“We’ve already created more jobs in the last three months than Joe Biden and Barack Obama created in their eight years in office”
- Mike Pence, Vice President (8/13/20)
Breath in. Exhale slowly. Repeat.
It’s Friday and cerebral & spiritual placidity remain the nurturing ground for personal revelation and professional epiphanies.
If you still haven’t downloaded The Daily Calm app and taken the few minutes, daily, to indulge in purposefully cultivating some internal serenity … today is your next best opportunity.
Back to the Global Macro Grind …..
So ….
- Fri-Tues = Cyclical rotation on! …. Definitely, for sure this time.
- Wednesday = party canceled, mega-cap tech and slowflation allocations back in the driver’s seat.
- Thursday = Real Yields Up, Gold Up, Rates Up, XLF Down (i.e. confusion for correlated factors and what should have been cyclical support) as the market collectively shrugged its shoulders in a kind of bewildered submission to the surreality that 1M in Initial Jobless Claims six months into a “temporary” shock is somehow worth cheering while Pence pushed the pre-election propaganda machine to productive capacity with the headline quote above in framing the largest employment vacuum in history and -12.8M in net job loss since February.
I’m largely politically agnostic but that is a remarkable filtering of prevailing labor market conditions.
It would be laughable if it wasn’t a tragically true reflection of the prevailing state of national/political/social discourse and the pervasive entrenchment of reality distortion/willful blindness in an era of ubiquitous connectivity, social isolation and digital echo chambers.
Anyhow, I’d like to offer up a quick macro medley here this morning, contextualizing some of the high-frequency labor data while updating a couple slides from our 3Q Macro & Housing Themes presentations.
Initial Claims: Initial State Jobless Claims printed 963K, breaching 1M to the downside for the first time in 21 weeks.
- With Continuing Claims and Total Claimants ticking down also, the update was unequivocally better, on the margin.
- Lower claims is a positive as it relates to how long the money from diverted disaster relief funds can support unemployment benefits. It’s a prospective negative in terms of (not) adding urgency to stalled bipartisan stimulus discussions.
- It’s unclear the extent to which storm Isaias and any associated damage/power loss across the east coast may or may not have impacted the filing/processing of Claims last week.
- Enhanced Benefits have expired. Their re-implementation at reduced levels via executive order is in transition and is likely to be fraught with the same implementation challenges and disbursement delays that plagued the original implementation of changed eligibility requirement. Whether individuals are waiting for clarity around the remixed enhanced benefits and their implementation before filing (and thus dampen the reported total in the interim) remains a TBD.
- As we’ve highlighted, while the drop in PUA Claims is encouraging, it’s also evidence that job loss is shifting away for direct/temporary virus related impact to permanent job loss in adjacent industries.
- Duration of unemployment greater than 15 weeks continues to step function higher and the ranks of those unemployed for >26 weeks continues to build. The sum of the two is now approaching 8M and looks set to breach the GFC peak in the coming month(s).
- It’s increasingly difficult to characterize that growing unemployed cohort as “temporary” and the flow through implications to the consumption economy increase as those numbers progressively matriculate past unemployment benefit eligibility timelines.
Summarily, right direction but underwhelming magnitude for what should be the steepest part of the recovery curve as the destruction/structural damage in the domestic labor market remains the poster child for the still yawning divergence between fundamental conditions and asset market prices.
Small Business: There is no shortage of anecdata and pseudo-quant around the still acute state of fundamentals conditions for Small Business. Time does not heal all financial wounds – it’s quite the converse actually as it relates to the capacity for small business to weather a protracted period of depressed demand. And the clock tick is getting unequivocally louder.
- PPP fund exhaustion: According to the latest NFIB Survey, as of July 21st 71% of small businesses have exhausted the entirety of their PPP funding.
- Half of small businesses indicated the need for additional financial support over the next six months.
- In a separate American Express survey, 62% of small businesses indicated they needed consumer spending return to pre-virus levels by the end of 2020 in order to stay in business …
- … That is not a high probability scenario. Given the magnitude of the shock, the timeline for full eco and labor market renormalization is unlikely to occur this year and the longer suppressed demand remains the reality, the more likely we are to see workers transition to (or back to) unemployed.
The small business plight feeds directly back into the pro-cyclical zeitgeist and its fleeting cameo in the latest bout of factor rotation angst.
There is little chance the fed will acquiescence to any sharp backup in nominal rates, spike in real rates or vigilante bear-steepening in the curve given the precariousness of macro conditions and the collective leverage position for corporates.
So there is an effective built-in ceiling as it relates to the capacity for the growth/vaccine optimism-inflation expectations-higher yields dynamic to drive durable performance in the cyclical rotation. And the extent to which such a rotation is actual positive for index performance given cyclical weightings and growth/tech overweighting’s is a separate consideration.
Moreover, and (perhaps more) importantly, there is and has been no earnings ex-FAAMG. This was a multi-quarter reality pre-pandemic and it remains difficult to conjure a scenario of durable margin expansion and profit acceleration over any near/medium-term duration under extant conditions.
Housing: We've passed the point where simple COVID catch up would explain the ongoing strength as all-time lows in rates, all-time highs in equities, the first thrust of a deurbanization push and residual rebound/deferred demand continue to support transaction mojo in the housing market.
- Purchase Applications: Purchase Application volume rose +2% W/W while accelerating to +21.4% Y/Y in the first week of August (inclusive of any negative distortion stemming from storm Isaias along the east coast).
- While Total Purchase activity has moderated off the snap-back peak in June, we remain at cycle highs in Purchase Application volume on a monthly basis.
- Recall the temporal sequencing in the reporting of key housing demand indicators: Purchase Apps → Pending Home Sales (contract signings) → Existing Home Sales (closed transactions) ….
- Given that fixed procession and lagged nature of housing data reporting, the historical acceleration in Purchase Apps into August presages further strength in reported Pending and Existing Home Sales over the next couple months, at least.
- Deurbanization: Outmigration from NYC probably serves as the most visible case study/microcosm for the Deurbanization push. New data has just begun to put some quantitative context around what appeared to be a real and accelerating phenomenon:
- Douglas Elliman-Miller Samuel data show that after accelerating meaningfully in June, Single-family home sales in Fairfield County (the most accessible CT suburb) were up +73.4% Y/Y in July. Single-family sales in Westchester County were up +112% Y/Y.
- The other side of the outmigration coin is reflected in NYC fundamentals where apartment vacancy rates and median rents (-10%) both saw record declines in July.
- To the extent the outbreak only served to turbocharge a secular trend that was already in motion, the tail on deurbanization may be long and potentially profound across select geographies (think construction, suburb growth, infrastructure shift, dramatic shifting in tax base, state/local budgets etc)
Sometimes progress is best measured not in what is gained but in what is discarded. That was the message in today’s Daily Calm.
If you have some losers scattered across the PnL … breath, exhale, maybe wish them well and let them go. What you lose in booked performance may be more than made up for in lost anxiety, fresh perspective and renewed analytical alacrity.
Today is always the best opportunity to make a change.
Immediate-term @Hedgeye Risk Range with TREND signal in brackets:
UST 10yr Yield 0.48-0.72% (bearish)
SPX 3 (bullish)
RUT 1 (bearish)
NASDAQ 10,759-11,159 (bullish)
Tech (XLK) 109.88-115.89 (bullish)
REITS (XLRE) 35.18-36.72 (bullish)
Utilities (XLU) 59.48-61.80 (bullish)
Financials (XLF) 23.54-25.66 (bearish)
Shanghai Comp 3 (bullish)
Nikkei 216 (bullish)
DAX 128 (bullish)
VIX 21.20-28.95 (bearish)
USD 92.58-93.96 (bearish)
Oil (WTI) 40.06-42.91 (bullish)
Nat Gas 1.97-2.34 (bullish)
Gold 1 (bullish)
Silver 23.97-29.74 (bullish)
Best of luck out there today,
Christian B. Drake
Macro Analyst
