Do not go long the euro into the weekend, just in case

Outlook:

Today’s nonfarm payrolls report will likely show a loss of 21 million jobs and the unemployment rate at 16%, the worst since the end of the war. Earlier the ADP private sector payrolls report shows that nearly a decade worth of job gains have been wiped out in a month, as Reuters puts it.

We shall find out at 8:30 am ET whether the response is ho-hum, or a straw that breaks the camel’s back.

Note that Canada’s jobs report, also out today, tends to get lost in the US shuffle but will likely show even higher job losses proportional to population. This expectation may account for some of the roiling yesterday in the USD/CAD.

Also later today and presumably after the close is Moody’s review of Italy’s credit rating, currently at the lowest investment grade. Do not go long the euro into the weekend, just in case. 

Some reports have it that after the 2-year yield fell to a record 0.14% yesterday, Fed funds futures contracts starting in Dec 2020 and out into 2021 and 2022 show a negative rate. The CME FedWatch tool doesn’t reflect it, but a different CMR reports shows it.

Bloomberg reports “Traders are now pricing in the possibility that the U.S. central bank will cut its policy rate below zero, dragging the yield on two-year Treasuries to a record low. Fed funds futures contracts extended their rally from earlier this week and prices for early 2021 contracts surged above 100, a level that marks the boundary to negative interest rates. The five-year Treasury rate also hit an unprecedented low as securities rallied across the curve and falling yields weighed on the dollar.”

Fed chief Powell and numerous Fed board members are against negative rates, noting, among other things, they haven’t worked for anybody else. However, the Fed attitude is “whatever it takes,” so a coterie of fans (or scaredy-cats) clearly think it’s possible.

The prospect of negative rates in the US is the biggest dollar negative we have seen in a while.

As for the equity markets, complaints persist of unrealistic earnings expectations and thus overpricing. Now that we have seen the European Commission forecasts of a slow recovery into 2021 and 2022, with something similar in the US, to imagine corporate earnings can be robust is just plain dumb. That includes the current consensus of a drop by only 10%. Citi, for one, expects global corporate earnings to fall 50%, the FT reports. Pictet Asset Management foresees 40%.

It doesn’t help that companies are declining to offer guidance, probably because in at least some cases the outlook is so awful they fear a sell-off. A couple of analysts at different firms concur that “equity markets in broad terms are running at different speeds beneath the surface.” The DataTrek guy sees two camps in the S&P 500, with one came acting like “stub equities, a term we never saw before. It means “a low stock price, no dividends or share repurchases and a higher-than-market-average price volatility, alongside high levels of financial debt and shaky credit ratings.” Some 200 of the 500 belong in this camp.

The other analyst (something named Cresset Asset Management) says “Investors also need to recognise the world will be clouded by uncertainty for the next quarter or more, so short-term valuation measures like forward P/E [price-to-earnings ratios] are meaningless. Investors today are less worried about a company’s future profit potential than they are about its survival. The pandemic shutdown has forced investors to clamour for large and profitable growth companies while they shun highly leveraged value-oriented stocks. Year to date, growth companies have outpaced value companies by nearly 9 percentage points.”

Other analysts point to something similar, like Barron’s: “The Nasdaq Is Flying High. Everyone Else Has Major Problems.” It’s hardly new that some sectors do well under some circumstances or that analysts who know their way around financial statements are winnowing out the losers, but the idea that the major indices do not properly reflect the “camps” inside them is certainly compelling. Various people over the years have proposed different indices to reflect managerial competence. We may be about to get one as we start to see lists of the dogs vs. the champions.

We shall see whether today’s payrolls are seriously upsetting and strike fear to the point of restoring risk-off, or get taken in stride. As usual on payrolls day, we expect the dollar to spike in both directions. As we keep seeing, less-bad news is “good” so any number under 20 million of unemployed might be “good,” despite everyone knowing we are undercounting. Similarly, if the number is 22 million or more, the dollar spike down will be sharper (but can still be temporary). By the close of the day, the stock market will tell us whither the dollar, because like it or not, it’s a proxy for the attitude toward risk.

Political Tidbit: The Justice Dept is dropping charges against former National Security Advisor Flynn on the grounds the FBI behaved badly, which seems to be true. All the same, Flynn was talking with the Russians before Trump was inaugurated and undermining official US policy, and was also serving as an undisclosed lobbyist for Turkey. In a word, he did commit crimes. One of the Justice Dept’s prosecutors resigned from the case, presumably in protest.

The basis for the withdrawal is that Flynn’s statements to the FBI did not involve “material” matters. But Flynn was caught talking to the Russian ambassador about cutting or removing sanctions against Russia, a measure Congress had passed and Obama had signed. There is nothing immaterial about it. One Flynn judge asked, apparently rhetorically, why is not treason.

The NYT reports “It is now up to the federal judge in Washington overseeing the case, Emmet G. Sullivan, to decide whether to dismiss the case and close off the possibility that Mr. Flynn could be tried again for the same crime. If the judge wants, he could ask for written submissions and hold a hearing on that topic…. But Judge Sullivan forcefully rejected most of the defense’s claims in a 92-page ruling in December.” For what it’s worth, Sullivan was appointed by first Reagan and then Bush I. Politico writes that “It would be extraordinary for a judge to order prosecutors to proceed with a case they are seeking to drop.”

Remember that it was Flynn who Trump was trying to protect when he asked FBI chief Comey to drop the case, and that firing led to the Mueller investigation. Most people expect Trump to pardon Flynn anyway, but it would be nice if respect for the law were seen to come first.  

Tidbit 2: Also on the political front, one more survey showing the American citizen increasingly distrusts Trump on the pandemic and do trust their governors. The FT finds “that 71 per cent of likely voters trusted their state’s governor rather than Mr Trump to “make the right decision” on easing social distancing and restrictions on non-essential businesses. It also found that 48 per cent believed Mr Trump’s policies had helped the economy, the lowest level since November, and only 34 per cent believe they are better off financially than they were when Mr Trump took office — also the lowest level since November.”

Democrats are obeying lockdown rules in greater number than Republicans—self-isolation, wearing masks, etc. This is reflected in another metric, that “While 90 per cent of Democrats and 78 per cent of independents trust their governor over Mr Trump, the president fared better with Republicans — though even among his own party, almost half (47 per cent) sided with their state’s leader.” And more Republicans believe the economy will recover this year than Dems.

At FiveThirtyEight.com, disapproval of Trump in four of the five latest polls is up by 7-16% with one showing a gain in approval. Three show approval at only 42%, one at 47% and one at 49%. This doesn’t mean he can’t win re-election, but it’s a start.

Tidbit 3: According to something named the Meat Institute, there are 1.156 million people working in meat processing plants and they make an average $14.65/hour. These are the people Trump ordered back to work despite the plants not being able to offer protective gear, let alone testing. Instead of using the Defense Protection act to get protective gear, ventilators and tests, Trump used it only to stop a possible panic over a food shortage. Well, there’s 1.156 million persons not voting for Trump, if they value their lives over hyped up fear of immigrants and other features of the “populist” Trump canon.

Now add the 3.8 million registered nurses, plus practical nurses, aides, physician assistants, lab techs, phlebotomists, and a bunch of other heathcare jobs. These frontline workers notice that the Trump administration failed to deliver needed supplies, let alone a hazardous pay wage hike (like Canada). We are not naming doctors, who noticed the same thing but are more likely to be in the cohort that gained over $45,000 in the Trump tax cut, while the average worker got about $400. 

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