July 3, 2020 – Happy 4th everybody! Here are a few tidbits to chew on over the weekend. Enjoy!
Highlights from the Week
Banks are “flying blind” after a provision in the government’s stimulus package forbids lenders from telling credit-reporting companies about deferred payments. (WSJ)
Gilead Sciences Inc. announced it’s going to charge hospitals $3,120 for remdesivir, an antiviral drug proven to hasten Covid-19 recoveries. (WSJ)
Citing the need for “considerable investment to grow the division” and a plan targeting net-zero carbon emissions by 2050, BP sold its petrochemical business to Ineos Ltd. For $5 billion. (WSJ)
After missing out on Grubhub, Uber is in talks to purchase Postmates for around $2.6 billion. A deal could come together next week, if not sooner. (WSJ)
Los Angeles based freelancers are in crisis (well, everyone is). L.A.’s economy has a tough recovery ahead. “Along with film and the arts, it is driven by hospitality, high-tech manufacturing and international trade, all industries devastated by the pandemic and likely slow to return,” The Wall Street Journal writes. (WSJ)
The U.S. halted high-tech exports to Hong Kong as the territory’s autonomy fades. Chinese lawmakers passed a national security law that could drastically curb free speech in Hong Kong. (NY TIMES)
Airbus is cutting 15,000 jobs, the most significant restructuring in its history, and a direct result of the Covid-19 pandemic. (WSJ)
Tribune Publishing ceded another board seat Alden Global Capital. The move fends off certain death for the newspaper company – for now. (WSJ)
It’s a double dose of headlines for TikTok this week. First, studies came out detailing how vulnerable the platform is to fake accounts. (THE INFORMATION) Today, TikTok pushed back against its ban in India, saying it had never been asked by the Chinese government to provide user data and would not comply if it did happen. (WSJ)
Chief executives from Amazon (Jeff Bezos), Apple (Tim Cook), Facebook (Mark Zuckerberg) and Google (Sundar Pichai) will all testify before the House Judiciary Committee this month as it continues to investigate these tech giants’ collective power over the digital marketplace. (WSJ)
After promising to deliver its first transparency report, Zoom has bumped the deadline again. The outside world will have to wait to learn how many government demands for user data the video conferencing giant has received until “later this year,” according to a blog post from the company. (TECH CRUNCH)
Dozens of private equity firms navigated around government restrictions and received funds from the U.S. Paycheck Protection Program, a relief program aimed at helping small businesses survive the coronavirus pandemic. It’s unclear how many private equity firms may soon be outed and what further action will be taken. (BLOOMBERG)
Intel is purchasing a stake in Jio Platforms for $253 million. The computer chip giant joins a notable roster of big tech and private equity firms investing billions into India’s largest wireless carrier. (BLOOMBERG)
Hydroxychloroquine might have some merit, after all. A recent study shows it helped Covid-19 patients when given in the early stages of contracting the virus and at the right dose. (WSJ)
Institutional Research Roundup
Jobless claims should hold relatively steady (around 1.43 million). However, claims are increasing in Texas, Florida, and California, all experiencing virus surges and have started rolling back reopening measures.
Private payrolls did do better than expected, increasing by 4.767 million. Not surprisingly, three sectors drove the gains – food services and accommodation, retail trade and health care and social assistance.
With reopening slowing down in certain areas – Texas, Florida and California – the recovery pace in areas such as food services and accommodations could slow down short term. As a result, the projected unemployment rate at the end of the year projects around 9 percent.
Gauges of mobility have risen over the past few weeks. But this also likely contributed to the increase in Covid-19 cases and could roll itself back. Comfort level is going to be a key indicator of when recovery can trend toward normalcy.
Even though recent data has exceeded expectations, troubling virus trends in several U.S. regions could slow recovery. In response, the Fed will probably keep monetary policy highly accommodative at least through year’s end.
- Large scale asset purchases should remain a central tool for Fed policy in the near-to-mid-term. Other options for providing additional stimulus include more formalized forward guidance and yield-curve control or targeting.
- The impact of these tools is relatively predictable: policy rates will remain near zero. Real and nominal market yields will remain historically low, and the term premium will continue to compressively out of the curve.
- Additional fiscal stimulus could be as much as $900 billion.
In the second quarter, Treasury issued $2.75 trillion in privately-held marketable debt, which came in slightly below the $2.99 trillion estimated in May.
- An estimated 56 percent of the newly raised cash has been spent, and the rest went to the Treasury General Account, boosting its balance to a record $1.72 trillion.
- TGA balances should fall in Q3, reducing the amount of Treasury issuance. Q4 levels should land somewhere in between $1.2 trillion and $800 billion.
- Forecasts predict 1.043 trillion in privately-held net coupon issuance and $350 billion in net bill issuance for H2 2020. That puts the full-year total net issuance at $4.6 trillion.
The Fed balance sheet could rise from $7 trillion to around $8 trillion to $8.5 trillion.
- Accounting for this increase is $720 billion expected in asset purchases, $500 billion for the PPP facility, and $350 billion in estimated loans and asset purchases for the corporate credit, municipal bond and Main Street lending facilities.
- As a share of U.S. GDP, the Fed balance sheet could rise 40 percent by year-end, more than double the figure from the end of 2019.
Funding markets should remain well-behaved in the second half of 2020 with stable rates and spreads.
- Bill supply is expected to level off significantly from $2.4 trillion in Q2 to roughly $350 billion for the rest of the year.
- Bank reserve balances are flushed with cash, resting at $2.9 trillion currently.
- Corporations likely have enough money raised to get through this year and are unlikely to tap short-term wholesale funding markets unless there’s another mass economic shutdown. If economic recovery progresses better than expected, improved cash flows could mean corporate borrowers paying back short-term obligations faster.
Rates should remain locally stable, and the tail risk in the near term is not substantial.
- Long-term effects, however, can be considerable given the dangerous mix of social and economic crises. In that context, rates in the long term might not be stable.
Have a great Fourth of July! See you Monday!
— Justin Birnbaum