Forecasters had their biggest miss ever on Friday in predicting the non-farm payrolls, which came in at 2.5 million after surveys said it would be -7.5 million. Models most likely failed to accurately account for the government’s relief response through the Paycheck Protection Program. The surge back was led by leisure and hospitality. As exports declined from the prior month by 20.5%, U.S. total trade has now slumped to its lowest level in almost a decade. One of the epicenters of the virus, NYC has begun its first phase of reopening with as many as 400,000 going back to work today. Retail stores are allowed begin curbside and in-store pickup or drop off and MTA subways and buses will be back on their normal schedules.
Fixed Income Market:
Our updates are becoming somewhat repetitive as the credit markets continue to follow the equity markets’ lead. For the fourth consecutive week, spreads in both the Investment Grade and High Yield markets saw significant tightening. For the week, IG spreads are tighter by an average of 10 basis points while HY spreads ratcheted in another 90!! basis points. The surge in HY was again led by the sectors that have been hardest hit by the pandemic – energy, transportation and hospitality. HY and IG bond funds continue their streak of strong inflows as IG bond funds saw nearly $10BLN in new money last week. The average spread on secondary BBB credits tightened to +190bps. Municipal bonds are the outlier this week as secondary levels actually widened an average of 5bps, while issuance remains heavy across the IG, HY and Muni markets as appetite for risk assets continues to outstrip supply.
Stock market commentators point out the dichotomy between equity prices and the sickness and strife on Main Street USA. We offer an alternative view. Financial markets are a long term discounting mechanism. They do not necessarily reflect today, but they anticipate what the world will look like over the medium to long run. Therefore markets are pricing in a full economic recovery to COVID, and possibly an increased level of investment and productive in “the new normal.” This optimism, coupled with a signal that the worst case never materialized in the employment figures, propelled U.S. equities to erase their COVID losses. The Dow Jones is now -4% on the year, the S&P is flat, and the Nasdaq is +10%.
Full steam ahead! The massive rally in global risk is set to continue this week after last Friday’s employment data for May was a huge surprise as the job market created over 2.5 million jobs. The overall USD weakness due to the rally in risk appetite, has been the leading driver of the ILS strength. We are quickly approaching the next level of major support in USD/ILS at 3.4000. The Euro continues to strengthen as the newest stimulus package of 600 billion euro exceeded the markets expectations. The GBP grinds higher on the back of overall USD weakness. The main event in the UK is the June 30th deadline on BREXIT, and whether there will be another extension, or an agreement will be made.
Behavioral Biases to Avoid
There is a term known as “behavior gap” that specifically applies to investing behavior. In short, it is the difference between what an investment returns and how much of that return the investor actually keeps. The most common behavioral biases that can lead to less optimal decisions are listed below.
- Loss Aversion – we are motivated more by losses than gains
- Endowment Bias – we assign greater value to investments we already own
- Anchoring – we attach ourselves to a certain view and seek confirming information
- Overconfidence – we are overly optimistic regarding our information and/or our ability to process it
- Gambler’s Fallacy – we believe that future probabilities are affected by past events
Over the next few weeks, I will review each bias in more detail along with what to do to mitigate their effects.
Last Week's Economic Data June 8th
|Last Week's Economic Data||Actual||Survey|
|Durable Goods Orders||-17.7%||-17.2%|
|Initial Jobless Claims||1877k||1812k|
|Change in Nonfarm Payrolls||2509k||-7500k|
|This Week's Economic Data||Release Date||Survey|
|Wholesale Inventories MoM||6/09/20||0.4%|
|FOMC Rate Decision (Upper Bound)||6/10/20||0.25%|
|PPI Final Demand MoM||6/11/20||0.1%|
|Initial Jobless Claims||6/11/20||1550k|
This Week's Economic Data June 8th
|Interest Rates||Current||WoW||MoM||YoY||US Swap Spreads||Current||WoW||MoM||YoY|
|1 Month Libor||0.19%||+0.9 bp||(1.0 bp)||(222.4 bp)||12-Month||+14 bp||+0.6 bp||(5.1 bp)||(5.4 bp)|
|3 Month Libor||0.31%||(1.6 bp)||(12.0 bp)||(213.6 bp)||2-Year||+8 bp||(0.5 bp)||(2.3 bp)||(4.3 bp)|
|6 Month Libor||0.46%||(2.2 bp)||(22.8 bp)||(191.1 bp)||3-Year||+5 bp||(0.1 bp)||+0.6 bp||(4.9 bp)|
|12 Month Libor||0.63%||+0.7 bp||(15.0 bp)||(171.3 bp)||5-Year||+5 bp||(0.1 bp)||+2.0 bp||(4.2 bp)|
|Fed Funds Effective||0.07%||+2.0 bp||+2.0 bp||(231.0 bp)||7-Year||(2 bp)||(0.8 bp)||+1.2 bp||(6.7 bp)|
|SOFR||0.07%||+0.0 bp||+1.0 bp||(232.0 bp)||10-Year||(2 bp)||+8.3 bp||+9.4 bp||+31.8 bp|
|US Treasury Yields||Current||WoW||MoM||YoY||30-Year||(48 bp)||+5.0 bp||+13.8 bp||+37.7 bp|
|12-Month||0.18%||+2.5 bp||+5.3 bp||(178.9 bp)||Equity Markets||Current||WoW||MoM||YoY|
|2-Year||0.22%||+5.8 bp||+6.4 bp||(162.9 bp)||Dow Jones||27,572||+1.7%||+13.3%||+6.1%|
|3-Year||0.28%||+7.1 bp||+6.1 bp||(154.1 bp)||S&P 500||3,232||+1.2%||+10.3%||+12.5%|
|5-Year||0.43%||+10.9 bp||+9.3 bp||(142.7 bp)||NASDAQ||9,925||+1.1%||+8.8%||+28.2%|
|7-Year||0.66%||+13.8 bp||+12.4 bp||(131.2 bp)||Currencies||Current||WoW||MoM||YoY|
|10-Year||0.83%||+5.8 bp||+6.4 bp||(162.9 bp)||Euro||1.1290||+1.1%||+4.5%||(0.2 %)|
|30-Year||1.59%||+5.8 bp||+6.4 bp||(162.9 bp)||Japanese Yen||108.1300||+0.5%||(0.4 %)||+0.3%|
|US Swap Rates vs 3ML||Current||WoW||MoM||YoY||British Pound||1.2672||+1.0%||+2.7%||(0.1 %)|
|12-Month||0.32%||+3.1 bp||+0.2 bp||(184.3 bp)||Canadian Dollar||1.3448||+0.5%||+4.2%||(1.3 %)|
|2-Year||0.30%||+5.3 bp||+4.1 bp||(167.2 bp)||Australian Dollar||0.6941||+0.6%||+7.0%||(0.3 %)|
|3-Year||0.33%||+7.1 bp||+6.7 bp||(158.9 bp)||Swiss Franc||0.9543||+0.8%||+2.0%||+3.7%|
|5-Year||0.47%||+10.8 bp||+11.3 bp||(146.8 bp)||Israeli Shekel||3.4519||+0.8%||+1.6%||+3.7%|
|7-Year||0.63%||+13.0 bp||+13.6 bp||(137.9 bp)||Bitcoin||9,725||+2.1%||+12.6%||+22.4%|
|10-Year||0.82%||+14.1 bp||+15.8 bp||(131.2 bp)||Commodities||Current||WoW||MoM||YoY|
|30-Year||1.11%||+10.8 bp||+20.2 bp||(125.2 bp)||Gold||1,712||(0.9 %)||+0.5%||+27.7%|
|Crude Oil||38||+3.0%||+53.2%||(29.8 %)|