- Analyzing high-frequency data — time-series observations and data taken on finer time intervals — can prove invaluable in uncovering trends and helping to evaluate the economy.
- Looking at an array of high-frequency data today reveals a tug of war at play between rising COVID-19 cases and economic activity.
- Although some high-frequency data appears encouraging, we continue to emphasize capital preservation and liquidity while maintaining a relatively defensive stance in portfolios, given the degree of uncertainty.
This month’s main article examines how high-frequency data can prove to be invaluable in helping to evaluate the economy.
Paula Solanes, Senior Portfolio Manager
As market and economy watchers, we love data. But in a rapidly changing world, it’s important to remember that traditional economic numbers are nothing more than a glimpse through the rear-view mirror. So, while GDP prints and payroll reports are worth scrutinizing, we also like to look at less popular but fascinating high-frequency data.
Simply put, high-frequency data are market and economic observations taken on finer time intervals — often daily. Collecting and analyzing high-frequency data does a better job of illuminating trends at a more granular level, and it may even help portend what’s in store for the economy. Thanks to the latest technological advances, we can measure the effects of COVID-19 on economic activity at a higher frequency.
Right now, looking at a smattering of high-frequency data reveals a tug of war at play between rising COVID-19 cases and economic activity. The resurgence in cases in the US is stalling some of the reopening efforts, with notable slowdowns in some of the high-frequency data that had been accelerating. Conversely, some high-frequency data is showing improvement and normalization in the face of rising COVID-19 cases. This dynamic serves to underscore the complexity of the current situation and the ongoing struggle.
At the time of writing this, the US leads the world in cases with more than 5.0 million and cases per day peaking at almost 80,000. Some states that had done a good job flattening the curve initially are now seeing sharp increases, notably California, Texas and Florida (per chart below). As the pandemic continues on what appears as a relentless path, what does the high-frequency data show?
Mobility is often cited as a good gauge of economic activity. There are various ways to measure mobility, including the Apple Mobility Trends Reports, which track the relative volume of directions per region, assuming a baseline in pre-COVID times back in January 2020. This data show that driving and walking have largely recovered back to pre-pandemic levels, while public transit continues to be well below baseline levels, as shown in the chart below.
Another interesting piece of high-frequency data comes from OpenTable reservations, which shows a willingness/ability of people to eat out. In normal times, strong demand for restaurant dining is a sign of a robust economy, as people use their disposable income on nonessential dining. Recently, however, the challenges and risks of eating out have forced diners to opt for takeout or to simply stay home. Restaurant reservations dropped 100 percent in March, as localities enforced strict shelter-in-place mandates. By late April reservations began to improve, but recently restaurant reservations have plummeted once again, as cases rise nationally and some regions reinstate limits around indoor dining. (See chart below.)
On the retail front, it’s somewhat surprising that retail sales have rebounded so quickly. The Prodco Retail Traffic Index, which provides consumer traffic trends, shows that traffic has picked up from the lows back in March. As shown in the next chart, consumers appear to be open to shopping in person, and stores are learning to adapt to the pandemic by adding clear glass to protect sales staff, requiring customers to wear masks, keeping safe distances and providing hand sanitizer.
Another interesting high-frequency data source comes from TSA Checkpoint changes. This metric plummeted back in March, as travelers minimized any unnecessary travel. However, since May, the TSA Checkpoint indicator has been trending higher, albeit at a slow pace and still far from pre-pandemic levels.
As some of this high-frequency data illustrates, COVID-19 has created a very complicated world, and a return to normalcy is still far away. But it’s not all bad news. In fact, some of the granular high-frequency data is downright encouraging. Nevertheless, as we evaluate the data – both high frequency data and traditional data – we continue to formulate our market outlook and incorporate these dynamics in our fundamental analysis to appropriately navigate investment strategy through these times. We continue to emphasize capital preservation and liquidity, taking a defensive stance as long as uncertainties persist.
Eric Souza, Senior Portfolio Manager
Although we look closely at high-frequency data as part of our ongoing market analysis, we still pay close attention to the good old-fashioned economic releases. Specifically, our focus on three different data sets — employment, consumer spending and GDP — gives us a good picture of how the economy is performing and where it might be headed in a post-pandemic world. It’s not a crystal ball, but the data offer some clues.
On the employment side, there are two main releases: the monthly employment report and weekly jobless claims. The June employment report surprised with nonfarm payrolls growing by 4.8 million vs. expectations of 3.2 million new jobs, while the unemployment rate fell to 11.1 percent from 13.3 percent. This was the biggest one-month drop ever recorded, albeit it from a high level. Overall, the employment report has shown total job gains (yes, gains) of 7.5 million in May and June. Approximately 40 percent of the job gains came from some of the sectors hit hardest by the pandemic, such as hospitality and leisure.
Despite the encouraging employment report, weekly jobless claims paint a different picture and appear to be headed in the wrong direction. Since hitting a record high of 6.86 million in March, weekly jobless claims have seen a steady decline. However, they have remained stubbornly above one million for 19 consecutive weeks since late March, and July ended with two back-to-back increases after falling for the previous 15 consecutive weeks. This likely reflects the uneven reopening in many states where COVID-19 cases have spiked. The good news in the weekly data is that continuing claims have fallen significantly to 17 million from a peak of 24.9 million in May.
In terms of consumer spending, one of the most followed data points is the monthly retail sales report — a measure of consumer purchases at stores, restaurants and online. In June, consumer spending was better than expected across all readings, rising 7.5 percent vs. expectations of a more modest 5.0 percent increase. The control group — which feeds directly into GDP — also rose 5.6 percent vs. expectations of a 4.0 percent gain. The clothing component led the increase, rising 105 percent, while furniture and electronics categories rose by more than 30 percent, month-over-month. In an interesting twist, department stores had a positive reading of 19.8 percent, while e-commerce showed a drop of 2.4 percent. Perhaps consumers were a little stir crazy and decided to get out and shop!
Of course, we always look to see how the numbers manifest into overall economic growth. The much-anticipated first reading of second-quarter GDP actually came in better than expected, even if it was the greatest slowdown in history. Perhaps that’s not surprising, given how the pandemic and shelter-in-place orders put the brakes on virtually all economic activity. The initial GDP reading was an annualized drop of 32.9 percent vs. expectations for a 35 percent decline and an unannualized drop of 9.5 percent.
The lowest reading prior to this was a 10 percent drop in 1958. Personal consumption contributed 25 percentage points of the decline in GDP. However, it’s important to note that not everything was dire in this GDP report. Although outlays for equipment fell 37.7 percent, work-from-home policies led to computer investments rising 67.7 percent, which was the best reading since 1998.
So where do we go from here? Nobody knows for certain, but based on forecasts from economists, the market is pricing in a rebound in GDP starting in the third quarter of 2020. Consensus estimates are for quarter-over-quarter (QoQ) economic growth of 18 percent and for a steady decline in the unemployment rate.
In addition to this traditional economic data, we are also watching COVID-19 cases and news on vaccines and treatments as well as an array of high-frequency data. It all helps us develop a macro view and influence our investment themes and actions. At this point we remain cautiously optimistic. With the ongoing monetary and fiscal policy support, the economy may continue to gain its footing, allowing markets to look forward and discount the recent weak economic data points.
Tim Lee, CFA, Senior Credit Risk & Research Officer
Low interest rates are nothing new to Nordic banks. But are they strong enough to persevere in the current environment?
Financial institutions with operations in Sweden, Norway, Finland and Denmark have had years of experience adapting to negative central bank rates. In Denmark, where negative interest rates have existed longer than in any other country, banks have offset lower interest earnings with fee income, particularly in mortgage lending where refinancing activity has helped support profitability. The prolonged low and negative interest rate environment has propelled Nordic banks to make fundamental shifts to capture more fee-based income that is less sensitive to interest rates. Changes have also included a focus on growth through market expansion and, for some banks, a commitment to de-risking to keep credit losses low.
These strategic moves over the past few years have positioned major Nordic banks to handle a challenging operating environment that’s being exacerbated by the COVID-19 pandemic. While provisions for losses have moved higher this year, in part due to energy-related holdings and weaker macroeconomic forecasts, the provision rate is expected to be below the peak level experienced during the last global recession in 2009. This reflects the fact that some banks have reduced their exposure to more volatile industries, such as shipping, energy and agriculture.
Management at Nordea, for example, expects 2020 provisions to total 41 basis points (bps), while Skandinaviska Enskilda Banken’s (SEB) management is forecasting provision rates to reach around 38 bps. For both banks, those rates are less than what they experienced in 2009, as indicated in the chart below. Major Nordic banks have largely provisioned for most of their expected annual credit losses in the first half of the year, with some banks indicating they expect the loss provision rates to decline into the second half of the year.
Despite the provisions, most major Nordic banks remain comfortably profitable through the first half of the year, which has allowed them to build their capital to strong levels. On average, capital levels are near where they began the year, despite the increase in loss provisions. This is a testament to their experience operating in a low- or negative-rate environment.
In a display of conservatism, most major Nordic banks ignored a loosening of capital requirements by regulators in response to the COVID-19 pandemic by further building on their capital buffers into the end of the June quarter. The index CET1 ratio stood at 17.4% at the end of the second quarter 2020, compared with an average minimum regulatory requirement of 13.3%, which translates into a solid 4.1% buffer.
Looking ahead, little improvement is expected for interest margins, as interest rates and monetary policies look to be in easing mode across much of the Nordic region. Despite a rate hike in December 2019 by Sweden’s Riksbank to 0 percent from -0.25 percent, negative central bank rates are still in effect in Denmark and Finland. However, strong capital levels, adequate loan loss provisions, and respectable asset quality should help Nordic banks stay strong and maintain steady credit profiles.
Jason Graveley, Senior Manager, Fixed Income Trading
Summer sunshine certainly appears to be influencing traders. With continuing unprecedented central bank liquidity, investors are flush with cash and looking for ways to deploy capital in a zero-interest-rate environment. And despite ongoing economic uncertainties and the biggest single-quarter decline in GDP since 1947, investors seem to have no qualms rewarding companies with the healthiest balance sheets and the strongest forward guidance. Credit spreads have tightened for these companies across the curve, with recent market volatility lending particular emphasis to the front end. The relative value of corporate investments has held steady from a spread perspective, but is it really good news, or does it simply reflect the fact that all-in yields of money market funds and Treasury alternatives continue to diminish? Credit spreads have returned to pre-pandemic levels, narrowing to levels not seen since January on higher-rated, short-term indexes.
Money market fund flows have been a large driver in front-end rates. Spreads gapped wider when volatility peaked in March, as investors moved from Prime funds into stable net asset value (NAV) Treasury or government funds. Year-to-date, assets in Treasury and government funds have increased more than $1 trillion, while Prime fund flows have recently retraced their large outflows from the second quarter. And although Prime funds have rebounded strongly from the earlier pressures, the composition of the funds has been refined by their portfolio managers to further emphasize liquidity.
In general, funds have moved from larger allocations of term repurchase agreements and commercial paper to Treasury bills, primarily to take advantage of a shifting issuance market and to build more cushion to meet regulatory liquidity requirements. With commercial paper on the decline and corporations looking to longer-term debt options to shore up their balance sheet, rule 2a-7 corporate investment options have become more difficult to source. Money market complexes were able to turn to a robust Treasury bill issuance market to fill the gaps, particularly as the US Treasury ramped up auction sizes to fund the CARES Act. As this Treasury issuance normalizes through the third quarter and demand for short paper persists, the market is bracing for a move lower and for additional downward pressure in rates across sectors.
With money market fund yields grinding toward the lower bound, we will opportunistically purchase additional spread product when available. We will continue our measured approach to issuer selectivity, while taking a defensive duration stance for our longer benchmark portfolios. Given the continued uncertainty in markets, liquidity and capital preservation remain our top priorities. Thus, the issuers we invest in are well positioned and capitalized to handle any increased economic headwinds, while Treasuries and overnight repurchase agreements provide complementary options to ensure ample liquidity.
|Treasury Rates:||Total Returns:|
|3-Month||0.08%||ML 3-Month Treasury||0.02%|
|6-Month||0.09%||ML 6-Month Treasury||0.04%|
|1-Year||0.11%||ML 12-Month Treasury||0.05%|
Source: Bloomberg, Silicon Valley Bank as of 7/31/20