Long Road Ahead

Risk was on and stocks rose on all four days in the holiday shortened week. The week started with Dow heavy weight Boeing pushing the index higher after U.S. air-safety regulators said they would begin key flight tests for the 737 Max. On Tuesday, 30th June, we closed the quarter strong, the best in 20 years. Wednesday was about vaccine hopes from Pfizer and BioNTech and Thursday was all about the strong employment numbers in the US.

All this while US was setting new records on daily COVID-19 cases and Governors at various states were rolling back plans of reopening.

Here are three charts and some data points that stood out during the first week of July, 2020 - (29th June to 3rd July).

Employed, Unemployed and in Everything Between

The 4.8 million, employment print was solid and blew past every economist prediction. Unemployment rate fell to 11.1% down from a peak of 14.7%. The rate is still higher than any previous period since World War II and 600k people have permanently lost their jobs between May and June.

Words of caution flew in from all sides on the apparent strength of the jobs markets and what to expect in terms of its ripple effects on US consumer behavior and overall GDP support. As shown in the chart below from NYT, the path to previous levels of employment is long and might turn a lot bumpier thanks to new lock-downs. Note that the NFP data captures numbers until mid June when Restaurants and Bars were reopening. Leisure and hospitality contributed to 40% of the employment growth in June.

The more updated Jobless claims data was also released which showed 1.42m filed for new claims and continuing claims edged up higher to 19.29m. That number got me all confused. Here's the thing:

• Total NFP fell from 152.46 Million (Feb '20) to 137.80 Million which shows that we are still down 14.66 Million jobs. Understood. Still a long way to go, but these days we look at pace of change. So as long as its improving, its good!
• Continuing Claims have dropped from 22.37m (2 weeks ago) to 19.29m hence jobs gained should be 3.08m. But we get a gain 4.8m in the NFP.

I am still looking for a convincing explanation on what's happening here. Seems like a cocktail of mis-classifications, criteria of Paycheck Protection Program and States' backlog-clearing.

If you happen to come across some good analysis, please do share. Until then I am just going to put this aside as a long and bumpy ride ahead.

Squeeze the Swaps

As the premium for lending dollars keeps dropping, European and Japanese investors are using this opportunity to swap back and lock in better yields.

Lending dollars for euros in the fx markets now earns traders about 0.8% a year which is less than half of the five-year average of 2%.

After seeing wide trading ranges on yields for various types of paper, govvies, IG and HY paper, yields have settled down near the bottom of (yield) ranges and investors are now forced to either move down the credit risk spectrum or squeeze out extra yields via basis swaps.

As long as Fed is greasing the system with abundant dollar supply, these trades will be fine, but any sharp changes in dollar liquidity can lead to aggressive moves in basis that can potentially wipe out additional yields. From the time when dollar basis blew up and the whole system was scrambling for US dollars to a point when basis is used to capture yield pick ups, we have come a long way in such a short span.

Long and Short of Tesla

The band of short-sellers of Tesla seem to have resigned as Tesla keeps powering ahead on better than expected production news. Tesla is now the world's most valuable carmaker with a market cap of $224bn, overtaking Toyota's $205bn. Tesla produced 88k vehicles in the first quarter and 90,650 vehicles in the second quarter which is just 4% of Toyota's 2.4mn quarterly production.

Disclaimer: The views and opinions expressed, if any, are of my own and do not necessarily reflect the official policy or position of the organization I work for.