will not experience a V-shaped recovery.  

• Household wealth will not get back to the 2019 level until 2023.

• Capital Expenditures by businesses will not get back to 2019 level until after 2025. 

Assuming Deloitte’s worst-case scenarios for unemployment and most especially for savings as a percentage of disposable income the probability of the US recession becoming a depression is high.

Deloitte’s detailed and very granular report includes the actual comparative metrics for years 2014 through 2019 and three forecast assumptions for the years 2020 through 2025:

• Baseline

• Best Case

• Worst Case

GDP

The chart below depicts Deloitte’s best-case (+1%) and worst-case (-4.5%) growth rates for 2021 US GDP.  Under Deloitte’s best-case the recovery will be U-shaped and GDP will not exceed 2019’s high until 2023. For the worst-case GDP will not recover to the 2019 peak until 2025. For best and worst-case breakouts for years 2019 to 2025 see related table at the end of the article.

Consumer Spending

The chart below depicts that under Deloitte’s best-case scenario Consumer spending will not get back to 2019 high until 2023. The worst-case scenario would be 2025. For best and worst-case breakouts for years 2019 to 2025 see related table at the end of the article.

Corporate Profits

Corporate after-tax profits depicted in the chart below, under Deloitte’s best-case scenario will not exceed 2014 high until 2023.  Under the worst-case scenario, corporate after-tax profits in 2025 will have declined by 19.1% as compared to 2019.  For best and worst-case breakouts for years 2019 to 2025 see related table at the end of the article.

Unemployment

The chart below depicts the actual unemployment rate from 1929 to 2019 and Deloitte’s best-case and worst-case scenario forecasts for the years 2020 through 2025. The best-case scenario is for unemployment to not to decline to below double digits until 2022. The worst-case scenario is for unemployment to remain in the double digits until 2025 (9.9%). For best and worst-case breakouts for years 2019 to 2025 see related table at the end of the article.

The best and worst-case unemployment rate forecasts for 2021 in the above US Employment Rate chart are the highest since 1941. Assuming a Deloitte worst-case scenario unemployment will reach its highest level since 1938 in 2021 and will remain above 1941’s rate through 2025.

Savings & Personal Income

The chart below depicts the actual savings as a percentage of disposable income from 1947 through 2020 and Deloitte’s best and worst-case scenario forecasts for 2021 to 2025. Even if the rate declines from its record high of 25.7% in 2020 to Deloitte’s 14.2% best-case scenario in 2021, the rate would be the second-highest since 1975’s 15.3%. Under Deloitte’s worst-case scenario, the rate would remain above 1975’s until 2025.

The three highest readings prior to 2020 in the above Savings % Disposable Income chart occurred from 1973 to 1975. They coincided with the 1973 to 1975 recession.

The Dow Jones Industrials chart below depicts that the Dow declined by 41% from when the recession began to its December 1974 low.

All of the readings of 12.5% or higher from 1947 to 2020 in the above Savings % Disposable Income chart occurred between 1967 to 1982. The period coincided with the 1966 to 1982 secular bear market.

Secular Bulls & Bears

The chart below which contains all secular bull and bear markets from 1920 to 2020 depicts that the Dow declined by 65.7% from 1966 to 1982.

The Savings % Disposable Income chart above illustrates that savings as a percent of disposable income rate which is published monthly by the US Commerce Department’s Bureau of Economic Analysis (BEA) are arguably the most important metric for every investor to follow. It’s because the rate is the inverse of consumer spending. The higher the savings as a percentage of disposable income the lower consumer spending is as a percentage of GDP.

Declines in consumer spending increase the probability of economic contractions including recessions and depressions. The chart below is a good example. It depicts that consumer spending as a percentage of GDP declined from 66.6% at its high in 1949 to a low of 59.1% in 1951. The percentage then remained at 62% or below until 1982 which was when 1982 to 2000 secular bull began. The rate peaked at 68.7% in July 2011. The July 2020 reading of 67.1% was the lowest since April 2007. 

Conclusion

The comparison of Deloitte’s best and worst-case forecasts with the empirical data dating back to 1929 indicates that there will not be a V-shaped recovery. 

The two significant headwinds, high unemployment and saving rates, increases the probability of an extended recession or an economic depression. 

*  *  *

Click here to receive the BEA’s monthly savings as a percentage of disposable income readings.

Authored by John Authers, op-ed via Bloomberg,

The Money Says Kenosha Is Helping Trump

Prediction markets show people are betting the disorder will help the president, even though he is the incumbent.

Labor Day will be late this year, on Sept. 7, and it barely seems to function as the start of the presidential campaign any more. With both parties’ conventions complete, the last leg of the U.S. presidential campaign starts now. 

It does so with prediction markets, in which investors trade futures tied to the result, suddenly sharply out of line with the closest political equivalent of “fundamentals” — rolling poll of polls averages. The following chart of the polling average from RealClearPolitics shows the Democrats’ Joe Biden in a clear and stable lead of almost 7 percentage points:

Source: RealClearPolitics

[ZH: Although, in battleground states, Trump is ahead of where he was in 2016…]

Source: RealClearPolitics

Now look at the “betting average” compiled by the same organization. This aggregates a number of spread-betting sites to produce an average probability of each candidate winning. On this reckoning, Biden’s lead has collapsed in the last month:

Source: RealClearPolitics

In the Predictit market, where investors trade futures tied to political outcomes, the spread on Biden beating Trump has declined sharply, but is still at 10% (55% plays 45%). What will be horrifying to Democrats is that their chance of taking control of the Senate is deemed to have imploded:

Source: Bloomberg

Neither prediction markets nor polls are perfect. They were both wrong four years ago. But it’s hard to get a better grasp on perceived probabilities than from a prediction market, where people are betting actual money. Over history their results have tended to be uncannily accurate. And polls tend at least to be directionally right.

There are, I suspect, three factors at work here.

The first is simply a lag.

Gamblers have the chance to place bets before the polls come out, and a lot of people are convinced that the odds have shifted in the Republicans’ favor. This will be partly due to the Republicans’ convention, which would normally give some polling “bounce,” but is more thanks to a second critical factor, which is the disorder in Kenosha, Wisconsin.

Since the shooting of Jacob Blake went viral a week ago, trading volume in Predictit’s contract on the presidential outcome in Wisconsin has surged, as has the probability of a Trump victory. Biden is still shown with a slight lead, but it has reduced sharply — and Wisconsin may well be the “tipping point” state that decides the election. 

Source: PredictIt

The Kenosha effect isn’t specific to Wisconsin. Bettors appear to believe that the disorder will help Trump throughout the country. Here is a similar chart for North Carolina, a state that fell to Barack Obama and which bettors considered a likely Biden victory. There has been a dramatic change, which started before Kenosha and has since accelerated:

Source: PredictIt

Are prediction markets right? In 1968, perceptions of increasing lawlessness helped Richard Nixon to victory — but he was running against a sitting vice-president, while the current Republican candidates are incumbents. There is also a strange disconnect in the betting markets, which is that the violence following the killing of George Floyd in late May, and the growth in support for Black Lives Matter, was seen as almost wholly positive for Biden, while the latest protests are seen as helping Trump.

There should be more evidence on the Kenosha impact in coming days. For now, the caution of fivethirtyeight.com makes sense:

“There’s just not a lot of data that can help us understand how Americans are responding to what’s happening in Kenosha, Wisconsin, but… one thing we do know is that declining support for the Black Lives Matter movement hasn’t translated to a decline in support for Biden just yet.”

The final factor is the coronavirus. So far this year, Biden’s chances have improved when cases are increasing, and declined when they are falling. The relationship is startlingly close:

Source: Bloomberg

If cases continue to decline, Trump’s chances will be deemed to improve further. Moreover, there is evidence that the virus is less deadly as time goes by. The fact that the (mostly Republican) Sun Belt states suffered far fewer deaths than the (mostly Democratic) northeast did earlier this year is seen as removing a key risk for Trump. The following chart compares the five-day change in deaths for New York and New Jersey, against Florida and Texas. It shows that the second “wave” in the sun belt was far less severe — and would seem even smaller if the numbers were adjusted to take account of the southern states’ larger populations:

Source: Bloomberg

Republicans tended to refer to the pandemic in the past tense at their convention last week, which was highly questionable given the continuing numbers of fatalities. But if current trends in infections and deaths continue, it may begin to look justifiable by election day.

Will it happen? Two months ago, I offered this framework for asking why infection rates (often referred to as “R”) were falling. It was produced by Andrew Brigden, chief economist of Fathom Financial Consulting in London, and it remains as relevant today. He offered five roughly equally plausible explanations:  

• Heterogeneity across the population means that we all have a different R number, with some people, including those with a large network of contacts, more likely both to acquire the disease and to pass it on. Once those people have been exposed, and are no longer susceptible, the average R will fall;

• The virus has spread far more rapidly than antibody testing suggests, which means the virus is running out of people to infect;

• Fear of dying from the disease provokes other changes in behavior, such as more frequent hand-washing and wearing face masks;

• Potential “super spreader” events — such as nightclubs and concerts that bring many people together indoors — are no longer happening;

• It is a seasonal phenomenon in the northern hemisphere, and will return later this year.

The first two are broadly cases for “herd immunity” having arrived earlier than many had expected. If true, these would be great for Trump. The third and fourth suggest there could be perils from complacency, particularly as schools attempt to reopen. The fifth would be a disaster, but there is no particular evidence yet that it is going to happen. 

If, looking through these options, bettors think the pandemic may appear to be over by November, then that would go a long way to explaining the way they see the race narrowing. 

Whatever the truth of the coronavirus, it would be wise to brace for a lot of politically induced volatility between now and the end of the year. 

No charges have been filed against a Florida man who was pictured in a viral protest video whipping out a gun before being immediately swarmed by police and taken into custody.

In the video, a gang of “peaceful” protesters could be seen pursuing and attacking the man, who was found to be carrying a legal concealed carry permit.

But after reviewing several videos of the incident, investigators with the Tallahasse Police Department ruled that the suspect was carrying a concealed carry permit and that brandishing the weapon was justified given the fact that he was being “attacked”.

The suspect appeared at the Tallahassee protest over the weekend carrying a sign during a demonstration at the state capital. The man soon attracted a crowd who surrounded him and pelted him with curses, until members of the crowd physically lashed out at him.

While several of the protesters told local media that the suspect threw the first punch, the video tells a different story. And police investigating the incident ruled with that.

The Tallahassee PD released a statement relaying the facts of the incident. Police said a white man began “documenting the protest” and then was pushed from behind. A fight ensued, police said, and the man was knocked to the ground.

“He got back to his feet and brandished a gun,” but “officers quickly engaged, took the individual into custody and peacefully dispersed the crowd.”

No charges were filed, and no injuries were reported as the suspect “was lawfully carrying a concealed weapon as a license holder.”

Tallahassee PD’s statement ended with a warning, and a plea, calling for people to remain peaceful.

“Tensions are very high, and TPD is calling for protests and actions to remain peaceful. Verbal and physical altercations can quickly escalate into tragedy. Everyone must work together to de-escalate conflict,” the statement said.

Police also released a couple of videos so citizens could judge for themselves. The videos clearly show that the gun owner was “knocked to the ground and under attack before lawfully defending himself.”

“The evidence confirmed the physical altercation between numerous protestors and that the individual was knocked to the ground and under attack before lawfully defending himself. TPD confirmed that the individual with the gun was lawfully carrying a concealed weapon as a license holder.”

Watch the videos below:

By Michael Every of Rabobank

Bank Holiday Bombshells

Happy Monday – or for me traditionally an unhappy Monday. Growing up in the UK, this particular Bank Holiday Monday (for a holiday in the UK it is) was a shock to the system. First, the weather always, always sucked – and surprise! It’s cold and rainy again today. Moreover, psychologically it was a day where it was still August and the shops were trying to sell us damp ice cream and tales of summer and sunshine…and yet 24 hours later you knew it was going to be September: autumn; back to school; the media talking about the clocks changing; dark; cold; no more bank holidays for the year, and no day off until Christmas. In short, you were always trying to enjoy the Bank Holiday, but with a sense of foreboding as you knew that a psychological and physical bombshell was looming.

Which seems an apt metaphor for today. Once again, markets are rising. Once again, it’s all sunshine in terms of market commentary. And yet 1 September looms.

First of all, back to school, then. Let’s see how that challenge is overcome in the age of Covid-19.

Second, we have stories in the UK that the Treasury is considering massive tax hikes to try to deal with the existing Covid-19 debt build-up (let alone what happens if re-opening schools goes wrong.) Regardless of the political-economy of tax hikes and reallocation, which I addressed last week, any step up in taxation means a smaller fiscal deficit – and that means less state stimulus – and that is at a time when the recovery is far from cemented against either the downturn or the virus. Apparently, No. 10 is not on board with tax hikes. They want to consider spending cuts instead, which are arguably even stupider given their political-economy.

So what’s the simple message? The UK has not worked out how to safely reopen the economy, including schools, and has even suddenly flagged shut downs can be seen again if things go wrong; and the UK has not worked out that everything has changed, fiscally and politically, when it clearly has. Imagine if we get austerity and a virus flare-up. Imagine if we don’t and we don’t. That’s the difference between a Bank Holiday scorcher and the usual downpour.

This metaphor applies everywhere, even in places with far better weather.

Other bombshells loom, of course.

The US election campaign is moving into even higher gear, and as it does so we see further US sanctions on Chinese companies, with Bloomberg reporting the chip industry fears it is next. TikTok owner ByteDance has meanwhile said that it will comply with a new Chinese regulation that seems to imply that it cannot be sold without Beijing’s say so: does this slow things down, or does it mean the value of this asset is not in the tens of billions mentioned recently, but perhaps zero? If so, this would very powerfully illustrate the point about how private companies can get swept away by the changing political economy, something that was again being flagged last week.

On the political side, a Democracy Institute/Sunday Express Poll also now puts Trump 3 points up on Biden nationally (48% – 45% with 7% undecided) and up 7 in key swing states (49% – 42%), with a Trafalgar poll on Friday putting Trump up 2 in Michigan (47% – 45%). Saying anything about the US election now generates a hyper, hyper-partisan response, but can we agree the outcome in November still remains open rather than being a done deal?

Meanwhile, over the weekend Greek and Turkish F-16s were involved in not-so-mock mock dogfights. Clearly, tensions in the East Mediterranean remain high. Indeed, Turkey’s Foreign Minister has now cited a 1995 Turkish Parliamentary resolution to declare that if Greece extends its territorial waters to 12 miles in the Aegean (consistent with the UN Law of the Sea) it would be a casus belli – and Greece has stated it intends to do so. The EU is also threatening sanctions against Turkey over its energy drilling. Escalation on all fronts, in other words, and no clear path to a compromise that does not also compromise the UN Law of the Sea (again).

China has also slapped another investigation on Aussie wine exports that could last until 2022, just in case they didn’t notice the first one. Fortunately, they are still snuffling up as much iron ore as is possible, because that ol’ pump-primin’ just keeps a pumpin’…regardless of the inefficiency of the investment and how this all plays out in the long run.

Frankly, it is tiring to keep repeating that the real world, where people still live, and markets, where people don’t, are related to each other like a dream UK August Bank Holiday and the actual outcome. Such is life, however.

Indeed, in terms of data, the Asia-Pacific outlook overall showed more showers than sun:

• Japanese industrial production today was up 8% m/m vs. 5% expected, so some ice cream due there for once…until one sees it is still -16.1% y/y, and that retail sales slumped 3.3% m/m vs -2.5% expected and are down 2.8% y/y;
• NZ business confidence was flat at -41.8, showing no recovery at all;
• China also reported that its August manufacturing PMI at 51 vs. 51.2 consensus, but with services at 55.2 vs. 54.2 expected (which is odd given all other indicators show the production side of the economy is close to normal, but the consumption side isn’t….so which services are doing so well?); and
• Aussie private-sector credit was -0.1% m/m and now up just 2.4% y/y. This is not the stuff recoveries are made of.

As we move into September tomorrow, markets will turn their attention to a number of important data releases, including the PMI readings and the US jobs report. Otherwise, as DB’s Henry Allen writes, the events calendar is somewhat quieter following Jackson Hole, with the only major central bank decision coming from Australia on Tuesday. Investors will also continue to pay close attention to coronavirus case numbers and the possibility of further restrictions, particularly in Europe where the numbers have risen in recent weeks.

As Allen notes, this week will see a number of high profile data releases, most notably with the release of the August PMIs from around the world, as well as the ISM readings from the US, which will give us an indication of how the global economy has fared through the month. We already have some idea of how these might pan out from some of the flash readings, with the Euro Area seeing a loss of momentum into August as its composite PMI fell from 54.9 to 51.6. The UK saw a stronger move as it rose to 60.3, but that simply reflected the UK climbing out of a more protracted downturn rather than a higher level of activity. Remember with the PMIs that they’re diffusion indices, so are simply asking respondents whether conditions are better or worse than the previous month, and don’t capture by themselves how rapidly activity is expanding or contracting.

The other top-tier release comes from the US jobs report on Friday, which will also have a reasonable amount of political significance, given it’s the penultimate monthly jobs report before the presidential election on November 3. In terms of what to expect, the consensus on Bloomberg is currently looking for a further +1.518m increase in nonfarm payrolls in August, which if realised would bring the total growth in nonfarm payrolls to +10.797m over the last four months. However, even if that was achieved, that would still mean that less than half of the -22.16m jobs lost in March and April had been recovered, so there’s still a long road back before the labour market fully recovers to where it was pre-Covid.

Central banks will take something of a back seat this week following the Jackson Hole symposium and the announcement of the results of the Federal Reserve’s policy review framework. The only G20 policy decision to expect comes from the Reserve Bank of Australia on Tuesday, where the view is that policy will remain unchanged, with the cash rate and three-year AGS target remaining at 0.25%. Meanwhile, with recent high-frequency data looking to have mostly confirmed their expectations on the cost of Melbourne’s second lockdown, the RBA’s economic assessment is also expected to see little change.

Otherwise from central banks there isn’t a great deal on the calendar, though both Vice Chair Clarida and Governor Brainard will be speaking on the new monetary policy framework. We’ll also get the release of the Fed’s Beige Book which is published 8 times per year.

In the background, it’ll be important for investors to keep an eye on coronavirus case numbers, which have risen in Europe in particular in recent days. For instance here in the UK, the 1,522 cases reported yesterday were the highest in over two months, while France just reported its worst 24 hours since late March, with 6,111 cases. This rise in cases comes as the start of September next week will see schools go back from their summer holidays in a number of countries. Meanwhile governments face the continued challenge of seeking to revive their economies and relax restrictions whilst avoiding a new outbreak of infections.

Day-by-day calendar of events courtesy of Deutsche Bank

Monday

• Data: Japan preliminary July industrial production, July retail sales, housing starts, China August composite PMI, manufacturing PMI, non-manufacturing PMI, Italy final Q2 GDP, preliminary August CPI, Germany preliminary August CPI, US August Dallas Fed manufacturing activity
• Central Banks: Fed Vice Chair Clarida and Bostic speak
• Other: UK bank holiday

Tuesday

• Data: August manufacturing PMIs for Australia, Indonesia, South Korea, Japan, China, India, Russia, Turkey, Italy, France, Germany, Euro Area, UK, South Africa, Brazil, Canada, US and Mexico, Japan July jobless rate, August vehicle sales, Germany August unemployment change, Italy preliminary July unemployment rate, UK July consumer credit, mortgage approvals, M4 money supply, Euro Area July unemployment rate, August CPI estimate, US August ISM manufacturing, July construction spending
• Central Banks: Reserve Bank of Australia monetary policy decision, Fed’s Brainard and ECB’s Knot speaks

Wednesday

• Data: Japan August monetary base, Euro Area July PPI, US weekly MBA mortgage applications, ADP employment change, July factory orders, final July durable goods orders, nondefence capital goods orders ex air, Canada Q2 labour productivity
• Central Banks: Federal Reserve releases Beige Book, Fed’s Williams, Mester and ECB’s Weidmann speak

Thursday

• Data: August services and composite PMIs for Australia, Japan, China, India, Russia, Italy, France, Germany, Euro Area, UK, Brazil and US, Euro Area July retail sales, Canada July international merchandise trade, US weekly initial jobless claims, continuing claims, July trade balance, August ISM services index 

Friday

• Data: Germany July factory orders, August construction PMI, UK August construction PMI, Canada August net change in  mployment, unemployment rate, US August change in nonfarm payrolls, unemployment rate, average hourly earnings, labour force participation rate

Finally, looking at just the US, Goldman notes that the key economic data releases this week are the ISM manufacturing index on Tuesday and the employment report on Friday. There are several speaking engagements by Fed officials this week

Monday, August 31

• 09:00 AM Fed Vice Chair Clarida (FOMC voter) speaks: Federal Reserve Board Vice Chair Richard Clarida will participate in a virtual discussion on the Fed’s framework review hosted by the Peterson Institute. Prepared text and questions from a moderator are expected.
• 10:30 AM Atlanta Fed President Bostic (FOMC non-voter) speaks: Atlanta Fed President Raphael Bostic will speak about philanthropy and inclusion at a virtual event. Prepared text is not expected. Audience Q&A is expected.

Tuesday, September 1

• 09:45 AM Markit US manufacturing PMI, August final (consensus 53.6, last 53.6)
• 10:00 AM ISM manufacturing index, August (GS 55.0, consensus 54.5, last 54.2): We expect the ISM manufacturing index to increase by 0.8pt to 55.0 in August amid continued industrial rebound after rising 1.6pt in July. Our manufacturing survey tracker rose by 1.5pp to 55.6 in August.
• 10:00 AM Construction spending, July (GS +0.9%, consensus +1.1%, last -0.7%): We estimate a 0.9% increase in construction spending in July following four consecutive monthly declines.
• 01:00 PM Fed Governor Brainard (FOMC voter) speaks: Federal Reserve Governor Lael Brainard will participate in a virtual discussion on the Fed’s framework review hosted by the Brookings Institution. Prepared text and questions from a moderator are expected.

Wednesday, September 2

• 08:15 AM ADP employment report, August (GS +1,600k, consensus +950k, last +167k): We expect a 1,600k gain in ADP payroll employment in August, reflecting a boost from lagged payrolls and lower jobless claims.
• 10:00 AM Factory orders, July (GS +6.1%, consensus +6.0%, last +6.2%); Durable goods orders, July final (last +11.2%); Durable goods orders ex-transportation, July final (last +2.4%); Core capital goods orders, July final (last +1.9%); Core capital goods shipments, July final (last +2.4%): We estimate factory orders increased by 6.1% in July following a 6.2% increase in June. Durable goods orders rose by 11.2% in the July advance report.
• 10:00 AM New York Fed President Williams (FOMC voter) speaks: New York Fed President John Williams will speak during a webinar on effects of the coronavirus pandemic. Prepared text and audience Q&A are expected.
• 02:00 PM Beige Book, August FOMC meeting period: The Fed’s Beige Book is a summary of regional economic anecdotes from the 12 Federal Reserve districts. In the August Beige Book, we look for anecdotes related to growth, labor markets, wages, price inflation, and the economic impacts of the ongoing coronavirus outbreak.
• 06:00 PM San Francisco Fed President Daly (FOMC non-voter) speaks: San Francisco Fed President Mary Daly will give a speech on the economy hosted by Harvard University. Prepared text is not expected. Audience and media Q&A are expected.

Thursday, September 3

• 08:30 AM Initial jobless claims, week ended August 29 (GS 930k, consensus 950k, last 1,006k); Continuing jobless claims, week ended August 22 (consensus 14,000k, last 14,535k); We estimate initial jobless claims dropped to 930k in the week ended August 29.
• 08:30 AM Nonfarm productivity, Q2 final (GS +7.4%, consensus +7.4%, last +7.3%); Unit labor costs, Q2 final (GS +12.0%, consensus +12.1%, last +12.2%): We estimate nonfarm productivity was revised up by one tenth to +7.4% (qoq ar) in Q2. We estimate growth in Q2 unit labor costs – compensation per hour divided by output per hour – was revised down to +12.0% in Q2.
• 08:30 AM Trade balance, July (GS -$58.0bn, consensus -$57.0bn, last -$50.7bn): We estimate the trade deficit increased by $7.3bn in July, reflecting a sharp increase in the goods trade deficit.
• 09:45 AM Markit US services PMI, August final (consensus 54.7, last 54.8)
• 12:30 PM Chicago Fed President Evans (FOMC non-voter) speaks: Chicago Fed President Charles Evans will speak on monetary policy and the economy at an event hosted by the Lakeshore Chamber of Commerce.

Friday, September 4

• 08:30 AM Nonfarm payroll employment, August (GS +1,900k, consensus +1,400k, last +1,763k); Private payroll employment, August (GS +1,650k, consensus +1,275k, last +1,462k); Average hourly earnings (mom), August (GS -0.1%, consensus 0.0%, last +0.2%); Average hourly earnings (yoy), August (GS +4.3%, consensus +4.5%, last +4.8%); Unemployment rate, August (GS 9.8%, consensus 9.8%, last 10.2%): We estimate nonfarm payroll growth rose +1.9mn in August after +1.8mn in July and +4.8mn in June. The resurgence of the coronavirus did not produce a meaningful rebound in layoffs in the Sunbelt, and nationwide continuing claims fell by 2.2mn from survey week to survey week (adjusted by GS). Because of measurement issues with the BLS birth-death model, we also expect the establishment survey to better capture business reopenings and gross hiring than the mid-summer business closures resulting from the virus. We also expect a 250k boost to government payrolls from Census canvassing activities (we estimate private payrolls rose 1.65mn).
• Because of difficulty measuring temporary business closures in the establishment survey, we note scope for a relatively smaller rise in the household employment measure (which surveys employees directly). Based on this and a possible increase in the labor force participation rate, we estimate the unemployment rate declined by four tenths to 9.8%. We estimate average hourly earnings declined 0.1% month-over-month, lowering the year-on-year rate by five tenths to 4.3%. This forecast reflects a continuing unwind of the composition shift from lower to higher paid workers, partially offset by positive calendar effects.

Source: Deutsche Bank, Goldman, BofA

After a brief mini-flash-crash this morning, VIX is spiking at the cash market opens (more levered long call-buying or is protection actually bid this time?)…

Stocks are also tanking so perhaps that suggests the answer to the above question…

As both Robinhood and TDAmeritrade users are reportedly “having problems” this morning.

 

Summary:

• NJ to reopen indoor dining for first time since mid-March
• Restaurant capacity will be limited to 25%
• US cases top 6 million
• Controversy over FDA Commissioner’s remarks continues
• India passes Mexico’s death toll
• Hong Kong set to restart in-person learning

* * *

As we reported Sunday evening, the US surpassed 6 million confirmed coronavirus cases, adding the latest million cases in 22 days, compared with just 16 days to go from 4 million to 5 million. And as the outbreak slows, it looks like some of the most recalcitrant states, which have until very recently been reluctant to meaningfully roll back any of their pandemic-era emergency orders, are finally starting to walk the long path back to (some semblance of) normalcy.

For example, on Monday, New Jersey Gov Phil Murphy tweeted that he would allow restaurants in the state to reopen their dining rooms – albeit with just 25% capacity – as he works to “restore one of our state’s key industries”.

In other words: the exodus of wealth tax payers finally motivated Murphy to act.

NEW: Restaurants statewide will be able to open for indoor dining beginning this FRIDAY at 25% capacity and with social distancing between tables.

Reopening responsibly will help us restore one of our state’s key industries while continuing to make progress against #COVID19. pic.twitter.com/EPdEfi5Dmh

— Governor Phil Murphy (@GovMurphy) August 31, 2020

Restaurants will be allowed to reopen their dining rooms on Friday morning for the first time since mid-March.

Unfortunately for restaurant owners, running a restaurant at just 25% capacity would be extremely difficult – if not impossible – to do profitably.

Restaurant owners in NJ were initially instructed that they could reopen their dining rooms at 25% capacity on July 2. Outdoor dining has been ongoing since June 15. But on June 29, just three days before indoor dining was set to open, Murphy announced that he would post plans indefinitely following a spike in new cases.

Murphy blamed overcrowded dining areas and irresponsible citizens who refused to wear masks as justification for the decision.

Since early July, restaurants, who spent thousands on cleaning supplies and plexiglass dividers, have been distraught over Murphy’s inability to offer a clear timeline for reopening, something the governor blamed on the “unsteady rate of transmission”.

Hospitality industry lobbyist Marilou Halvorsen, president and CEO of the New Jersey Restaurant & Hospitality Association, told North Jersey.com that 30% of restaurants will close because of business lost during the pandemic.

While we imagine thousands of Garden Staters will rush to revisit their old favorite restaurants (at least those that are still around), for those stuck living on rice and beans no that all the “Trump money” has dried up, at least you can enjoy this video of NJ.

Paris is now offering free coronavirus testing at locations in each of its 20 districts starting Monday as it battles against a sharp resurgence of cases that has centered mostly in France’s two largest cities, Paris and Marseilles.

As the number of new cases tapers off in Hong Kong, high schools will soon be able to resume face-to-face classes in phases starting Sept. 23, according to an announcement from Secretary for Education Kevin Yeung.

Perhaps the biggest news overnight comes out of India’, which saw its death toll finally top Mexico’s to claim the third-largest death toll globally.

India is fast becoming the world’s new virus epicenter as outbreaks in both the US and Brazil slow.

The grim milestone comes a day after the world’s second-most populous country reported its latest record jump in new infections, which was also the most new cases reported in a day by any country on earth.

India reported 78,512 additional cases and 971 fatalities on Monday. It now has more than 3.6 million cases, while the death toll is above 64,000, compared with Mexico’s. On Sunday, Mexican health authorities reported 4,129 new confirmed novel coronavirus cases and 339 additional deaths, bringing the total number to 595,841 cases and 64,158 deaths.

Finally, as we noted last night, FDA Commissioner Stephen Hahn has doubled down on his claim, made during an interview, that the FDA would approve a vaccine before Phase 3 trials were finished if it thought doing so would be “appropriate”. It’s just the latest media-assisted ‘witch hunt’ for undue political influence.

Dividend payouts are a big part of the investment return for folks owning stocks. Given the unprecedented volatility in financial markets earlier this year, triggered by the virus pandemic, global dividend payouts have sustained the worst quarterly decline in a decade.  

According to Janus Henderson, the asset manager that tracks dividends globally, global dividends fell by $108.1 billion to $382.2 billion in the three months to June. The 22% drop was the worst quarterly decline since the fund launched Janus Henderson Global Dividend Index (JHGDI), a long-term study into global dividend trends, a decade ago. 

Janus Henderson said, “all regions saw lower payouts except North America, where Canadian payments proved to be resilient.” Worldwide, “more than a quarter (27%) of Q2 payers cut their dividends, and more than half of this group canceled them outright.” The worst affected region was Europe and the U.K., where companies slashed dividends by at least two fifths. In the U.K., dividend payouts dropped by 54% in the second quarter, down by $18.4 billion to $15.6 billion. 

“2020 will see the worst outcome for global dividends since the global financial crisis, although by the end of March 2020 they had almost doubled from when the index was launched in 2009,” the report said. 

Natural resource and energy firms slashed their dividends the most as commodity prices tanked. Consumer discretionary companies were second as lockdowns prevented consumers from spending money in brick and mortar retail outlets.  

The report noted technology companies were among the top global dividend payers for the first time this year. 

Ben Lofthouse, Head of Janus Henderson’s Global Equity Income strategy, said the drop in dividend payments this year will be unpleasant for investors. He said ex-Europe, some companies continued paying dividends, despite the virus-induced recession. 

“The short-term dividend cut or halt doesn’t necessarily change the long-term valuation of companies,” Lofthouse said. 

He asked: 

“The big question for the U.S. is what will happen in the fourth quarter. If many companies make significant cuts to their dividends, payouts will be fixed at a lower level until towards the end of 2021.”

A recent Goldman Sachs note shows US dividend cuts. 

The latest quarterly plunge in global dividends (see: “Dividend Massacre In This Crisis Is Already Breaking Records, And It’s Only Just Starting”) , with the possibility North America could see cuts in 4Q20, suggests a worldwide ‘V-shaped’ economic revival is not in the cards this year.