Day by Day

Devastating employment number. It was expected but it stings very hard. The real question on the employment side: when do we bottom and how many jobs come back?

We’ve discussed how the speed of reopening matters. Safety is paramount and a very tough and difficult balance. Risk assets continue to look forward but appear to be taking a leap of faith. 

 S&P 500 channel off the Fed driven March lows

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This week we had an opportunity to rejoin Maria Bartiromo and Fox Business for a brief discussion on reopening and interest rates.

Let’s take a look: 

1) The Fed has told us throughout the last few years that the traditional measures of looking at employment have changed (Powell: Phillip’s curve 2019).

2) The U-6 rate is close to 23%. Unfortunately it’s likely to rise as we reopen the economy in a very uneven way. Average hourly earnings is indicative of the nature of jobs loss but in no way alleviates the devastation.

U-6. Ran double to standard unemployment in the global financial crisis of 2008

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Average hourly earnings. Lower income jobs comprise bulk of loss. No solace.

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3) We will need to see a bottoming in the employment numbers. It’s that simple. This will take more time. Essentially, we will know when we know. Focusing day to day on the high frequency economic data (on the ground) is the only way to sift through this. The continuing claims will begin to assume more relevance going forward. 

Initial versus Continuing Claims back to 2000

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4) Although the numbers on the surface were better than expected, the overall magnitude of this loss is devastating. Congress will need to act again soon. More liquidity will be needed short term. Stimulus will be next. Overall- 2.4 Trillion.

5) We expect Treasury issuance to continue to grow. The need on the fiscal side will grow more in the coming months. Not advocating, but the reality. Much to date has been with the short end (T-bills and cash management). The refunding announcement this week is in line with our forecast highlighting the long end and new 20-year. There is much more to come regarding our debt levels. We were running pro-cyclical before Coronavirus.

Treasury General Account

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Primary Dealer T-bill holdings

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Total Outstanding Treasury Debt

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6) US rates on the long end have been range bound. We prefer to look at 10-years. We view the current range as 55-80 basis points as the Fed purchase program continues to lighten up. The extreme buying by the Fed has taken volatility out of the market. They needed to given the distortions.

 BOA ICE Move Index; Treasury Volatility

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10-year US Treasury Chart

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7) US short end. We were disappointed the Fed didn’t address negative rates forcefully at the last meeting. No doubt they will need to soon. When looking at the Federal Reserve Act the Fed has no legal authority to charge banks for holding reserves. However, it becomes a fine line when markets move that way (negative) as a function of the environment and policies of other central banks. The Fed should address it formally.

Effective Fed funds, T-bills, SOFR and general collateral

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