Daily Update: June 9, 2020

The U.S. economy, surfacing several striking surprises, is at an inflection point. While employment is rising and equity markets are booming, stagnation persists—painting an uncertain picture for a country currently experiencing rising coronavirus cases, a raucous nationwide movement for equality, and an impending presidential election.

The Bureau of Labor Statistics’ May U.S. jobs report revealed an extraordinary rebound in activity as states started reopening, with nonfarm payrolls jumping 2.5 million, regaining one-tenth of the jobs lost in March and April and marking the largest monthly increase in jobs on record, according to S&P Global Ratings.

“We continue to anticipate a much larger increase in employment in June as businesses call back employees when the economy continues to reopen or as they received Paycheck Protection Program loans,” S&P Global Ratings Chief U.S. Economist Beth Ann Bovino said in a June 5 report. The report “doesn't materially change our unemployment rate forecast (from April 16) of 14% in the second quarter, recovering back down to 8% in the fourth quarter. All in all, the May employment report still showed 15 million additional folks unemployed and the unemployment rate up by 9.8 percentage points from February.”

While the BLS report stated that the unemployment rate fell to an unexpected 13.3% from April’s devastating 14.7%, the federal agency reported a miscalculation error that prompted the job growth to likely appear higher than the real rate.

“There is potential for meaningful revisions,” Ms. Bovino said, noting that “the timing of the net gain in nonfarm payroll employment is at odds with the closely followed unemployment insurance claims report; the unemployment rate understated the true unemployment rate by 3 percentage points due to misclassification issues; the household survey response was 15 percentage points lower than in months prior to the pandemic; and the firm survey was also lower, because bankrupt firms were not captured.”

Overall unemployment was marginally worse for black Americans, whose unemployment rate was at 16.8% in May and 16.7% in April.

Leisure, hospitality, construction, education, retail trade, and health services saw the greatest job growth, as employment gains were largely centralized in private industries. Notably, the U.S. healthcare sector added 312,400 jobs in May, recovering from the more than 1.4 million job losses across the sector in April resulting from the pandemic, S&P Global Market Intelligence reported.

After months of volatility spurred by the coronavirus crisis, hopes of a recovering economy and higher employment buoyed already-strengthening U.S. equity markets, with the benchmark S&P 500 climbing 4.91% to 3,193.93 in the week ended June 5.

Continued optimism stoked U.S. equity markets to a shocking bull market high yesterday, when the S&P 500 recovered the entirety of this year’s losses, rallying 1.2% on June 8 to close at 3,232.39. The index, which had tumbled more than 30% in March due to the pandemic, settled 0.1% above its 2019 close, but remains down 4.5% from its February high.

Nonetheless, the U.S. officially plunged into a recession in February, the nation’s first since 2009 and ending the record-setting 128 months of expansion, the National Bureau of Economic Research’s Business Cycle Dating Committee said on June 8. The nonprofit research group, which is operated by the U.S.’s top economists and considered to be the authority on calling the country’s downturns, noted that quarterly economic activity peaked in the fourth quarter of last year.

“The pandemic and the public health response have resulted in a downturn with different characteristics and dynamics than prior recessions. Nonetheless, it concluded that the unprecedented magnitude of the decline in employment and production, and its broad reach across the entire economy, warrants the designation of this episode as a recession, even if it turns out to be briefer than earlier contractions,” the NBER said.

The coronavirus pandemic, despite lifted restrictions and signs of economic recovery, isn’t over. The World Health Organization reported that June 7 saw the highest number of new cases worldwide—totaling 136,000—since start the start of the crisis. “More than 100,000 cases have been reported on nine of the past 10 days,” Dr. Tedros Adhanom Ghebreyesus, the organization’s director general, said during a June 8 news briefing.

The U.S. has almost 2 million confirmed cases, the most worldwide, according to Johns Hopkins University data. Infections are increasing across several states.

“We continue to urge active surveillance to ensure the virus does not rebound, especially as mass gatherings of all kinds are starting to resume in some countries,” Dr. Tedros said. “W.H.O. fully supports equality and the global movement against racism. We reject discrimination of all kinds. We encourage all those protesting around the world to do so safely.”

Today is Tuesday, June 9, 2020, and here is today’s essential intelligence.

Uncertainty in the Global Economy

Economic Research: U.S. Biweekly Economic Roundup: Employment Surprises, Rising Sooner Than Expected

The May Bureau of Labor Statistics (BLS) jobs report was a pleasant surprise. The U.S. economy regained 2.5 million jobs in May as the shelter-in-place restrictions were gradually lifted. This rebound is a little more than a one-tenth of the 22 million job collapse seen in March and April. The labor market recovery started sooner (in May) than S&P Global Economics had anticipated. We expected layoffs to outpace (re-)hiring until the first half of May based on continuing claims, which had risen by 2.8 million between the survey weeks in April and May (the weeks with 12th of the month). Initial unemployment claimants also jumped over 12 million between the survey weeks with reportedly potentially more on the backlogs, also suggesting a disappointing figure. May payroll data defied the co-movements between continuing claims and nonfarm payroll that were apparent in the early months of past recoveries.

—Read the full report from S&P Global Ratings

A Slow Recovery And U.S.-China Trade Tensions Could Test U.S. Investment-Grade Tech Companies

S&P Global Ratings revised three rating outlooks on U.S. investment-grade tech companies since the COVID-19 outbreak, a stark contrast to 43 rating actions on speculative-grade peers. The resilience in investment-grade ratings is due to these companies' strong balance sheet and liquidity, reduced business volatility over time, and the growing demand for their services in the global economy-which has allowed the tech industry to outgrow global GDP. Credit quality could suffer, however, if the recovery in IT spending is slower than we forecast amid lower global GDP growth arising from the lingering effects of COVID-19. U.S.-China trade tensions could alter the semiconductor and hardware landscape for decades to come, with mostly negative consequences for U.S. investment-grade technology companies as China invests in its native semiconductor industry.

—Read the full report from S&P Global Ratings

Supply chain finance grows amid pandemic, but faces stark risk warnings

Worldwide revenues from supply chain finance grew in the first quarter of 2020 despite global trade disruption, and some banks are seeking to expand their market share. But credit rating agencies warn that this financing technique could mask episodes of financial stress. A type of trade finance, supply chain finance has been consistently growing since the global financial crisis of 2008, and revenues derived from it reached between $50 billion and $75 billion in 2019, the International Chamber of Commerce estimated.

—Read the full article from S&P Global Market Intelligence

Higher Turnover Ahead For S&P 500? Not Necessarily!

The emergence of COVID-19 caused sizeable recalibrations in financial markets as investors grappled with the anticipated impacts on people’s lives and on economic activity. Given many companies saw significant drops in market capitalizations amid the recent market sell-off, and in light of expectations for companies’ earnings to suffer from reduced economic activity, some may be wondering if we will soon see elevated S&P 500 turnover.

—Read the full article from S&P Dow Jones Indices

The Future of Credit

Emerging Markets Monthly Highlights: Financial Conditions Reflect Optimism, Lockdown Fatigue Emerges

Activity in emerging market (EM) economies is picking up, as lockdowns are eased gradually, but the recovery is still very slow. High-frequency data confirm a precipitous slowdown in activity in April across EM globally. While April was likely the weakest month in terms of activity, getting back to pre-pandemic levels will take time. A lockdown fatigue is developing across EMs driven by mounting political pressures and economic costs. Some EMs are gradually lifting the lockdowns after taming the pandemic. In some cases, however, lockdowns are eased despite increasing COVID-19 cases, which could undermine a potential recovery. S&P Global Ratings now expects the Indian economy to contract sharply in 2020. The COVID-19 outbreak in India and two months of a strict lockdown—longer in some areas—have led to a sudden stop in the economy.

—Read the full report from S&P Global Ratings

EMEA Structured Finance Surveillance Chart Book

The report includes a round-up of the latest credit developments that S&P Global Ratings has observed across structured finance sectors, along with data on recent rating actions and underlying performance indicators. The report also highlights the key takeaways from S&P Global Ratings’ recent research publications.

—Read the full report from S&P Global Ratings

Top 10 Investor Questions On Our Ratings Process

S&P Global Ratings strives to provide the financial markets with timely, transparent, and forward-looking credit ratings. Through this unprecedented time, S&P Global Ratings continues to engage with borrowers, investors, and other market participants to better understand the credit effects of the coronavirus-related economic shock. Financial markets function best when participants have as much up-to-date information as possible. Through S&P Global Ratings’ surveillance, we continue to update our forward-looking credit ratings to incorporate new information relating to the COVID-19 outbreak. S&P Global Ratings has also been publishing and making freely available our research commenting on the effects of the pandemic on credit to help market participants better understand our thoughts and views. Here, S&P Global Ratings answers the top 10 investor questions we've received regarding the analytical decision-making process.

—Read the full report from S&P Global Ratings

Banking Sector Under Pressure

Banks' capital raises hit highest level since 2009

Banks raised more capital in May than any month since the Great Financial Crisis as depositories sought to shore up their balance sheets. Banks issued $21.37 billion of senior debt, subordinated debt or preferred equity in May, up from $6.13 billion in the year-ago month and the highest level since May 2009 when banks raised $47.47 billion of capital. Senior debt was the most common form of capital raise for banks, followed by preferred equity. Bankers and analysts said the capital raises prepare depositories for the coming economic downturn from COVID-19, but banks could also use the funds for merger activity or organic growth if the recession is milder than anticipated.

—Read the full article from S&P Global Market Intelligence

Auto loans holding strong in uncertain year of forbearance

Banks appear to be taking a cautious approach to the auto loan space while continuing to ink new deals. Total auto loans for the industry clocked in at $486.0 billion in the first quarter, up 6.2% from the year-ago quarter and higher than the 2019 fourth quarter. While banks are still issuing new auto loans, they are favoring customers with higher credit scores. As of May 10, more than 60% of auto loan originations carried a credit score of 700 or higher, compared to less than 50% as of March 1, according to data presented at the May 28 Equifax webinar.

—Read the full article from S&P Global Market Intelligence

Scope Of Policy Responses To COVID-19 Varies Among Latin America's Central Banks

As the COVID-19 outbreak spreads throughout Latin America, expectations of a widespread economic recession in the region have been materializing. In this sense, the regional banking regulators have responded with measures to support financial systems, allowing credit to continue flowing to households and corporations. The financial relief programs are similar to those in other parts of the world, such as credit facilities for financial institutions; loan moratoriums; looser loan classification and provisioning, and capital requirements; and government and special trust guarantees on loans to small- to medium-size enterprises. However, the effectiveness, timeliness, and scope of these measures has varied from country to country. Chile, Peru, and Brazil implemented the more comprehensive set of measures while Mexico has been slower. Colombia and Argentina's responses have fallen in the middle.

—Read the full report from S&P Global Ratings

ESG in the Time of COVID-19

The Energy Transition And What It Means For European Power Prices And Producers: Midyear 2020 Update

Spot prices will remain low. Since the start of 2020, European power prices have been dented by an average 5%-7% drop in demand due to the mildest winter in history, COVID-19 lockdown measures, increased supply from renewables, and a drop in commodity prices. Prices are only likely to partially recover. S&P Global Ratings expects some price increases over 2021-2023, except in the Nordics, as demand rebounds and more coal and nuclear power plants are shut down. However, S&P Global Ratings now expects prices to be about 20% below our previous forecast published in November 2019. The financial impact on our rated European power generators is generally manageable in 2020, thanks to price hedges. The impact will be greater over 2021-2022, as the hedges are lower and the forward prices weaker than we anticipated last year. Renewables will come to play a greater part in power price formation over the next decade. This is on the back of EU leaders signing the European Green Deal in December 2019 and governments' recognition during the COVID-19 pandemic that the energy transition will play a central role in Europe's economic recovery.

—Read the full report from S&P Global Ratings

Q&A: Green Evaluations–Transaction And Framework Alignment Opinions With The GBP And GLP

Here, S&P Global Ratings responds to questions about its "Green Evaluation Analytical Approach" and our opinions on transaction and framework alignment with the Green Bond and Green Loan Principles. On June 5, 2020, we expanded the approach to provide an opinion about green financing frameworks and how they align with the Green Bond Principles 2018 (GBP) and the Green Loan Principles (GLP). Among other questions, we address: The Green Evaluation and how the approach is applied to the GBP and GLP; how we opine on the alignment of transactions with the GBP and GLP; our Green Financing Framework Alignment Opinion, and how we determine an alignment opinion of a green financing framework with the GBP or GLP.

—Read the full report from S&P Global Ratings

In market first, leveraged loan pricing for Logoplaste linked to ESG

A new amendment from packaging firm Logoplaste Consultores Técnicos SA has created the first institutional term loan with interest payments directly linked to environmental, social and governance, or ESG, factors. The Carlyle Group–backed firm has received approval from its full syndicate to tweak the pricing structure on its existing €570 million financing package so that the margin ratchets according to how much CO2 the firm is able to save. For those investors involved in the transaction, this "ESG pricing ratchet" may represent the future of sustainable lending. "As a debt investor, it's always scary to take on something nobody's done before with no track record of how it will go," said one senior lender. "This is a situation where finance and sustainability come intrinsically together, and it's a win-win for everybody."

—Read the full article from S&P Global Market Intelligence

Listen: US shale starts to return, but how sustainable is it?

US oil producers have started announcing plans for putting shut wells back online. But just how sustainable are these plans at current prices and with the uncertain global demand outlook? And how are OPEC and its allies going to view this returning US shale production as they're deciding how long to keep their massive oil supply cuts in place? Shin Kim, head of oil supply and production analytics for S&P Global Platts, predicts how high oil prices can go before OPEC starts to worry about stimulating US shale. Jason Modglin, the new president of the Texas Alliance of Energy Producers, tells us how drillers in the top US oil-producing state are weighing the market uncertainties as they start to put wells back into service.

—Subscribe and listen to Capitol Crude, a podcast from S&P Global Platts

The Future for Energy & Commodities

Economists wonder: Did COVID-19 accelerate timeline for peak oil demand?

Still in the midst of the COVID-19 pandemic, the oil industry is beginning to ponder the long-term consequences of a sudden halt in global economic activity and whether it might bring forward oil's long-term decline. There are signs the oil market is past the worst part of a crisis that erased an estimated one-quarter of global oil demand; sent oil prices to negative levels and oil equities into a tailspin; nearly overwhelmed the industry's storage infrastructure; and drove the industry to slash capital expenditures by tens of billions.

—Read the full article from S&P Global Market Intelligence

BP to slash one seventh of workforce in a major cost-cutting move

BP announced one of the most aggressive wave of job cuts in its history June 8, with plans to slash a seventh of its global workforce, as the oil major looks stem losses from the pandemic-triggered oil price collapse. Europe's second-biggest integrated oil company said it is starting to cut its global workforce by 10,000, from a current global total of 70,000, with most of the affected staff to leave this year.

—Read the full article from S&P Global Platts

ANALYSIS: US gas exports to Mexico rise, propelled by weather, reopening economy

US natural gas exports to Mexico are up sharply this month amid signs of looming demand growth from warming temperatures, a reopening economy and from Fermaca's delayed Wahalajara pipeline system. In June, US pipeline exports to Mexico are averaging 5.2 Bcf/d and are up about 11%, or 500 MMcf/d, from the monthly average in May, S&P Global Platts Analytics data shows. Surging southbound exports come amid a recent uptick in gas demand from Mexico. Month to date, total demand has climbed about 300 MMcf/d to an average 7.9 Bcf/d as more summer-like temperatures arrive, driving additional cooling load from Mexico's power generators.

—Read the full article from S&P Global Platts

FEATURE: Wave of progress for UK, Ireland floating LNG import projects

New projects to develop floating LNG infrastructure in the UK and Ireland have taken significant steps forward in recent weeks, as companies look to secure additional flexibility for the countries' inter-linked gas markets. The UK currently has three operational LNG import terminals, while Ireland has none and, despite some high-profile plans for new facilities such as Shannon LNG in Ireland, appetite for new facilities had been weak given the high amount of existing regasification capacity in Europe. However, LNG utilization rates across Europe have soared over the past year or so due to the major ramp-up in global LNG liquefaction capacity.

—Read the full article from S&P Global Platts

Watch: Market Movers Asia, Jun 8-12: OPEC+ extends output cuts; Asia awaits July OSPs from Mideast producers

The highlights in Asia this week with S&P Global Platts Middle East crude oil editor Eesha Muneeb: OPEC+ extends oil production cut agreement to July; Middle East oil producers are expected to follow Saudi Aramco's OSP hike; and demand slump seen slashing tanker earnings. Also in this week's episode: paraxylene prices hit record lows, US-China friction keeps agriculture sector on tenterhooks, and June metals trading seen to be stronger than usual.

—Share and watch this video from S&P Global Platts

Written and compiled by Molly Mintz.