"Ten million in tens? ... You want fries with that?"
- Chris Tucker, Rush Hour
So, it’s rush hour for both macro risk and main street economics as we head into the election and year end.
The problem with respect to those dual realities is that McConnell continues to flick pennies from the overpass, while the Pandemic and his co-conspirators (colder weather, partisan rancor, structural damage) continue to throw spike strips across the freeway.
A convoluted macro maze to navigate for sure and a surreal post-lockdown journey made more maddening via distortions cultivated by policy intervention, market structure idiosyncrasies (reduced liquidity, delta hedging, dealer gamma flows, etc) and single-name option exploits emanating from the hoodie-verse.
Meanwhile, the top half of the K gets to revel in rubbernecking the ongoing inequality pile up with detached amusement, relatively insulated by happenstance, institutional privilege or some combination.
Back to the Global Macro Grind…
So, negative yielding global corporate debt is back at all-time highs while CEO confidence spiked into 4Q on expectations for reduced capital spending, workforce reductions, and flat/reduced wages (HERE)
Amidst depression level labor and small business profit conditions, public corporates have effectively managed to convert liabilities into assets while C-suite ebullience step functioned higher due to the margin leverage associated with reducing investment, not hiring people and paying the people who are hired less.
Market history is replete with all manner of ostensibly silly or circular machinations.
In the wake of the United States debt downgrade, which facially represented a rising risk that the government can’t pay its debt, investors responded by .... increasing their purchases of that debt.
Presently, the prevailing view is that recovery is unlikely to gain escape velocity mojo without a draining of the corporate coffers in the direction of productivity investment. At the same time, those coffers remain full out of fear that the recovery in unlikely to realize escape velocity mojo.
Anyway, the data duet of corporate debt & CEO confidence is simply this morning’s example of the burgeoning market-main street disconnect and offers a nice juxtaposition as we await the latest bottom-of-the-K update on the tens of millions facing acute income, housing, food insecurity.
To quickly redux the larger setup with respect to Jobless Claims:
- Initial Claims have stalled for the last 10-weeks at a level 25% higher than the highest levels observed historically. In fact, they have re-inflected higher in recent weeks are now going the wrong way …. 30+ weeks in … and despite no updated reporting out of California (more on that below).
- Continuing Claims have continued to improve, but that “improvement” is, at least partially, illusory as it more likely represents individuals losing eligibility than it does large-scale re-employment.
- PEUC Claims: Pandemic Emergency Unemployment Claims (PEUC) provide an additional 13 weeks of benefits once normal state benefits (which typically last 26 weeks) are exhausted. This will continue to be the measure to monitor is it will realize the largest inflow as individuals exhaust regular state benefits. Indeed, PEUC claims spiked +818K W/W last week and are up 1.17 mn in the last three weeks. Note that PEUC Claims are lagged two weeks, so only really reflects the lead edge (2 weeks) of the roll-off in eligibility.
- Benefit Cliff: The clock is ticking on extended benefits as all pandemic related UI programs (PUA, PEUC, etc) expire on December 31st.
CALI CATCHUP (& Distortion)
California paused Claims processing in an effort to clear their existing backlog, ferret out fraud, and buttress the system against further organized graft.
This matters both due to California’s relative contribution to the reported totals and to the extent it serves as a real-time case study for the larger dynamics plaguing Claims application and processing nationally from the beginning.
Again, to review:
- California: CA claims numbers remain on pause (probably through this week) and they continue to use a placeholder value equal to the reported September 16th level. California makes up more than a 25% of total Initial Claims so the numbers obviously matter and are requisite for discerning a clean read on the underlying trend.
- Constrained Throughput: An experienced CA claims processor can manually work through 24 claims per day and CA can manually processes a maximum of 2400 claims per day. Given the challenges associated with changes in eligibility requirements and a higher percentage of claims being flagged for further review (a flagged claims gets pushed out of the automated system and pushed to manual processing for further review/clarification), full processing of claims has proved an impossibility.
- Backlog: Given the increase in claims and processing constraints, unprocessed claims were increasing at a rate of ~10K per day and had built to north of 600K as of Sept 16th. See Taskforce report → HERE.
- Fraud: PUA claims are the primary conduit for fraudulent claims. Reduced regulation and the invariable reality that some people who didn’t need money would get it was tacitly accepted as part of the effort to expedite disbursement of stimulus payments and enhanced UI benefits. Part of the pause was to evaluate the level of fraudulent claims, which CA deems may be significant (see: AZ Central, BloombergLaw)
- Impending Distortion: The build-up in Initial Claims and large bolus of push through associated with backlog processing is likely to juice the Headline Jobless Claims numbers once CA reporting comes back online. Following the initial week(s) of upward pressure, the impact is likely to reverse and provide modest downward pressure.
As we look ahead to the October NFP data, the stall out in Claims is not great for the separations side of the net payroll equation. Recall, also, that the majority of temporary Census hiring which helped juice the August figures will reverse to deflate the October numbers.
As of September, there were 246.8K decennial temporary Census workers. At the beginning of October that was down to 163.9K with a further two weeks of reductions before the Employment Survey reference period. In other words, in addition to any organic deceleration in hiring, the reduction in Census workers should drag on the reported headline by ~150K, at least. An underwhelmingly anemic or negative print is not a tail risk.
I was hoping to touch on the COVID-catalyzed juggernaut that has been the post-lockdown performance in Housing this morning.
The upside asymmetry for the group has progressively collapsed and some cross-winds have begun to gather against what has been a ubiquitous set of tailwinds … an interesting, duration sensitive setup, particularly for a group enjoying massive relative/absolute performance and ‘as good as it gets’ macro-fundamental conditions.
Next time perhaps.
Immediate-term @Hedgeye Risk Range with TREND signal in brackets:
UST 10yr Yield 0.69-0.84% (bearish)
SPX 3 (neutral)
RUT 1 (neutral)
NASDAQ 11,308-11,965 (neutral)
Tech (XLK) 116.99-124.30 (bullish)
REITS (XLRE) 35.08-37.24 (bullish)
Utilities (XLU) 62.94-64.28 (bullish)
Financials (XLF) 24.32-25.50 (bearish)
Shanghai Comp 3 (bullish)
Nikkei 238 (bullish)
VIX 23.89-30.32 (neutral)
USD 92.40-93.49 (bearish)
Oil (WTI) 39.27-42.15 (bearish)
Gold 1 (bullish)
Silver 23.78-25.66 (bullish)
Best of luck out there today,
Christian B. Drake