Surveillance: U.S. Jobless Claims Fall With Gapen

I'll stop it to show at want why well, John, thanks for having me this morning. What's driving markets here? Is is really policy right? And I'll give you a few statistics we have. You know, we talked about treasuries just a moment ago. You know, real yields in the tragedy market are are are very low. So if you look at real yields, have could need to decline. We have five year really yields about minus a hundred basis

points real tenure yields minus ad basis points. We have a fed that it continues to be active in the market, which is the reason why we've gotten this big bounce off of the bottom and if you look at what happened in June, it becomes very very clear what that that is what's driving things. So in June we saw investment grade, which we know that the Fed is buying, continue to rally. Investments grade, investment grades, spreads tightened by twenty four basis points or so in June. High yield

UH did not rally as much. Spreads titan much less, and you know, bank loans kind of went sideways in June. And the reason for that is that that the i G is is very closely tied to UH FED policy, as the Fed is actually buying. So our mantra has been by what the central banks are buying, by what the central banks are supporting, because the fundamentals themselves, undguing

fundamentals disease are not that positive. Rob Dan cass Of of BMP berry bat was it's out in the last hour talking about you know, nominal yields can stay or they are folks, the visible interest rate that we see, and yet with rising inflation, those real yields could drive ever ever lower. I have trouble believing that's a stable process. Will that be a stable process or do you look for bond price volatility. Well, Tom, the FED I think is trying to make sure that's as stable process as possible.

You know, the treasury volatility, to take the move index for instance, which is a measure of treasury volatility, is at its lows. So the FED I think is with their with their for guidance and what what they their Their policy going forward will be to try and maintain that stability in the short end of the market at least so that you can have these really yields continue

to decline. Obviously there's a point of breaking point where they may lose control, but that will be well in the future in our view, so they will continue to be able to control all the level of nominal rates to some extent um and its inflation expectations rise, which they have been recently in the is priced and market

that means really ill to go down. Robert, What does a cautious stance mean at a time when there is discretion in markets where you have the best quality assets with extremely high prices and the riskiest assets the ones where you see companies closest to default priced as such, how are you cautious in this environment? So what we get what we would advocate is you know, own what the FED is buying or what the central banks are buying.

So in Europe that is corporate bonds. In the US here it is i g. It is mortgages because those assets you know, will be supported the central banks are driving that. We're a little bit more cautious on assets that are more dependent upon the economic recovery. So the economic recovery we clearly bottomed. I think some good news in our view is that we've on a little bit you know less down in the United States and in terms of the economy that didn't dip quite as much

as we were fearing. Um. But this open reopening processes and train. But it is not clear to us at all how this reopening process is going to go, especially given the viral pickups track pickup that we've seen in some states recently. Rob Lasa touches on something really really important.

Now everybody is crowding into the same trades. You're not the first, you won't be the last to come on this program and talk about following the FED coming against the US investment grade, do you need to think about redefining what is considered safe in this market? Well, you know the I'm sure that if I when I came on the program the last time, I would have said exactly that, which is by what the FED is buying. And you know the fact is that in June that worked. UM.

In June that worked. We think probably in July that will continue to work. UM. Redefining what is safe? Uh? You know that that the fundamental problem for the market here, John, because uh, you know, the safe asset now has very very little yield to it. So as we think about building portfolios, and I think there's a portfolio construction question really right, But with with such a low rate of yield for the risk free asset, we need to think about other assets that we can use to support that.

And again, investment grade bonds, uh, you know, spreads and one forty over right now, um investment grade bonds where we did the risk of imminent default is not there. Um, the volatility comes and spread and the FED is in managing that volatility. That seems like a pretty safe asset to us, Rob, Where's the unsafe asset? I mean the real question here is I get I get the idea of I G but where do I not want to

be in fixed income? Well? You know, I think the things that that you might want to be that that require so rather than say don't want to be there, where you really have to do your fundamental work is is in assets that are more directly tied to specific sectors of the economy. So we know, for instance, the you know, the high yield default rate is picked up. We're what running about three and a half percent I

think now, and how yield defaults. That's not a big number, um, but there are hidden in that, there are idiosyncratic issues. We know the defaults have picked up an energy and a couple of other sectors. So you know what we would say, Tom, is those things that are that are tied more directly to the economic outcomes we need to be. You need to do your homework on John. I find this conversation so interesting because to your point you're talking about earlier, a lot of people are following the FED.

Initially it was trying to front run the FED. Now it's don't fight the FED and follow the FED. And you're seeing this and flows incoming into the biggest investment grade corporate e t F. I just want to give you this nugget. There has been one point two billion dollars put into this fund in the past week alone. With them, they're two hundred and two million dollars put overnight. This trend has not gone away, and it does raise a question, John, at what point has a FED fully

been priced in? And are they going to be unwilling to continue to backstop credit markets? And how does that rearrange what we are going to see going forward? At least there's an important question, and I think Rob's addressing the portfolio construction component of that question. I think it's really important Rob, in the next draw down, in the next downturn, what's going to give me that downside protection?

And my portfolio with ten years try some real it's just stuck between ten, say sixty to seventy basis points on a ten year. Well we make a great point, Johnathan, which is that that you know, there's less there's obviously much less downside for yields in portfolios right now. So you have to be a little bit more sophisticated now you build your portfolio. And again, uh, you know, investigrade is a good is a good way to think about, uh,

adding some safety. But you traditional way of using treasuries as your risk free asset to your point is valid, which is there's much less downside available and yields right now, so much less underlying protection. If you like Rob, always appreciate your time, sir. I'll best that the team I've read of robball into that off Investco advices right now, get out the calendar. It is July, and it is July ish on the way too well, you know earning season.

It is total chaos. But we need perspective. When we get that from the Bank of America and their equity strategist, Chill carry Hall, Jill. There's eight ways to go here, and I love the detail of your research. Note given the present chaos, I want to go to somewhat minutia, which is the wiggle room corporations have with capital expenditures. The way they do this is they reduced them in crisis.

Is that's what's happening now, hieah, thanks for having me. Definitely, we're seeing that, um, you know, overall corporate cash deployment has come down. We've seen about the spending buy backs, We've seen a little over ten percent of the index of spending dividends. And then capex has really been an

area that that corporations have cut back on UM. When when we look at you know, what happened last quarter capex spending was it was essentially flatish UM, and then the quarter week you think it will continue to remain week when we look at capex guidance, which some companies will give on their plans spending, that's been extremely weak. Um. You have very few companies you know giving it now to begin with, is overall guidance has here but for the one the ones that are, it's you know, pretty

close to two thousand nine levels. So they're sort of that disconnect between the improvement we've seen in the i SM and just very negative. What I note, Jill is Mr Buffett and Berkshire Hathaway take out Dominion and Dominion is actually going to deploy the billions. So Mr Buffett over to a more conservative tone on their balance sheet.

Would you expect that to happen throughout all of corporate America? Well, I think what we've seen when you look at you know, the Bank of America Global Fund Managers survey, investors have really honed in on companies balance sheets. Um. There's a lot of leverage out there, particularly down the market cap spectrum. So investors have been wanting companies to use their excess cash to clean up their balance sheets over other cash uses.

Now we have been in the lackluster capex environment, so you know, I think there is sort of a demand for that as well. You know, where where companies can invest in areas that it makes sense UM and and certainly that that's beneficiary for for companies UM, whether it's tech capex or more traditional industrial capex UM. But I think right now a lot of companies are really being

cautious on undeploying big projects given the uncertain environment. UM. So, so we're not looking for a big cap XCHUME this year, but but certainly if UM economic conditions continue to to improve, we'll be watching the guidance closely to to see effects. Suggest to pick up Joe. We're sitting that this morning, Walgreen's coming out kind of have a full thousand jobs, suspending the ship buy backs. So yesterday evening bet Bath and beyond cutting stores as well. We say this every

single day. Is this why you think we need to own the mega cap stocks with the strongest balance sheets versus the small cap stocks with something a little bit more frati alebernate the surface. Yeah, so we continue to prefer larger were small cops right now, I think, you know, overall, the fundamental backdrop is so much we grew down the cap spectrums. So this this sarning season which kicks off next week, large cap earnings should fall about every year UM.

Small cap earnings are going to be falling a lot greater analysts are looking for about you know, dred percent you're your decline and earnings for small caps UM. So So even though UM, you know, recovery certainly benefits small caps, if we we see a more sustainable recovery and we stop seeing a pickup in cases, that that could be positive. But obviously the fact that UM, you know, there's a lot of fear right now about the rising cases UM.

Small caps have been generally underperforming again since the early June escalating trade tensions or another risk there and one of the key reasons smaller stocks underperformed in in so you also have really expensive valuations not across the cap spectrum, but for small and mid caps there at at record highs right now UM. And and a lot of the economic data on reopening suggests you're starting to see stalling

or decelerating trends for small businesses. So um, you know, as you mentioned, balance sheets are a lot cleaner for for larger stocks. You have a lot higher quality for for the SMP five relative to small cap benchmarks. So you know that that's still something we're thinking about right now.

But but certainly if you are an investor in small caps, still opportunities that you know, if we do see a bit of a tactical rotation into into value, um, you know that that's something we expect could work across the market. But but being more selective within small caps makes sense. I just given that that a lot of the value stocks within small caps have been become increasingly synonymous with with leverage and risk. Jill, your comments make a lot

of sense. Your caution makes a lot of sense with the bigger picture of the pandemic and the accelerating job losses in some sectors. At the same time, valuations have reflected this. And there's a theory out there put out by JP Morgan that really the surp eyes could be to the upside if we get a stalling out of the pandemic or better than expected data, and you could see the small caps rally and some of the larger caps the mega tech stocks sell off given where valuations are,

Why is that flawed in your opinion? Well, I think if we if we do see a much more sustainable recovery. You know that that is when when we've looked at size and style performance, you do tend to see UM small cap stocks. Value stocks tend to rally during those those early recovery stages of the cycle. So we obviously saw some early innings of that, and now that's that's

called into question. You know, I think one risk this time is that small caps were just a lot worse position going into this crisis than they were going into a lot of the prior recessions. UM. You know, they had record leverage ratios that they've never had before. They've benefited from uh keewee and all the actors to cheap capital. Um. You know, there are a lot of or quality today. So and it's a crisis that hurts small businesses. So I think there's some additional risks there as well as

around trunk Jill Jill, this is a huge deal. Come on, We've got this company boot John Farrell mentioned Boots out with layoffs. We got Walgreens with layoffs, and on and on. And on there's gonna be a job curnage out there, the chances of the exchequers spoke about it yesterday. Vice President Biden is going to speak about it today. What is the elasticity of those job cuts to the revenue line of small, mid and large cap? The answer is

small cap is gonna get absolutely crushed on this, right. Yeah. I mean, I think the labor market backdrop and like I said that, the data we've been seeing kind of stalling and decelerating for small businesses is a big risk. And you know, overall for for the market, we think there's a lot of risk of you know, just pay risk because we've seen all the stimulus and moving on into your end and then as if soolatility picks up

around the election. So you know, we're at this point, we're even for the SMP five hundred, the markets treating above targets for a year end. So um, so we're more neutral on equities at this point and think it makes sense for investors. So it's really kind of picture spots. Okay, the one final question then, and folks, I'm distraught this morning because I have my pasta maker on order at sir La Tabla and they announced are going bankrupt this

morning or last night or whatever. And I'm never able to make a pasta to have Faraoh over. So you can get some really good quality Tom Kinge Italian pasta. That's all great, but it's gonna come in an Amazon box. What does the capex reduction? What do the job layoffs do to the top line fundamentals of Apple and Amazon

and the others. Are they immune from this dynamic? Well, I think you know, and and Amazon and some of those companies are are actually the ones that have been been the cap ex spenders during this current crisis and kind of keeping SMP five hundred capex positive as all

of the commodity oriented areas have cut back significantly. Um. But but then in terms of capex beneficiaries, you've certainly seen kind of a slowdown across the board in terms of both more cyclical capex spending from the commodity complex and then overall spending on tech. But but if we are in a more permanent, you know, work from home type of environment, certainly some of the mega cap tech companies have benefited. We're we're equal weight tech overall. We

think tech looks very positive fundamentally strong balance sheets. Um. But but obviously that's one sector where there could potentially be regulatory risks. Um that the tech has largely escaped up until this point. Um. So as we go into the election, that's, you know, one of the reasons we've just been equal weight. Uh. In addition to obviously the very strong run it's had. Joe brilliant catching up with you as always, love hearing from you, My best to you.

Entertainment Banks America they like to surbata for us as well. Do you carry hold that off Bank of America to give us perspective in the dynamic here and particularly to get to August Michael Gape and joined some Barclay's capital. Michael, do you have any ability to forecast estimate a judge August right now? Not a lot. I think that we would, as Jonathan said, give a little more credibility to some of these high frequency mobility data's restaurant bookings. I've in

particular watch the Dallas FEDS Mobility and Engagement Index. The claims data just don't have as clear of a signal For all the reasons that you've discussed in recent weeks, including backlogs and processing, and we're in this very strange situation where where the separation side of the labor market is still bad, but claims really only tell us about half the story. The other half has been a tremendous

pick up in in the hiring rates. So we're in this odd period where we can have a high level of claims, unusually extraordinarily high level of claims, but still have an improving labor market. So August, I think it's probably more more about COVID cases, a willingness to move around still, not so much about what the labor market is saying today. And what's so important that insight, folks, is from Dr Gape and the idea of claims being

a one sided view. Can there be a one or two or even three sided view of the distinction between furloughs and layoffs and firings in the short run yes, Somewhere in the long run no. And so there's this tension in labor markets, as you know, where where most the vast majority of people unemployed right now consider themselves

temporarily unemployed. But as we've seen, even though the labor market has been improving and the number of unemployed has come down, a greater share of those layoffs are unemployed are now starting to be booked as more permanent unemployments. So as as this gets prolonged into August, September, and October, I think no, there's there's that difference is just a name only, and we risk a temporary unemployed worker turning

into a long term unemployed worker. And that's the scarring that the Federal Reserve, of course, is trying to avoid, and we're seeing that in the numbers. Michael, the churn. Beneath the surface, the net change is positive, but beneath the surface, we're starting to see permanent layoffs build again. We've had so many different companies in the last twenty four hours announced job cuts, store closures, the worries about the second wave of layoffs. Are we starting to see

evidence of it? Yes? Absolutely. I think there's been a narrative that that says that business models under pressure. Retail is the most obvious case of this, that if firms we're thinking of making major transformations over two to three year horizon, that those would be brought forward. So COVID is accelerating some of those structural changes, and I think what you're seeing now is firms have had several months

to assess the state of play. They're now making plans, and so we're getting some some word and some releases that those those plans include more layoffs. I think those are probably layoffs that are being brought forward relative to where plans would have stood in January and February. Michael, some analysts and some traders would say economists are just

being chicken little right now. And you're seeing this in the economic surprise Index in the United States, which is surging to a record high as economist projections come in too low again and again and again, and certainly today with the jobs report. Do you take that as a sign that economists are being too pessimistic and it's sort of accounting for a greater amount of permanent layoffs in the market really will sustain or do you view this as just how difficult it is to gauge a labor

market in such dramatic flux. Well, I'm six nine, so I've never really been described as as little um. But the way that I look at this is we I mean, yes, it is true that we've been surprised to the upside, but it's my view it's been mainly on the good side of the economy. The good sector can rebound quickly. It has been the case that that has happened has happened in the US, and globally, spending by households on goods is only a little bit short of where it

was in February. That's rebounded from here, though, is if the rest of the economy is going to recover and we're going to get continued upside surprises, it had to come out of services. So while the good sectors recovered about half of the lost jobs that we saw in March and April, the service sectors only recovered about a third. So I think it's what we're seeing at the moment, is the good sector rebounding quickly. Economists are still thinking a little bit more longer term about well, this is

a service oriented economy. It's roughly seventy percent of where the economy is going, and there's still a lot of after effects from COVID that could affect the services sector. So I think we're thinking a little more longer term. But have we have to accept the fact that the near term bounds has been stronger than we thought. He said, Rules of engagement. We insult the economists after the interview, not during the interview. Just save it just for a

couple more minutes. Michael, I do have a question voice about the recovery and when you expected to flatten it out? Is a story we should look for for the back end of August later this summer. Where are you focused on the calendar? I think that's exactly right. We uh, it happened about two to three weeks quicker than we thought. And given the flows and the magnitudes that we're discussing, it's it's meant a lot of outperformance. Uh And and so therefore I think you're you're seeing May and June

and July are probably gonna be pretty strong numbers. And then as you get into August and September, if we're still dealing with coronavirus outbreaks, increased hospitalizations, and back pedaling on phased reopenings, then you you'd likely see a sluffing offer at least a moderation in the rate of improvement from from there. And that's why I think we and others are still calling on on Phase four. Stimulus is needed to help bridge the economy a little further into

the year. So if we get the ads for stimulus, I think it will help. Certainly we would expect a larger slepting off and activity if if we don't. So it is a critical piece of the forecast, as well as what's happening underneath in in terms of COVID and a willingness to rehire. To be clear, John, I knew that Michael was very tall, so I knew he could handle being referred to in a profession of chicken littles,

because that is sort of some people are saying. So to be very clear, but Michael, I do want to get your sense when you talk about stimulus. Can you talk to our earlier conversation with Claudia some about the most effective stimulus that we have seen thus far coming from the US government. I think, well, I think it's been I think it's been twofold one. I mean, I'm going to include some policy here as stimulus because it's

just Emergency Liquidity Provision. But I think the combination of of the p PP it came late, and it needed to be remodified and it needed to be upsized. But I think we saw in May and June that it likely help hold in a lot of employment. So I think the p p P at the end of the day has been fairly successful. And then I think on the other side of it, it's it's just tax rebate payments or rebate payments to households plus the unemployment benefits.

So this is not traditional stimulus in the sense of households have a lot of income and we're trying to add something on top of that that wasn't expected. This is about income replacement, and so I think that I would say number one has been the income replacement on household balance sheets, and number two has been you know, getting some wage and salary support to small and medium business through the p p P. To me, those two

have been the most important. Michael always gret to catch up with the sad my best of the team, Michael Cape and now about leaves the chief US Economists. Right now it is front and center. I'm sure the Vice President will address it as with the resident today as well. Vice President Pence, I should point out, and that is this continuing pandemic. You've been following it, the case dynamics, the death dynamics. Just recently we started to see hospital

supplies running low again. We get perspective from Jason Farley the Johns Hopkins University. Yeah, well he who just came out with reasons data actually from six of ten different states and local regions, and they used the blood supply basically, so if you've had blood obtained for any particular reason in a commercial lab UM in the United sent in sixteen graphic regions. They took samples that were used for

other tests and tested them for antibody. And what they found was that the increase actual prevalence of antibody positivity was between six and twenty four times higher than current estimates and so just really large estimates of population penetrance of this virus. And so what that means, however, is is to be determined. We don't know how many people got tested and has already lost antibody. We don't also

know how many people might have tested fault positive. Although we think it's it's a smaller proportion, there are there are people who can test fault positive for antibody UM. So it's it's a really important data point, uh, and it really tells us that we are missing still a lot of cases in the community. So, Jason, the infections between six to twenty four times higher rates of infection. What does that give us, like ten percent of the

population could have already had COVID nineteen. Well, most estimates are generally less than five per cent, but when you look really at these numbers, UM, you're really showing upwards of ten percent in some localities. UM. So it's really it's really critical that people continue all of the non parmacal logical interventions social distancing, why, math wearing, uh and and really just to understand that a fairly large number of people in a geneographic region have been exposed to

the virus. Jason. Another you know, I guess repercussion because of COVID nineteen is that the student and exchange visitor program in the US has been modified so people that that tad a visa but now we're on online courses have I believe been asked to maybe go back to the countries where they were initially from. Does that mean

that this is also being used as an immigration policy. Well, it's certainly putting restraints on the waves in which we in colleges and universities of the country can flex our programs.

For the fall, we had had restrictions for the F one VIA program to be the program that allows foreign nationals to study in the United States UH gluosened in the spring semess or UH through the summer, have now received a word that that is not going to be the case for the fall, suggesting that anyone on our visa for for academic purposes must attend face to face classes. They can attend at most one class that's fully online, which really hampers our ability to think about the ways

in which we plan for the fall UH semesters. So, in other words, faculty staff, students who are on F one visas, the students in particular on F one visas must be in a classroom, face, face to face and not online. And it really does put UM universities and in a quite a pick bull, frankly when we think about the way which we can offer education to those students. Jason with the Johns Hopkins University in updating the pandemic.

Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm on Twitter at Tom Keane. BEFO are the podcast you can always catch us worldwide. I'm Bloomberg Radio,