Things I've Noticed . . .

Welcome to Indicators and Insights. Every Friday, I write about what I find to be the key financial market topics, charts, and stories of the week, often challenging the conventional wisdom.

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In this article, I'd like to share a few stories and charts that caught my eye this week that others may not have picked up on.

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During this last week of July, there were a few important developments for the U.S. economy and the financial markets.

• While we knew this was coming, the BEA reported on Thursday morning that Q2 GDP in the U.S. crashed 32.9% q/q (annualized) for the largest quarterly decline in 75yrs or more.
• The U.S. 5yr yield moved to a new record intraday low (.212%) and the 10yr yield punctured the April low at .539% on it's way to .518% overnight on Friday.
• The Federal Open Market Committee (FOMC) and Chair Jay Powell delivered another sobering outlook for the U.S. economic recovery, admitting that Covid-19 is in control. One reason yields moved lower was because Powell said for "quite some time we're going to be struggling against disinflationary pressures rather than against inflationary pressures." Millions are out of work, the recovery will be slow, and Fed policy will remain supportive, even accommodative at some point. From a policy perspective, he said "We're in this until we are well through this."
• Meanwhile, AAPL, AMZN, and FB all reported blow-out results for the second quarter.

In this edition of Indicators and Insights, I could rehash all of these developments more completely, but I won't. They've already been well picked through and tossed about by economists, analysts, strategists, traders, and investors.

Instead, I'd like to share a few stories and charts that caught my eye this week that others may not have picked up on. Hopefully, this will shed some light on some things that haven't had mainstream attention.

Unemployment Benefits, Rent, and Eviction

In this eye opening Urban Wire blog post from #UrbanInstitute on "Reducing the Amount of Federal Unemployment Insurance Would Increase Rent Burden for Millions of Households", @SarahStrochak and @AaronShroyer offer an analysis intended to quantify what the impact of reducing or eliminating the weekly $600 enhanced unemployment benefit in the CARES ACT would be on renters who have lost their jobs due to the pandemic in the U.S. Here are a few excerpts from the post:

"We estimate that, in the absence of any federal weekly supplement to state unemployment insurance, 4.1 million (68 percent) of the 6 million renter households with job losses would pay more than 30 percent of their income on rent, and 2.8 million (46 percent) of those 6 million households would pay more than 50 percent of their income on rent. This is significant because paying 30 percent of income for housing is the generally accepted threshold for affordability."

 "Before the crisis, we estimate 2.4 million of the 6 million renter households who lost jobs were cost burdened. With no benefit, that number would have climbed as high as 4.6 million, but the $600 per week supplement has kept the number stable. Reducing the amount of weekly unemployment insurance to $200 per week would lead to an increase in cost burdened households to 3.5 million." (cost burdened = paying more than 30% of income on rent)

The post goes on to say the estimate of severely cost burdened renters (SCB - paying > 50% of income) numbered "1.1 million of the 6 million renter households with job losses" before the health crisis. The $600/wk benefit set to expire at midnight tonight (7/31) simply "mitigated what would’ve been a sharp increase in severe cost burden." In fact, the analysis puts the SCB renters at 1.280m with $600/wk benefit, 1.489m with $400/wk, and at 2.007m with $200/wk.

Click through to the post because it has a couple of good graphics that illustrate the impact.

Euro Breaking 12yr Trend

Understandably, much focus has been given to the breakdown in the U.S. dollar. After capturing a strong safe-haven bid in the teeth of the health, economic, and financial market turmoil back in March, the ICE Dollar Index (DXY) flushed lower heading into June after the Fed rushed in to flood the world with the currency.

DXY hasn't stopped falling since, declining from 99.75 on May 26 to 92.54 at today's low for a -7.22% plunge in just two month's time - a massive move in foreign exchange. A number of other factors have played into the dollar weakness as well, but that's beyond the scope of this article.

Here's a long-term look at how the index has been trading going back to 2015:

As you can see, once it gets moving in one direction, the dollar tends to stay on that course for some time. The right hand side shows the recent pummeling.

DXY is an index that includes the currencies of six of the main trading partners of the U.S. The euro currency has the highest weighting at 57.5%. In other words, as the EURUSD pair goes, so goes DXY.

With the dollar on a weaker trajectory, the other side of that trade, namely euro, has been on a tear stronger, and it has just penetrated a 12 year trend line to the upside.

As you can see, the common currency, as euro is known, has moved up to the area of the 2010 and 2012 lows on either side of the $1.200 level. Euro closed at $1.1780 vs dollar today. Expect some headwinds in the $1.20 area not only because there is some resistance there, but also because EURUSD has had such a strong move.

It will likely need to pull back to the trend line in the $1.16 to $1.15 area to test it as support before it can build up enough momentum to trade up decisively through $1.20, eventually on its way to the 2018 high in the $1.25 area.

Last Man Standing?

??Global equity markets ex-U.S. have broken down since the July highs.

??Positive trends of varying lengths have been violated in Japan, Germany, Italy, and the U.K. in the last 24 hours.

??The German DAX has violated a trend line that, previous to Thursday, held throughout the recovery from the March lows.

??Yet, the S&P 500 is only down 1.28% from the July highs while markets these other major markets are down between -5.46% and -9.28% over the same two weeks.

Plus, the U.S. is dealing with many headwinds unlike the other countries:

?Secondary outbreak of Covid-19 in at least 40 states

?Rollback of reopening in key states

?A deep recession/Slowing economic recovery

?The great political divide

?The inability of Congress to put forth 4th fiscal support plan

?The U.S. election

?Blood and acrimony in the streets

?A currency that is getting punished

?Debt, deficit, and tax revenue concerns

?At some point, investors will begin to realize/admit all's not well and the S&P 500 should catch down to the others. A close below 3200 will be first indication. Key trend line support is down around 3170.

China Could Drown

Lastly, Tyler Durden of ZeroHedge picked up a post from Bruce Wilds of Advancing Time blog on a serious situation developing along the Yangtze River in China. The title of the post is "Is China's massive Three Gorges Dam on the verge of failure?"

The post starts out with this . . . "The massive flooding taking place in China continues, for some reason, this story has been widely ignored by mainstream media. It is important because China's massive Three Gorges Dam is in peril. If the dam fails there will be a staggering loss of lives and property. The Three Gorges Dam is around one and a half miles long and just over 600 feet tall. About 400 million people live downstream of the dam and apparently, no plans have been made for their evacuation."

. . . and it ends with this "Because of its size, the failure of the Three Gorges Dam would have broad ramifications for China's Communist Party and its reputation."

Embedded in the post are three videos that explain the situation. The sources seem credible and the pictures and videos appear authentic. I have no way of knowing if they are current.

A google search has a number of reports from China state media indicating it's all clear. Someone's not being upfront.

This one needs to be watched because of the humanitarian, economic, political, foreign policy, and geo-risk concerns.

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This article is part of my LinkedIn Newsletter Series: Indicators and Insights – Perspectives on the Top Financial Market Movers with a View of What's to Come.

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