565 Americans Have Lost Their Job For Every Confirmed COVID-19 Death In The US
In the last week 4.427 million Americans filed for unemployment benefits for the first time.
Source: Bloomberg
That brings the four-week total to 26.5 million, which is over 10 times the prior worst five-week period in the last 50-plus years.
And of course, last week’s “initial” claims and this week’s “continuing” claims… the highest level of continuing claims ever
Source: Bloomberg
A breakdown of initial claims by state shows that the weekly devastation is easing, with the number of (not seasonally adjusted) claims in New York, California and Michigan declining notably over the past week, while Florida and Connecticut still showing dramatic increases.
And as we noted previously, what is most disturbing is that in the last five weeks, far more Americans have filed for unemployment than jobs gained during the last decade since the end of the Great Recession… (22.13 million gained in a decade, 26.46 million lost in 5 weeks)
Worse still, the final numbers will likely be worsened due to the bailout itself: as a reminder, the Coronavirus Aid, Relief, and Economic Security (CARES) Act, passed on March 27, could contribute to new records being reached in coming weeks as it increases eligibility for jobless claims to self-employed and gig workers, extends the maximum number of weeks that one can receive benefits, and provides an additional $600 per week until July 31. A recent WSJ article noted that this has created incentives for some businesses to temporarily furlough their employees, knowing that they will be covered financially as the economy is shutdown. Meanwhile, those making below $50k will generally be made whole and possibly be better off on unemployment benefits.
Furthermore, as families across the nation grapple with lost jobs and struggle to get meals on the table, The Epoch Times’ Zachary Stieber reports that food stamp benefits are up 40%, according to the Department of Agriculture.
The increase will “ensure that low-income individuals have enough food to feed themselves and their families during this national emergency,” Secretary of Agriculture Sonny Perdue said in a statement.
“President Trump is taking care of America’s working-class families who have been hit hard with economic distress due to the coronavirus. Ensuring all households receive the maximum allowable SNAP benefit is an important part of President Trump’s whole of America response to the coronavirus.”
Families receiving food stamps can typically get a maximum benefit of $768. Through the increase in emergency benefits, the average five-person household can get an additional $240 monthly for buying food. Families already at the maximum won’t get additional benefits. SNAP normally costs the U.S. government approximately $4.5 billion each month. The allotments made under the Families First Coronavirus Response Act, which President Donald Trump signed, is adding nearly $2 billion per month to that total. The emergency funds are made available through waivers the Department of Agriculture makes for each state.
But, hey, there’s good news… well optimistic headlines as Treasury Secretary Steven Mnuchin said he anticipates most of the economy will restart by the end of August.
Finally, it is notable, we have lost 565 jobs for every confirmed US death from COVID-19 (46,785).
Futures Flat Despite Record Eurozone Business Collapse Ahead Of Latest Claims Shocker
US equity futures and global stock markets were surprisingly uneventful on Thursday on the back of a continued modest rebound in oil prices despite a record collapse in European business activity, as investors braced for another staggering jobless claims report as sweeping lockdown measures hammer economic growth.
The S&P500 jumped on Wednesday on a recovery in oil prices and signs Congress was set to pass $500 billion more in relief for small businesses and hospitals. The bill is expected to clear the House of Representatives later in the day. Still, the benchmark index is 17% below its February record high as statewide shutdowns sparked layoffs and crushed consumer spending. Surveys on U.S. manufacturing and services firms are likely to mirror dismal readings from Asia and Europe issued earlier on Thursday. As noted earlier, a composite European business index plunged to its lowest print on record.
Data set to be announced shortly is also likely to show a record 26 million Americans sought unemployment benefits over the last five weeks, confirming that all the jobs created during the longest employment boom in U.S. history were wiped out in about a month.
Retailer Target Corp tumbled 7% in premarket trading despite a surge in digital sales in March and April which offset a slump in-store sales. Eli Lilly gained 1.5% as it reported a jump in first-quarter sales, boosted by its diabetes drug and also benefiting from customers stockpiling its medicines during the pandemic.
Europe’s Stoxx 600 Index drifted as the abovementioned PMI index plunged far more than economists anticipated. Credit Suisse slipped after the bank said first-quarter profitability rose but that it’s taking a greater than expected $1 billion in writedowns and provisions for bad loans after the pandemic.
Earlier in the session, Asian stocks gained, led by materials and energy, after rising in the last session. Most markets in the region were up, with Japan’s Topix Index gaining 1.4% and India’s S&P BSE Sensex Index rising 1.2%, while Shanghai Composite dropped 0.2%. The Topix gained 1.4%, with Jeans Mate and Showcase Inc/Japan rising the most. The Shanghai Composite Index retreated 0.2%, with Xinjiang Winka Times Department Store and Zhejiang Meilun Elevator posting the biggest slides.
Crude futures jumped for a second day despite a swelling global glut.
Looking ahead, investors will focus on the latest weekly jobless numbers from Washington that are estimated at 4.5 million. While governments across the world have pledged more than $8 trillion to fight the pandemic, a sharper picture of a crippled global economy is emerging from unprecedented layoffs, chaos in the oil market, poor European data and a mixed bag of corporate earnings, as Bloomberg summarizes.
There were some good news on the virus front, where New York fatalities were at the lowest rate since early April, while Treasury Secretary Steven Mnuchin said he anticipates most of the economy will restart by the end of August. House lawmakers on Thursday are set to pass another round of aid. Infections and deaths spiked higher in Spain, home to the world’s most extensive outbreak after the U.S., even amid its sixth week of strict lockdown.
The most important event today is the long-awaited European Council summit via videoconference this afternoon, where the big question will be over how the idea of a European Recovery Fund is financed. Yesterday, Bloomberg News reported that the Commission would propose a €2 trillion plan that would in part use the bloc’s 7-year multi-annual budget with a €300bn recovery fund included, but also establish a new temporary financing mechanism that would raise up to €320bn. However, this could prove controversial given the issuance of joint debt, to which the northern member states are strongly reluctant.
In rates, Treasuries steadied while commodity currencies advanced on a rise in oil prices; Spanish bonds extended an advance, leading peripheral outperformance over euro-area peers; bunds erased declines after French PMIs missed median estimates. Gilts fell then rose after the U.K. DMO announced it will raise in four months of debt sales almost as much as it did during the height of the global financial crisis.
In FX, the Bloomberg dollar index inched up, erasing losses after coming under pressure from short covering in crosses into the London open. The euro fell after much worse than anticipated German consumer confidence data. The Norwegian krone shrugged off a plunge in industrial confidence and rose versus all major peers. Australian and New Zealand dollars traded higher against the greenback as the recovery in oil futures sparked short covering among commodity currencies
Looking at the day ahead, and along with the aforementioned European Council meeting, PMIs and initial jobless claims from the US, other data releases include Germany’s GfK consumer confidence reading for May, the UK’s public sector net borrowing for March, along with the US new home sales for March and April’s Kansas City Fed manufacturing activity index. From central banks, we’ll hear from the BoE’s Vlieghe, while earnings out today include Intel, Eli Lilly and Company, NextEra Energy and Union Pacific.
Market Snapshot
S&P 500 futures down 0.1% to 2,786.75
STOXX Europe 600 down 0.1% to 329.81
MXAP up 0.8% to 142.65
MXAPJ up 0.5% to 460.76
Nikkei up 1.5% to 19,429.44
Topix up 1.4% to 1,425.98
Hang Seng Index up 0.4% to 23,977.32
Shanghai Composite down 0.2% to 2,838.50
Sensex up 1.4% to 31,805.19
Australia S&P/ASX 200 down 0.08% to 5,217.11
Kospi up 1% to 1,914.73
German 10Y yield fell 0.3 bps to -0.41%
Euro down 0.2% to $1.0800
Italian 10Y yield fell 7.6 bps to 1.902%
Spanish 10Y yield fell 8.9 bps to 1.048%
Brent futures up 7% to $21.80/bbl
Gold spot up 0.6% to $1,724.11
U.S. Dollar Index up 0.1% to 100.44
Top Overnight News from Bloomberg
Confidence among European businesses and consumers is in free fall as shutdowns to contain the coronavirus push the economy into recession
The Federal Reserve’s beefed-up swap program is having some unintended consequences, especially in Europe. It helped bring down the cost of dollars to such an extent they’re cheaper to borrow in cross-currency markets than any major currency. But that’s driving opportunistic players to tap local markets to swap into dollars, which ends up elevating domestic borrowing costs
The effect of the U.K.’s emergency spending to combat coranavirus began to show up in public finance data for March, as a jump in spending caused the budget deficit to widen more than expected
The U.K. government is to survey 20,000 households in a bid to track the spread of the coronavirus in Britain, five weeks after it abandoned a strategy of community testing for the disease
Asian equity markets mostly benefitted from the more constructive handover from Wall St where sentiment rebounded in tandem with oil prices amid touted bargain buying and increased US-Iran geopolitical risks after US President Trump instructed the US Navy to destroy any and all Iranian gunboats if they harass US ships at sea, with the Senate’s recent passage of the USD 480bln relief bill also adding to the bout of optimism stateside. ASX 200 (-0.1%) advanced at the open but with gains later pared after mixed data releases, as well as weakness in defensives and the largest weighted financials sector. Nikkei 225 (+1.5%) traded higher although upside was restricted by an indecisive currency and following abysmal PMIs in which Manufacturing PMI posted its worst reading since 2009 and both Services and Composite PMIs were at record lows, while the KOSPI (+1.0%) outperformed after it eventually shrugged off the largest contraction for South Korea GDP in more than 11 years. Elsewhere, Hang Seng (+0.4%) and Shanghai Comp. (-0.2%) were indecisive with price action kept rangebound amid a lack of fresh drivers and continued PBoC liquidity inaction, while Hong Kong policymakers remained focused on defending the currency peg. Finally, 10yr JGBs initially weakened amid the early broad optimism but then recovered from lows as the regional stock indices retraced some of the gains and following stronger results at 2yr JGB auction.
Top Asian News
South Korea’s Economy Shrinks Most Since 2008 Amid Pandemic
Singapore Traders Say They’re Healthy Amid Hin Leong Saga
Operation Twist Returns to Send India’s Bond Yields Plunging
The optimism seen in the APAC session faded as European trade went underway [Euro Stoxx 50 -0.1%], with the deterioration attributed to a string of dismal April Flash PMIs across the region and as participants look ahead to the Eurogroup summit later today (Primer available on the Newsquawk headline feed). A meeting which could see disagreement over the rollout of the European Recovery Fund – officials touting a launched in 2021; however, Italy stated they cannot wait until June 2020 for approval. European bourses trade mixed with no standout under/outperformers, whilst broader sectors also paint a mixed picture and fail to reflect a clear risk tone – albeit the energy sector outperforms as the complex continues to post gains. The breakdown also sees a similarly mixed picture – again with Oil & Gas leading the gains. A slew of earnings were reported in the pre-market, including prelim figures for Daimler (+0.9%) and Software AG (+0.8%), whilst Renault (+2.3%), Orange (+0.5%), Pernod Ricard (+0.3%), Accor (+1.1%), Swedbank (-0.7%), Volvo (-7.0%) all reported quarterly numbers – with Renault firmer despite a downbeat earnings release on reports Renault CEO is to unveil cost-cutting measures next month, whilst Volvo is pressured after substantially missing on its EPS and adj. operating profit expectations. Moving to Credit Suisse’s (-2.2%) earnings, the group topped net income forecasts but reported a deterioration in revenue and a Q1 loan loss provision over double its expectations. That being said, market volatility saw its FICC and Equity trading and sales both higher in excess of 20% YY. Elsewhere, Wirecard (+8.0%) sees itself at the top of the DAX after an independent audit of the Co. has uncovered no substantial findings with regards to questionable accounting methods; however, the full report is yet to be published. Results from the audit are now expected for April 27th and the Co’s FY results are to be published on April 30th. Finally, Tullow Oil (+30%) opened with gains above 60% and holds its place at the top of the Stoxx 600 after divesting its stake in Uganda to reduce net debt, whilst also seeing tailwinds from favourable price action in oil.
Immofinanz Names Investor Ronny Pecik as New Chief Executive
Orban Blinks After Decade Fighting Foreign Sway Over Economy
In FX, the single currency is languishing at the bottom of the G10 table and looking precarious under 1.0800 vs the Dollar not to mention across the board as Eur/crosses teeter over psychological or key technical levels, like Eur/Chf on the verge of 1.0500, Eur/Jpy edging towards 116.00 and even Eur/Gbp testing the 200 DMA (0.8736). Much worse than anticipated preliminary Eurozone PMIs, and particularly poor services sector prints have undermined the Euro, but Eur/Usd is holding in just above or around chart supports ahead of 1.0750 in the form of April 6’s so called reaction low at 1.0769 and a 1.0757 Fib retracement level, for now, with some additional buffers provided by option expiries extending from 1.0800-1.0790 to 1.0750 in 3.1 bn and 1.2 bn respectively.
NZD/AUD/JPY/GBP – The Kiwi and Aussie continue to see-saw vs their US counterpart, with the former recovering from a stop-induced slide overnight after 0.5900 held and subsequently retesting resistance ahead of 0.6000, while the latter was able to withstand weak PMIs with the aid of trade data revealing a much wider surplus as exports outpaced imports nearly 3-fold. Aud/Usd has reclaimed 0.6300+ status and briefly extended gains to circa 0.6370 before fading alongside Aud/Nzd ahead of 1.0650. Meanwhile, the Yen continues to retain an underlying safe-haven bid between 108.00 and 107.50 with decent option expiry interest also keeping the pair contained (1 bn at 107.50 and 1.6 bn from 107.85 to 108.00). Elsewhere, Sterling has (somehow) taken bleak UK PMI and CBI surveys in stride and resisting Greenback advances after Cable came close to filling bids touted at 1.2300, though this could be due to the aforementioned Eur/Gbp correction from recent 0.8800+ peaks rather than anything especially or uniquely Pound positive.
USD – The Buck may be primed for a fall after the latest US initial claims release and/or Markit PMIs, but for now the DXY is establishing a more assured base on the 100.000 handle and building momentum through 100.500, albeit with indirect traction from the Euro underperformance noted above and more pronounced Franc depreciation below 0.9700 through 0.9750.
SCANDI/EM – The Scandi Crowns are back on the front foot as crude prices continue to stabilise and sharp falls in Swedish sentiment indicators are acknowledged, but partially taken in context when compared to the starker deterioration elsewhere in Europe. However, in contrast to crude-related recoveries for EM currencies like the Rouble, COVID-19 contagion has intensified in SA where the Rand is back under 19.0000 vs the Dollar in the run up to President Ramaphosa setting out plans to re-open the economy after rolling out fiscal stimulus representing around 10% of the country’s GDP..
In commodities, WTI and Brent front month futures trade on a firmer footing as geopolitical risks continue to be priced in following US President Trump’s tweet regarding his order to the US Navy to shoot down all Iranian gunboats that harass US vessels. Aside from that, the underlying fundamentals remain broadly unchanged. The supply glut remains, and storage space remains scarce. “Given the glut we have in the oil market, it is difficult to see this offering lasting support to the market, unless the situation does escalate further” – ING says. Elsewhere and in fitting with recent source reports, Saudi Aramco has started to implement the OPEC+ pact ahead of its inauguration on May 1st. Aramco will be lower output to 8.5mln BPD, the output level mentioned under the terms of the of the deal – markets are yet to see if other producers follow suit, with Kuwait the only other country to publicly announce their early cuts thus far. WTI resides around USD 15.5/bbl having had briefly topped USD 16/bbl in early trade ahead of yesterday’s high of USD 16.18/bbl. Brent futures meanwhile meander just above 22/bbl after printing a current intraday high at USD 23.22/bbl. Elsewhere, spot gold remains relatively steady north of USD 1700/oz thus far and briefly topped 1725/oz. Meanwhile, copper trades on a firmer footing after Anglo American’s copper production showed a YY decline, meanwhile, Antofagasta also stated it expects copper output this year towards the lower end of its guidance.
US Event Calendar
8:30am: Initial Jobless Claims, est. 4.5m, prior 5.25m; Continuing Claims, est. 16.7m, prior 12m
9:45am: Markit US Manufacturing PMI, est. 35, prior 48.5
9:45am: Markit US Services PMI, est. 30, prior 39.8
9:45am: Markit US Composite PMI, prior 40.9
10am: New Home Sales, est. 644,000, prior 765,000; New Home Sales MoM, est. -15.82%, prior -4.4%
11am: Kansas City Fed Manf. Activity, est. -37, prior -17
DB’s Jim Reid concludes the overnight wrap
This working from home routine is good for productivity if not my social skills. My wife won’t get too close to me at the moment as I refuse to shave off a four week old bristly beard. We’ll see who holds out the longest. On the productivity front we published two quick notes yesterday. The first ( link here ) where we rank the severity of this pandemic relative to 24 we’ve found going back over 2000 years and make some observations of where it’ll end up and also some markers for the future. Secondly we published a chart looking at 150 years of oil prices in nominal and real terms ( link here ). This week the price of oil in nominal terms was lower than it was in 1870 and at any point in history. The note shows what inflation and the S&P 500 have done over the same period for comparison. Guess before you look at the answer. At least how many figures the latter runs into in percentage terms. If anyone can think of a financial related asset that still trades today that had a lower price this week than it did 150 years ago then I will give them a virtual prize. Even if you can think of one from 100 or even 50 years ago.
We’ll come back to oil a little later but the most important event today is the long-awaited European Council summit via videoconference this afternoon, where the big question will be over how the idea of a European Recovery Fund is financed. Yesterday, Bloomberg News reported that the Commission would propose a €2 trillion plan that would in part use the bloc’s 7-year multi-annual budget with a €300bn recovery fund included, but also establish a new temporary financing mechanism that would raise up to €320bn. However, this could prove controversial given the issuance of joint debt, to which the northern member states are strongly reluctant.
Frankly, if we saw a full agreement today that would be a surprise but progress and something that Italy can sign up to will be the key. In his blog on Monday, DB’s Mark Wall said that while he expects an eventual agreement on a recovery fund, it would be a positive surprise if the important details were agreed today, since the question of burden sharing is politically complex and the ECB’s purchases are absorbing market pressure for now. Mark says that the things to watch out for are the size, speed and structure of the fund, but he thinks joint bonds are unlikely for obvious reasons due to the Northern states current lack of desire to go down that route. We’ve also seen increasing speculation around grants recently, which could be the principle means of buying solidarity, but that would also lead to tough debates around the ratio of grants to loans within the Recovery Fund and eligibility for the grants. This would fit into the idea that we shouldn’t expect a fully detailed agreement today.
Ahead of that, sovereign debt continued to sell off in Europe yesterday, though it should be noted that Italian BTPs actually outperformed, with yields falling by -7.7bps by the end of the session. Nevertheless, in the rest of southern Europe sovereign bond spreads moved wider, with the spread of Spanish (+6.3bps) debt over bunds reaching its highest level since the aftermath of the Brexit vote back in June 2016. Having said that they did complete a successful syndicated deal which would have led to pressure elsewhere in the curve – similar to Italy on Tuesday. The ECB last night said it would accept some HY bonds as collateral if they were rated IG before April 7th and stay above BB. This clearly looks designed to mainly help Italy if they get downgraded to HY over the coming weeks or months. Next stop is S&P’s review of their BBB rating due to be announced tomorrow. Finishing off on sovereigns, 10yr Treasury yields rose by +5.0bps yesterday, up from their second-lowest closing level ever the previous day to reach 0.619%.
Staying on today, we’ll also get the much-anticipated April flash PMIs this morning. For our readers who thought that the March readings were dire, today’s numbers are likely to show an even bigger deterioration. That’s because when the surveys were taken back in March, plenty of economies hadn’t actually fully locked down yet, or only did so towards the latter part of the survey. The one country that was in a full lockdown for the March survey was Italy, where the services PMI fell to 17.4, which gives you some idea of how low these could go today. Given that these are diffusion indices they lose some meaning in extreme events as they don’t give a scale of the severity of declines (and rebounds when they occur) just whether things were worse or better than the prior month for the various respondents.
We’ve already had a taste for how the PMIs look in Asia overnight where Japan’s flash services PMI slid to 22.8 (vs. 33.8 last month), a record low, while the manufacturing PMI printed at 43.7 (vs. 44.8 last month). The accompanying text highlighted that “PMI data for Japan tells us that the crippling economic impact from the global coronavirus pandemic intensified in April,” and “the decline in combined output across both manufacturing and services was the strongest ever recorded by the survey in almost 13 years of data collection.” Meanwhile, Australia’s services PMI also printed at a record low of 19.6 (vs. 38.5 last month) while the manufacturing reading came in at 45.6 (vs. 49.7 last month).
In other overnight news, Bloomberg is reporting that Germany’s government has agreed on an additional EUR 10bn stimulus package that would temporarily reduce value added taxes for restaurants and increase the amount of money paid as state wage support as part of a seven-point plan to fine-tune the government’s economic crisis response. Elsewhere, Singapore’s trade and industry minister Chan Chun Sing said that the country is bracing for a sharper economic contraction this year than an earlier forecast of as much as a -4% slump. We also got South Korea’s Q1 2020 GDP print this morning which printed at -1.4% qoq (vs. -1.5% qoq expected), the worst contraction since the GFC. Elsewhere, the US Treasury Secretary Steven Mnuchin said that he expects most of the US economy will restart by the end of August.
Asian markets are trading mixed this morning with the Nikkei (+0.74%), Hang Seng (+0.23%) and Kospi (+0.47%) all up while the ASX (-0.38%) and Shanghai Comp (-0.06%) are in the red. In FX, the Australian dollar is down -0.32% following the PMI data. Elsewhere, futures on the S&P 500 are down -0.42% while yields on 10y USTs are down -1.8bps to 0.603%.
The final expected highlight today comes from the weekly initial jobless claims in the US, which have become an important high frequency indicator over the last month. Over the last 4 weeks, a cumulative total of more than 22m claims have been made, which is around the number of jobs that were created in the decade of expansion. So it’s no exaggeration to call the scale of the declines unprecedented. For today, our US economists are forecasting claims at 5m, which would be down from last week’s 5.245m, and if realised would mark the 3rd consecutive week that the number has fallen, which would suggest we could be past the most rapid period of job losses for now. The S&P 500 rose by +0.58% last Thursday for a 4th successive positive close on multi-million claims day. The previous 3 Thursdays came in at +6.24%, +2.28% and +3.41% for the S&P 500. Will the streak extend for a 5th straight week?
With all that to come later, markets rebounded yesterday following their poor start to the week, with the S&P 500 (+2.29%), the NASDAQ (+2.81%) and the STOXX 600 (+1.53%) all moving higher. Energy stocks led the rebound on both sides of the Atlantic thanks to another day of sizeable swings in oil markets, where Brent Crude managed to pare back its losses from a 21-year low to actually end the session up +5.38% at $20.37/barrel. June and July WTI saw even larger rises, up by +19.10% and +10.70% respectively to $13.78 and $20.69/barrel. June WTI is up a further +4.28% this morning to $14.37. The catalyst seemed to be a tweet from President Trump, who said that “I have instructed the United States Navy to shoot down and destroy any and all Iranian gunboats if they harass our ships at sea.” While geopolitics has rather moved out of the headlines since the start of the year, it’s worth noting that it was only last week that the US Central Command said in a statement that 11 Iranian ships crossed the bows and sterns of US vessels at close range. So one to keep an eye on. In related news, the largest oil-ETF, USO, has altered its fund holdings further away from near-term WTI. The fund has over $3 billion in AUM and is the largest single-holder of WTI futures according to Bloomberg. The ETF will now roll exposure to August and September, while lowering June and July, in order to shield itself from the price action in near-term contracts. Oil ETFs have been a hot topic over the last couple of days given the recent turmoil. When these were structured no-one could have contemplated a negative price on the contracts they invested in. It’s fair to say it’s caused some chaos.
There wasn’t a lot in the way of data yesterday, though we did get the European Commission’s advance consumer confidence reading for April, which plummeted to -22.7, its lowest level since March 2009. Otherwise, we got February’s FHFA house price index for the US, which saw a +0.7% increase month-on-month before the impact of the pandemic began to be felt. And in the UK, the CPI reading for March fell to 1.5% as expected, down from 1.7% in February.
Corporate earnings were mixed again. Chipotle Mexican Grill (+12.44%) rose after 1Q digital sales grew over 80% yoy and EPS came in well ahead of analyst’s estimates at $3.17 vs. $3.08 expected. Heineken (-3.05%) cancelled its interim dividend, while volumes were down 14% and net income fell 69%. Kering (-4.92%) announced on its earnings call that it doesn’t expect a recovery in the U.S. or Europe before at least June or July, while sales at its brand Gucci tumbled 23% year-over-year. The company did announce that sales in mainland China turned positive this month as tourist spending rose.
To the day ahead now, and along with the aforementioned European Council meeting, PMIs and initial jobless claims from the US, other data releases include Germany’s GfK consumer confidence reading for May, the UK’s public sector net borrowing for March, along with the US new home sales for March and April’s Kansas City Fed manufacturing activity index. From central banks, we’ll hear from the BoE’s Vlieghe, while earnings out today include Intel, Eli Lilly and Company, NextEra Energy and Union Pacific.
“In a time of universal deceit – telling the truth is a revolutionary act”
Trump is not a complete fool. He knows enough to move oil prices up. Threaten to start a war in the Middle East. Works every time..! Sure enough stocks followed higher.
But, even St George would struggle to slay the microscopic dragon at the core of this unfolding crisis. Just a few months ago none of us foresaw just how deep the downturn the COVID virus triggered could possibly go. In early Feb I suggested we faced an economic hit similar to the SARs epidemic – a $40 bln hit to the global economy, and a 16% slide in markets. I massively underestimated.
There are a number of brutal realities:
1) We still don’t know how much deeper the Virus will dig. The news is very mixed – the first wave is apparently passing in Europe and US, but there are still doubts on subsequent waves, and uncertainty about renewed infections around the globe. Lockdowns are being extended. The social distancing and lockdowns that have trounced the global economy in the short-term aren’t going to end overnight. They are set to continue with only limited easing – for months, maybe through the year. We just don’t know – which means the real economic damage continues to escalate.
2) Don’t look to Global Markets for guidance – they are detached from the economic reality because of renewed financial distortions from QEI (QE Infinity) govt supports and bailouts. There is still an element of denial in markets – but sentiment is beginning to shift as the evidence mounts. A host of indicators such as the rate of downgrades to upgrades being nearly 10/1, central banks buying Fallen Angel junk, and mandatory dividend cuts – all point to rising crisis. (There are still sound investment opportunities out there – but prices are seriously distorted.) The number of recommendations to buy gold is soaring – a sure sign of trouble.
Readers might be wondering why the authorities are apparently conniving at the market’s extraordinary levels? Why do they appear so keen to bail markets and maintain the illusion of normality?
That’s a story of consequences and pensions..
This story began back in 2008 when central banks, bank regulators and frustrated politicians played the blame game on the Global Financial Crisis. It was decided it was the banks who’d been at fault, but since governments now owned the banks and crisis had conclusively demonstrated the importance of banks within the global economy, they embarked on a programme to de-risk banks and their importance in the system. Remember all these promises about separating banks from investment banking, no bank being too big to fail, SIFIs and other such gibberish?
As a result, the most important trend of the last 12 years has been the transfer of risk from the then fragile banking systems to the wider, more diverse and less individually systemically important asset management sector. Converting bank credit risks into corporate bonds was one aspect. That risk is now largely held by asset managers is just one factor. Others included the rise of alternative lenders to SMEs, packaging receivables, debts, loans into formats asset managers could buy. Junk debt packaged as CLOS anybody?
Guess where all the risk now resides?
There was a time when banks had whole floors, even buildings, full of credit officers busily doing the calculations on lending risks. They were supported by networks of bank managers, sector specialists and analysts who lived, breathed and understood every aspect of bank lending risk within the economy.
Today’s risk management department of a mid-sized asset manager is likely to be a small number of very clever accountants, who are massively underpaid in comparison to the front office Portfolio Managers.
These guys are managing our future financial security.
Over the last 12 years we’ve seen massive inflation in financial assets – stocks and bonds – as a result of financial repression, QE and ultralow interest rates. The last thing the Authorities can contemplate now is a collapse or reset in financial asset prices. While incomes remained flat through the last decade, most Boomers and Gen Xers approaching retirement were placated and encouraged by the growth of their pension pots (missing the fact the asset management business have actually creamed off most of the appreciation of their financial assets as fees..).
If markets collapse, and financial asset prices reset.. the Government are going to face very angry voters who will literally have lost their retirement pots, and a massive ongoing future debt burden.
Here in the UK we are already moving to a future where £1.10 in every pound of tax collected by government will be going towards paying Civil Service and State pensions. (Yes, it means the government will be borrowing more and more.) You could argue that doesn’t matter under Modern Monetary Theory. But it does. The numbers will become even less sustainable if all the private self-saving pension schemes collapse, leaving a growing population of destitute elderly retires to care for.
This spawns enormous challenges for governments:
What are the implications and limits of unbounded Modern Monetary Theory on economies, inflation and currencies? Can some nations simply write off the balance of National Debt held by central banks as a result of QE? Do taxes matter? What will monetary creation trigger in terms of inflation? How will FX markets react to burgeoning debt and inflation?
It’s going to be ever tougher for Europe – which has pretty much agreed already that today’s crisis meeting will simply keep kicking the can down the road. (I suspect the acceptance of fallen angels as collateral is anticipating the possibility S&P downgrades Italy to Junk tomorrow.) They are still coping – badly – with implications of the deeply flawed single currency, and the ultimate riddle remains:
How does the consensual committee government of the EU deal with the crisis of avoiding economic shutdown by mutualising debt in a community that won’t accept it?
The situation is likely to get even more difficult.
The planet is now headed into de-facto global recession – with a very strong likelihood it turns into a deepest and sustained global depression on record. The degree to which governments around the globe are ditching every vestige of monetary and fiscal orthodoxy to sustain economic activity is astounding. Some will succeed, but many will fail – re-ordering the global economy for when it eventually recovers. The consequences in terms of social, political and geopolitical outcomes could be enormous.
If it goes wrong we face social unrest, revolutions and, because all the environment, over-population, and poverty issues remain, don’t rule out an escalation of resource driven wars.
The confusion and complexity of this crisis is truly extraordinary. But like most things – here in the West we will probably muddle through.
“Unprecedented Damage To The Euro Zone” – European PMIs Hammered By Record Collapse
Economic activity across the eurozone ground to a halt this month as the new coronavirus sweeping across the world forced governments to impose lockdowns and firms to down tools and shut their businesses.
The latest monthly PMI manufacturing and service surveys illustrated the severity of the crash in economic activity across Europe and the UK, as lockdowns stifle businesses from Paris to Frankfurt. Overall, the eurozone composite purchasing manager’s index – which monitors manufacturing and services activity – fell to 13.5 in April, from 29.7 in the previous month, a record low in more than 22 years of the history of the survey, and blow even the lowest estimate of 18.0. The manufacturing component tumbled from 44.5 in March to 33.6 in April, below the 39.2 expected, but it was the collapse in Services that was shocking, collapsing more than 50% from 26.4 to 11.7.
According to Markit, demand all but dried up this month, headcount was reduced at a record pace and firms cut prices at one of the steepest rates since the survey began.
“April saw unprecedented damage to the euro zone economy amid virus lockdown measures coupled with slumping global demand and shortages of both staff and inputs,” said Chris Williamson, chief business economist at IHS Markit.
“The ferocity of the slump has also surpassed that thought imaginable by most economists.”
Williamson said the PMI was consistent with the European GDP contracting 7.5% this quarter. A Reuters poll published on Wednesday had a 9.6% contraction pencilled in. Unsurprisingly therefore, optimism was also at a survey low. The future output sub-index, which almost halved last month, was 34.5.
With restaurants, bars and other leisure activities shuttered, holidays cancelled and travel restricted the situation in the bloc’s dominant services industry was dire. The flash services PMI sank to a new record low of 11.7 from 26.4.
A new business index dropped to a record low of 11.6 from 24.0, and firms completed outstanding demand at the fastest rate in the survey’s history. April is also proving to be a grim month for the bloc’s factories.
The preliminary manufacturing PMI dropped to a survey low of 33.6 from March’s 44.5. An index measuring output, which feeds into the composite PMI, more than halved to 18.4 from 38.5. Demand was barely existent and with many of their factories closed, manufacturers cut staffing levels sharply. The employment sub-index fell to 35.7 from 44.3, its lowest since April 2009, around the start of the euro zone debt crisis.
“In the face of such a prolonged slump in demand, job losses could intensify from the current record pace and new fears will be raised as to the economic cost of containing the virus,” Williamson said.
Earlier, French and German business activity also fell to record lows, in readings that suggest the region faces a major economic downturn, with manufacturing hit hard …
… but once again it was Services that were crushed as virtually all of the continent was put on lockdown.
As can be seen above, business in Germany – the eurozone’s economic powerhouse – crashed this month, following France in recording its lowest readings of services and manufacturing activity on record. The IHS Markit flash purchasing managers’ index for services fell to 15.9 in April from 31.9 in March, the lowest since record began more than 22 years ago as about three-quarters of companies reported a fall in activity.
The index for manufacturing output also dropped to a record low at 19.4 in April, from 41 in the previous month. The IHS composite index, an average of services and manufacturing fell to 17.1 in April, also a record low. April’s PMI surveys show “business activity across manufacturing and services falling at a rate unlike anything that has come before,” said Phil Smith, principal economist at IHS Markit.
Summarizing the catastrophic data, economist Daniel Lacalle said that “the collapse is much larger than expected and the largest ever seen. With most of the stimuli aimed at the wrong areas of the economy (mostly zombie states and enterprises) while keeping high taxes and regulatory burdens, the recovery will be long and painful.”
Shocking New Data Show 90% Of COVID-19 Patients On Ventilators Won’t Survive: Live Updates
Just 48 hours before Georgia was set to become the first state in the country to start reopening its economy, President Trump revealed in what sounded like an offhanded answer to a reporter’s question that he “strongly disagrees” with Gov Kemp’s decision because it didn’t follow the federal guidelines.
Trump’s u-turn outraged some supporters who believe the lockdown “cure” is worse than the viral “disease”, just in time for the latest reminder of how many jobs have been destroyed by the pandemic so far. Before blaming them as “covidiots”, it’s worth remembering that many red states haven’t been hit nearly as badly as most other states. Even the outbreak at the Smithfield Food’s processing plant in South Dakota – an incident that the MSM labeled “the biggest outbreak in the country” and cited as evidence of GOP Gov. Kirsti Noem’s “anti-science” agenda – has already subsided, and the rate of new cases has slowed, and the state has only recorded 9 deaths.
Millions of people around the world are beginning to question the wisdom of strict lockdown strategies. Sweden, a country that was once routinely bashed by conservatives for refusing to close its economy and borders, has found that its approach appears to be working. As once doctor who appeared on CNBC Thursday morning pointed out, the number of deaths and cases per capita in Sweden is higher than its neighbors. But not by much. For the record, Sweden has left its schools, gyms, cafes, bars and restaurants open throughout the spread of the pandemic. Instead, the government has urged citizens to act responsibly and follow social distancing guidelines. The country has suffered fewer than 2,000 deaths, and has only confirmed 16k cases, and the strategy has proved broadly popular: Swedish Prime Minister Stefan Lofven is now one of the most popular leaders in the modern history of Sweden.
To be sure, even Lofven has admitted that Sweden made mistakes – for example, authorities should have invested more resources in protecting the elderly – and when deaths and cases started to spike a few weeks ago, there were a few uncomfortable days when he faced a hail of doubt and criticism. But he stayed the course, and the country appears to be emerging from the pandemic relatively unscathed. In what is perhaps the country’s biggest sign of renewal, Volvo, which was forced to halt production across Europe and furlough about 20,000 Swedish employees, will resume production at its Swedish plants on Monday.
Earlier this week, the mainstream press flew into a tizzy following a report that a leading American vaccine expert named Rick Bright had been ousted as director of the Biomedical Advanced Research and Development Authority, allegedly for resisting efforts to join President Trump in pushing hydroxychloroquine. A recent small-scale VA study recently found the drug to be ineffective, news that liberals have weaponized to bash the president, after dismissing virtually every other study suggesting the opposite (particularly when the drug is taken in combination with a Z-Pak).
As it turns out, Bright’s claim that his ouster was an act of retaliation for not “toeing the line” turned out to be somewhat embellished.
Possible for several things to be true:
— Trump’s push on malaria drugs was inappropriate
— That push alarmed health officials like Bright
— But some of those officials sent mixed messages about it
— Efforts to oust Bright predated Covid-19, as officials told me months ago
In the UK, where daily death numbers have remained stubbornly, the government’s top medic said Thursday that restrictions on everyday life in Britain will likely remain in place in one form or another until the “next calendar year” due to the time needed to develop and roll out vaccines or find a cure, the country’s top medic said on Wednesday.
South Korea, meanwhile, is already preparing for a second wave of the virus in the fall and winter, according Yoon Tae-ho, director general of health ministry, who announced the plans during a press briefing. Many public health experts – including FDA Director Dr. Stephen Hahn, before he “clarified” his statement the other day – have warned that the virus could come roaring back in the fall, combining with the seasonal flu to overwhelm hospitals once again.
The country also plans to secure more medical resources in the event of a bigger outbreak than what it experienced in Daegu, the city at the epicenter of the crisis. SK will continue to remain “on alert” until a vaccine is available.
Indonesia reported 357 new cases of the virus, bringing its total to 7,775. The country has reported a total of 647 deaths and 950 recovered cases, numbers that experts say are likely well short of the totals for both cases and deaths.
US Secretary of State Mike Pompeo called on China to permanently close all wet markets and other illegal markets selling wildlife for human consumption – something that China has already technically outlawed, just like they ‘outlawed’ the production of black-market fentanyl.
As more countries begin rolling back lockdown measures, tiny Vietnam, which has reported fewer than 300 cases of coronavirus and no deaths since the first infections were detected in January, said on Wednesday it would start lifting tough movement restrictions, according to Reuters, even as many of its neighbors remain on lockdown. Greece extended its lockdown until May 4, but said some small businesses will start reopening after that date, per the FT. A spokesman for the Greek government warned that “at each stage the impact on public health will be assessed. We’re going to take it week by week,” he added. A detailed timetable for re-starting the economy will be announced next week.”
More countries appear to be reopening as millions confront the undeniable reality that, when faced with the choice of sacrificing their livelihoods or risking infection, most people would opt for the second, even as the WHO’s Dr. Tedros warned during a press briefing on Wednesday that the rolling back the quarantines too soon might cause the virus to reignite.
The situation in Russia, which took early steps to keep foreigners out yet never followed up with widespread testing and surveillance, continued to worsen as the country reported 4,774 new cases of coronavirus and 42 new deaths, another record number of new cases, bringing the country’s total of 62,773 cases and 555 deaths.
Perhaps the biggest news overnight came out of Australian, where PM Scott Morrison called on all member states of the WHO to support an “independent review” of the origins of the novel coronavirus outbreak, further jeopardizing what has been an incredibly prosperous economic relationship with China that had helped the Aussie economy achieve an unprecedented 30-year stretch of growth.
Finally, the Washington Post reports that new data from New York’s largest hospital system showed that survival rates for patients placed on ventilators are even lower than previously believed. The data showed that a staggering 88% of coronavirus patients who were placed on ventilators in the state’s hospitals didn’t survive. Doctors, meanwhile, are also seeing more strange complications from the disease involving blood clots and the cardiovascular system. One doctor in China who barely survived his struggle with the virus experienced an extremely strange shift in skin pigmentation.
This news follows yesterday’s report which found more than 10,000 nursing home residents in 35 states have succumbed to the virus, representing roughly one-fifth of all deaths in the US.
The number of confirmed deaths from the virus around the world is approaching 200k, while the number of confirmed cases has surpassed 2,645,000.
We have some troubling news developing deep inside America’s food supply chain network, suggesting rapid food inflation could be dead ahead.
In the last several weeks, six major US meatpacking facilities have shuttered operations because of the coronavirus outbreak. That means 15% of America’s hog-slaughtering capacity has been shifted offline, and there is an additional risk that beef and poultry capacity could be reduced in the weeks ahead, reported Bloomberg.
With every virus-related plant closure, farmers have been denied access to meatpacking facilities/slaughterhouses, resulting in herd overcapacity and suggests euthanizing hogs could be next.
Dennis Smith, a senior account executive at Archer Financial Services, warned that “meat shortages” will occur “two weeks from now in the retail outlets.” That means by the first week of May, certain pork products could be out of stock at grocery stores across the country.
“There is simply no spot pork available. The big box stores will get their needs met, and many others will not.”
Cold storage facilities only have a few weeks to cushion supply disruption of the latest plant closures. Bob Brown, an independent market consultant in Oklahoma, said cold storage supplies have a little more than a week’s worth of production – and wouldn’t be sufficient in satisfying demand.
We noted on Wednesday Tyson Fresh Meats, the beef, and pork subsidiary of Tyson Foods, released a statement that said its top producing pork plant in Waterloo, Iowa, will suspend operations until further notice because of virus-related issues. For similar reasons, Hormel’s Rochelle Foods closed its plant last week. Outbreaks have also forced closures for JBS SA in Minnesota and Colorado and Smithfield Foods Inc. in South Dakota. Several other meatpacking plants have recently come back online from virus-related shutdowns.
“It means the loss of a vital market outlet for farmers and further contributes to the disruption of the nation’s pork supply,” Steve Stouffer, head of Tyson Fresh Meats, warned on Wednesday.
If plant closures like these continue, it could add additional strain on the supply chain and cause “weird dislocations for prices — finished products are surging, while farmers are getting paid much less for animals,” Bloomberg notes.
The chart below shows how meatpacking plant closures have triggered exceptional food price volatility for pork-belly prices — crashing in March, to now doubling in a few days.
“Prices for pork bellies, the cut that’s turned into bacon, have more than doubled in just the four days through Tuesday on supply concerns. With so many fewer hogs moving through slaughter, Smithfield Foods had to shutter facilities in Wisconsin and Missouri that turn pork into finished products like bacon and sausage.
Meanwhile, prices for the hogs themselves are plummeting. There are way more pigs than can be processed right now, so animals are backing up on farms. Hog futures traded in Chicago are down about 21% in April.”
As for meatpacking plants, these folks are getting hogs at reduced prices from farmers and turning around and selling finished products to supermarkets for hefty premiums. HedgersEdge shows pork margins have jumped 340% since April 1.
A USA Today report warns of a “rash of coronavirus outbreaks at dozens of meatpacking plants across the nation is far more extensive than previously thought:”
“More than 150 of America’s largest meat processing plants operate in counties where the rate of coronavirus infection is already among the nation’s highest, based on the media outlets’ analysis of slaughterhouse locations and county-level COVID-19 infection rates.
These facilities represent more than 1 in 3 of the nation’s biggest beef, pork and poultry processing plants. Rates of infection around these plants are higher than those of 75% of other U.S. counties, the analysis found.
And while experts say the industry has thus far maintained sufficient production despite infections in at least 2,200 workers at 48 plants, there are fears that the number of cases could continue to rise and that meatpacking plants will become the next disaster zones.”
And if meatpacking plants become the next disaster zone for the virus – resulting in the closure of more plants, then food shortages could materialize and or a rapid surge in prices, a combination that could leave millions angry at a time when an economic depression is unfolding. Food shortages could trigger social unrest…
The mass shuttering of open-end mutual funds, a problem that has dogged the UK’s fund industry for months, appears to have crossed over to multiple fund industries in mainland Europe. According to Fitch Ratings, “at least” 76 European mutual funds, with an estimated $35 billion of assets under management (AUM), suspended redemptions in March after investors scrambled for the exits. Almost £9 billion was pulled from UK-based funds alone, more than any other month on record.
Fitch was able to identify the gated funds by scrutinizing their respective investment managers’ disclosures. But the actual scale of the problem is likely to be a lot larger than the numbers suggest. “The true extent of gating is even greater given that funds’ public disclosures are limited,” Fitch said. According to the European Securities and Markets Authority, funds totaling €100 billion in AUM suspended redemptions or applied other extraordinary liquidity measures in March.
Here’s a breakdown (by fund manager location, fund domicile and fund type) of the 76 gated funds identified by Fitch
Fund manager location: Almost two-thirds of the funds (53) were managed in Denmark. Fifteen were managed in the UK, five in Sweden and one a-piece in Finland, Norway and France. The preponderance of Scandinavian countries in the sample may reflect higher disclosure standards for fund managers in the region, Fitch says. In other words, other parts of Europe may also have growing numbers of gated funds that just haven’t been publicly disclosed yet.
Fund domicile, Luxembourg accounted for almost half (36 out of 76) of the gatings, reflecting the country’s dominant position as a domicile for mutual funds. The UK and Denmark respectively boasted 17 and 16 domiciled funds, while Sweden (5), Finland (1) and Norway (1) accounted for the rest.
Types of the gated funds:
15 funds, all UK-based, were in commercial real estate (AUM of €23 billion);
30 funds were in fixed income (AUM: €10.5 billion);
23 gated funds were equity funds (AUM: €1.4 billion);
5 funds were mixed funds (AUM: €1.9 billion).
Don’t Mention the “L” Word
“Widespread gatings like this are rare and the only comparable examples were during the 2008 financial crisis and following the 2016 Brexit vote,” Fitch said.
In the aftermath of the Brexit vote, six commercial real estate (CRE) funds gated. This time round, 15 CRE funds have so far shut their doors. Most of these were retail funds that offered daily redemptions though a few, such as the £3.4 billion BlackRock UK Property, were aimed at larger institutional clients and offered only monthly or quarterly redemptions. Combined, the gated funds account for roughly two thirds of all assets under management in the UK open-end property fund industry.
The official reason cited for the shuttering of these funds is that it is currently impossible to accurately value the funds’ real estate assets amid the market mayhem being caused by the response to Covid-19. Many of the open-end funds also probably suffered serious liquidity problems after sustaining significant outflows of investor money. They just don’t want to admit as much. As Fitch says, “even if the daily-dealing funds that gated recently had managed to avoid valuation issues, they would have had to gate anyway to prevent a surge in outflows.”
A sudden surge in outflows can be fatal for an open-end mutual fund, especially one with illiquid assets. When investors take their money out, the fund has to use up its remaining cash and then has to sell assets in the portfolio to raise money to meet the redemptions. In the case of commercial real estate, those assets can take months or even longer to sell, particularly in a downturn. This gives rise to that infamous “mismatch in liquidity” between what the fund offers to its investors (daily liquidity) and what the fund holds (largely illiquid assets).
Eventually, the fund runs out of cash and has no choice but to close its doors, leaving investors trapped and having to contemplate heavy losses. This is what happened to investors of M&G Investments’ £2.5 billion direct property fund, which gated in December 2019 after reporting “unusually high and sustained outflows.”
Rising Contagion Risk
Now, four months on, as more and more funds are following in M&G’s footsteps and shutting their doors, no one is talking about “outflows of funds” or “liquidity issues”, for one obvious reason: contagion risk.
Most of the gated funds in Scandinavia have adopted the same line used by the UK funds, blaming their decision to suspend redemptions on acute valuation problems. “The vast majority of gatings were driven by issues in pricing underlying securities across asset classes,” says Fitch. “There was even one case of an exchange-traded fund suspending trading due to pricing issues. Several funds have reopened but some are liquidating.”
In Europe, virtually all mutual funds operate with some degree of liquidity mismatch, with the vast majority offering investors daily liquidity with settlement within two or three days, notes Fitch. Some of those funds will have more cash and liquid assets on hand than others and will be better positioned to withstand heavy outflows. But as the recent saga involving the now-defunct £3.7 billion Woodford Equity Income Fund showed, even funds that claim to invest in highly liquid assets may be lying.
The good news, according to Fitch, is that the recent spate of fund gatings in Europe “does not pose an immediate threat to the broader financial system”. The volume of funds that have so far gated is a drop in the bucket compared with European mutual funds’ total assets under management, which were equivalent to around €16 trillion at the end of 2019.
The bad news, according to Fitch, is that “the interconnectedness of the financial system means that fund gatings can spread, giving rise to contagion risk.” This echoes earlier warnings from the Bank of England’s Financial Policy Committee that the liquidity mismatches of open-end mutual funds “can create an incentive for investors to redeem when they expect others to do so.” If this dynamic snowballs, it “has the potential to become a systemic issue.”
GM And Ford Are One Step Closer To Losing Billions On Used Car Price Plunge
The finance arms of Ford and GM are inching closer to billion dollar losses as a result of a plunge in used car prices.
While the impact has been expected for several weeks, the plunge in used car prices has worsened, with prices falling “faster and steeper” than analysts had predicted. We had pointed out worries about used car pricing just days ago.
Mid-month data from Manheim showed that the used vehicle value index had fallen 11.8% for the first 15 days of April, a decline on a record setting pace, according to Bloomberg.
JP Morgan analyst Ryan Brinkman said on Monday: “The real losers of the development are likely the captive-finance subsidiaries of automakers like GM and Ford, and the rental-car companies. If prices finish the second quarter 10% lower than envisioned, losses could total $3 billion at GM Financial and $2.8 billion at Ford Credit.”
Jennifer Laclair, the chief financial officer of Ally Financial Inc., said on an earnings call: “What we’re seeing right now is essentially the market is illiquid — and that’s the physical auctions as well as the digital auctions.”
They had been expecting a 5% to 7% drop in used car prices. And they may not be the only ones way off base. Recall, we reported days ago that GM was only bracing for a 4% drop in prices.
The collapse is coming as a result of used vehicle auctions grinding to a halt – along with the rest of the country – and vehicles piling up at places where buyers and sellers transact secondhand cars, according to Bloomberg.
A price drop in used vehicles could be another headwind for automakers and their lending units, which could be forced to write down the value of lease contracts that had previously assumed vehicles would retain more value. GM, for example, has $30.4 billion worth of leased vehicles on its books at the end of last year. Every 100 bps it has to raise its estimate for depreciation costs the company $304 million.
Joel Levington, a credit analyst with Bloomberg Intelligence said: “GM assumed a 4% decline in residual values this year. If the 10% drop Manheim has seen recently persists, depreciation expense could counter the $1.9 billion that GM Financial earned in pretax profit last year.”
A similar headwind could be felt by rental car companies, who would likely get less money from selling their used fleet of vehicles, which are also sitting idly by as the pandemic paralyzes the nation.
Hertz, Avis and Enterprise have all sought help from the Treasury Department for loans, tax breaks and other types of support.
Hamzah Mazari, a Jefferies analyst, said: “For Hertz and Avis, every 1% increase in fleet costs saps about $20 million from earnings before interest, taxes, depreciation and amortization.”
Dale Pollak, an executive vice president of Cox Automotive said: “Six months from now, there will be huge, if not unprecedented, levels of wholesale supply in the market. Cars are coming in, but they aren’t selling. Today’s huge supply of wholesale inventory suggests supplies will be even larger in the months ahead.”
Chinese Doctors’ Skin Turns “Very Dark” After Barely Surviving COVID-19
Dr. Yi Fan and Dr. Hu Weifeng both survived coronavirus after being infected while treating patients in the city of Wuhan, where they both worked. But after they were placed on life support, their skin turned “very dark”.
Both doctors were diagnosed back in January while working at Wuhan’s central hospital and were eventually taken to the Wuhan Pulmonary Hospital and transferred twice as a result of their serious condition.
While initially the change in their skin color was attributed to a hormonal imbalance after their livers had reportedly been damaged by the virus, another doctor suspected that it could have been as a result of one of the drugs they received during the beginning of their treatment, according to the NY Post.
“When I first gained consciousness, especially after I got to know about my condition, I felt scared. I had nightmares often,” Dr. Yi said after spending 39 days on life support.
Hu remains bedridden, which he has been for 99 days, after undergoing extracorporeal membrane oxygenation therapy from February 7 to March 22. He only recently regained the ability to speak, on April 11.
Hu’s doctor says he’s expected to change back to his normal color when his liver function improves.
Both doctors coincidentally “happened” to have worked with whistleblower Dr. Li Wenliang, who died of the illness on February 7.
It is no revelation that central banks are actively engaged in both the research and piloting of central bank digital currencies. But the mechanics of how they are conducting their programmes is not as widely recognised. This is largely because the information is buried within the pages of mundane reports, speeches and discussion papers. A few headlines might be glossed over in the financial press, but the technical aspects are usually not considered.
We learn that the 70% of central banks that were researching CBDC’s has now risen to 80%, with many of them reliant on ‘research conducted by international organisations (in particular the BIS and the IMF) or regional networks‘. The BIS’s Innovation Hub initiative, established in the summer of 2019, has been key in coordinating the advancement of CBDC’s projects worldwide. This is one of the reasons why banks are operating in step with one another.
As the survey points out, ‘collaboration through international vehicles such as the BIS Innovation Hub will be necessary to avoid any unforeseen international consequences.’
The Hub will catalyse collaborative efforts among central banks, and cooperate, when appropriate, with academia, financial service providers and the broader private sector to develop public goods for the benefit of the global financial system. As the Hub gathers experience, a home-grown agenda will quickly be developed. A key question informing the BIS Innovation Hub’s work is whether money itself needs to be reinvented for a changing environment, or whether the emphasis should be on improving the way it is provided and used.
In regards to CBDC, there are two variants. The first is a wholesale offering, which would be used to facilitate payments exclusively between financial sector firms. The second, known as a retail or general purpose CBDC, would be for use by the public. It is the latter which is of increasing concern to central banks.
According to the survey, a general purpose CBDC could prove as either a substitute or a complement to banknotes. A similar position was taken within a discussion paper on CBDC published by the Bank of England in March. In the foreword to the paper, former governor Mark Carney stated that any CBDC would act as a ‘complement to physical banknotes‘.
Like cash, a CBDC could and would be available 24/7, 365 days a year. At first glance, not much changes for someone, say, stopping off at the supermarket on the way home from work. He or she would no longer have the option of paying cash. All purchases would be electronic.
Who is right? I believe that allowing cash to co-exist with a CBDC long term is not what global planners have in mind. For a period of time this may prove the case, but eventually when cash usage drops to perhaps less than a tenth of all transactions is when we would see the beginning of a process to eliminate cash from circulation. All remaining banknotes in your possession would be converted into CBDC’s.
As the survey outlines, just under 50% of the world’s central banks are ‘investigating the public’s use of cash and a third are concerned that access to cash could decline in the medium term‘.
Cash use has been gradually declining over the last ten years, but since the outbreak of the Covid-19 coronavirus it has collapsed to new lows. One thing the survey is clear on is that ‘cash use is the key to driving many central banks’ plans‘. Whether Covid-19 will result in the time frame for introducing CBDC’s being brought forward is so far unknown.
If the BIS paper is an accurate indicator, then around 70% of central banks see it as unlikely that they would issue any form of CBDC ‘in the foreseeable future‘. But then again banks have apparently moved away from classifying the implementation of a CBDC as ‘possible‘, which the survey suggests may be a sign that ‘research and experiments‘ are ‘helping to clarify a firmer stance on issuing a CBDC in the near term‘.
For clarity, the BIS considers near term as anywhere from one to three years, and the medium term anywhere from one to six years.
Two countries that are piloting CBDC technology are Sweden and Uruguay. The survey reveals that both nations are looking to trial ‘non-interest bearing, non-anonymous CBDCs that are available 24/7 with restrictions on the values that can be held and distributed through intermediaries.’
Staying with the BIS, as part of their quarterly review released in March they published a paper called, ‘The technology of retail central bank digital currency‘. The primary question in the paper is whether a CBDC should be a direct claim on the corresponding central bank, or an indirect claim that is managed via payment intermediaries.
This is an area that former IMF managing director Christine Lagarde addressed in 2018 at the Singapore Fintech Festival. She raised the prospect of central banks going into partnership with commercial banks and financial institutions, with the idea being that the private sector would interface with customers, store their wealth and offer a range of services. ‘But when it comes time to transact, we take over‘, Lagarde said.
Banks and other financial firms, including startups, could manage the digital currency. Much like banks which currently distribute cash.
Or, individuals could hold regular deposits with financial firms, but transactions would ultimately get settled in digital currency between firms. Similar to what happens today, but in a split second. All nearly for free. And anytime.
Related to this is how the BIS and its members regularly talk about the ‘architecture‘ of CBDC’s – in essence, how they could be modelled and whether the infrastructure underpinning them should utilise a centrally controlled database or distributed ledger technology (DLT).
The BIS indicate here that ‘most likely central banks would consider only permissioned DLT‘. In practice a permissioned DLT would mean access to the network must be granted by participants in that network – participants who would be controlled through regulation devised at the central bank level. As looked at in previous articles, DLT is not the decentralised panacea that many of its advocates claim.
The narrative on CBDC’s has advanced significantly from early 2018 when the BIS began focusing on ‘money in the digital age‘ and what role central banks will play. We have now moved beyond CBDC’s just being a concept. Global planners are getting into specifics about how CBDC’s could be designed.
First, let’s look at what is termed a ‘direct CBDC‘. This would be a claim on the central bank and would also see the bank itself handling retail payments. In this scenario the central bank would keep sole record of all retail holdings, and would mean that they alone would be responsible not just for issuing the CBDC, but delivering it to customers. It would require central banks to expand their operations enormously and in effect have a presence on the high street. Judging from the BIS paper, a direct CBDC is not being considered as the most viable.
Next comes the ‘hybrid CBDC‘. Again, this would be a claim on the central bank but the difference is that the bank would periodically record retail holdings. This means the holdings in question could be transferred from one payment service provider to another – the intermediaries Christine Lagarde talked about – resulting in no single point of failure. The BIS deem this advantageous in the event of a major system outage. To quote the paper directly:
As the central bank does not directly interact with retail users, it can concentrate on a limited number of core processes, while intermediaries handle other services including instant payment confirmation.
The hybrid CBDC architecture could be implemented at scale using today’s technology and with a relatively modest infrastructure even in the world’s largest currency areas.
If we were to assume that the hybrid CBDC was the preferred choice, the next stage is how customers would access it. The two options mooted by the BIS are a token or account based CBDC.
A token CBDC would allow universal access requiring no bank account. Instead, customers would take possession of an online ‘digital signature‘, which would be exclusive to them and used as the vehicle to authorise payment. The argument goes that by deploying this sort of CBDC it would offer a stronger level of privacy than an account based CBDC.
One of the downsides, as the BIS detail, is an elevated risk of losing funds ‘if end users fail to keep their private key secret‘. More importantly though, at first glance a token based system would afford people too much anonymity for the establishment’s liking. As the paper mentions:
Law enforcement authorities would run into difficulties when seeking to identify claim owners or follow money flows, just as with cash or bearer securities.
Retail CBDCs would thus need additional safeguards if they followed this route.
An account based CBDC would be very different. This would ‘tie ownership to an identity‘, replicating a traditional bank account in that claims would be held on a database that records the value of payments along with ‘reference to the identity‘. Whilst the BIS visualises some drawbacks in terms of global universal access, in particular rolling it out in all jurisdictions, the benefits for the banking elite are obvious when it comes to tracking user activity at every turn.
The next consideration after a CBDC configuration is established is cross border payments. Regularly in speeches central bankers will lament that payments of this nature are too slow for modern commerce. Payments can take days to clear and be costly. A global CBDC network is being touted as a solution, with payments sent from one side of the world to the other being accessible immediately.
According to the BIS, a coordinated design effort ‘would represent a unique opportunity to facilitate easier cross-border payments.’ Coordination is imperative to the whole CBDC agenda. Currently, every major central bank in the world is advancing their CBDC programmes.
For my next article I will be looking at a Bank of England discussion paper on central bank digital currencies that was released just prior to the Covid-19 lockdown in the UK, and expands on the CBDC models outlined by the BIS.
