By Howard Schneider
(Reuters) - U.S. states that have driven a record surge in coronavirus cases may now be slipping backward https://graphics.reuters.com/USA-ECONOMY/REOPEN/yxmpjlxewpr in their economic recovery, as cellphone data shows retail visits in a clutch of high case-growth locations falling below the rest of the country.
In Arizona, Texas, Florida, Georgia and South Carolina, which had edged ahead of other states during their drive in May to reopen commerce, retail foot traffic has slipped below levels elsewhere, information from data firm Unacast showed.
The data, which covers the period through July 3, is not representative of retail sales. But it does highlight the dilemma many economists and health experts have raised from the earliest days of the outbreak of novel coronavirus: Inattention to health protocols like wearing of masks and social distancing combined with a rush to reopen businesses could lead to worse outcomes for both public health and the economy.
"A mismanaged health crisis across many states means short-term gains will transform into medium-term sluggishness as social distancing relaxation is reversed and virus fear lingers," Gregory Daco, chief U.S. economist at Oxford Economics, wrote in an analysis on Thursday. "It's now evident that the economy is entering Q3 (third quarter) with much less momentum than previously anticipated."
Oxford's recovery https://graphics.reuters.com/USA-ECONOMY/OXFORDINDEX/xklvyzdwypg index fell for the second time in three weeks on the basis of a surge in COVID-19 cases that is straining hospital capacity in places like Texas as the hot spots of the outbreak rotate from states in the Northeast to those in the South and Southwest that resisted the strictest health measures early on. Several have since begun tightening rules or imposing restrictions they initially rejected.
The result is an economic reopening that appears to be, at best, in limbo, according to an array of high frequency data and broader analyses prepared by economists and the U.S. Federal Reserve.
Goldman Sachs (NYSE:GS) indexes https://graphics.reuters.com/USA-ECONOMY/GSTRACKERS/gjnpwwxnjpw of U.S. industrial and consumer activity both edged higher during the week ended July 4, while a New York Fed index https://graphics.reuters.com/USA-ECONOMY/WEI/bdwvkaebwvm of growth in gross domestic product edged down.
The drop in the New York Fed's index may be notable because it was driven lower by the components related to retail sales and consumer confidence, NatWest Markets analyst John Roberts wrote on Tuesday.
"It doesn’t seem like a great sign that retail sales and confidence fell in a week ending with a big U.S. holiday ... It does seem likely, however, that the spike in cases and increased lockdown measures in some hot-zone states would have negatively impacted confidence and sales, as was the case last week," he said.
Graphic: Retail foot traffic, % change vs. 2019 - https://graphics.reuters.com/USA-ECONOMY/REOPEN/qzjpqegogpx/chart.png
MAGNITUDE AND DURATION
Nationally, cellphone tracking data from both Unacast https://graphics.reuters.com/USA-ECONOMY/UNACAST/jznpnzkwkpl and Safegraph https://graphics.reuters.com/USA-ECONOMY/SAFEGRAPH/bdwvkaexwvm showed retail visits were stalled or falling. Time management firm Homebase https://graphics.reuters.com/USA-ECONOMY/HOMEBASE/ygdpzwdzmvw showed employment among its small business clients hit a plateau, while clients of Kronos https://graphics.reuters.com/USA-ECONOMY/KRONOS/xlbpgobqypq, which manages employee time across a larger swath of industries, showed a drop in shifts.
In each of those cases the outcome was likely influenced by business or shift closures over the July 4 holiday weekend.
Still, another 1.31 million people filed for unemployment https://graphics.reuters.com/USA-ECONOMY/REOPEN/jznvnzkdnvl insurance in the week ended July 4, and 32.9 million people were receiving unemployment checks under all programs in the third week of June.
Fed officials looking across that data and their own models have begun sounding a more pessimistic note. In appearances this week they cited renewed nervousness among business executives, a loss of "energy" among firms and consumers, and concern that a recovery that seemed to start fast in May and June may be facing a sort of crossroads as the United States tries to resolve the tension between the health and economic risks it is facing.
"We are uncertain about two things and that’s always hard. We are uncertain about the magnitude and we are uncertain about duration," of the twin crises, San Francisco Fed President Mary Daly said on Tuesday. "Being in a risk posture that says things can get worse, or can stay this bad for a while, is important I think for all of us."
NEW YORK, July 9 (Reuters) - The Federal Reserve bought $21.685 billion of agency mortgage-backed securities in the week
from Jul. 2 to Jul. 8, compared with $22.705 billion purchased the previous week, the New York Federal Reserve Bank said on Thursday.
In a move to help the housing market begun in October 2011, the U.S. central bank has been using funds from principal payments
on the agency debt and agency mortgage-backed securities, or MBS, it holds to reinvest in agency MBS.
The New York Fed said on its website the Fed sold $3.6 billion in mortgage securities guaranteed by Fannie Mae (OB:FNMA),
Freddie Mac (OB:FMCC) or the Government National Mortgage Association, or Ginnie Mae,
in the latest week. It sold none the prior week.
By Caroline Valetkevitch and David Randall
NEW YORK (Reuters) - U.S. companies are preparing to open their books on a quarter that is set to show the biggest earnings fall since the financial crisis, leaving investors looking for light at the end of the tunnel.
The season unofficially begins on Tuesday with results from some of the biggest U.S. banks. Analysts expect S&P 500 companies overall to report a 44.1% drop in year-over-year earnings for the second quarter, when the coronavirus likely took its biggest toll on companies. Earnings fell 12.8% in the first quarter, according to IBES data from Refinitiv.
The first coronavirus cases in the United States were identified in January and within weeks much of the economy was shut down to slow the spread, throwing millions of Americans into unemployment. Companies across a range of industries have been dealing with the aftermath ever since.
The second quarter is expected to be the low point for earnings this year. It would be the second-biggest quarterly earnings drop in IBES data going back to 1968, trailing only 2008's fourth-quarter fall of 67%, when banks and other major lenders were hit at the height of the subprime mortgage crisis.
For a graphic on Four biggest U.S. quarterly earnings declines:
https://fingfx.thomsonreuters.com/gfx/editorcharts/qzjvqembrvx/eikon.png
"It's widely assumed at this point that earnings for Q2 are going to be pretty much a disaster," said Willie Delwiche, investment strategist at Baird in Milwaukee.
As a result, many on Wall Street are looking past this quarter's earnings results. The S&P 500 is now trading at 22 times forward earnings, well above the 19 times earnings it reached when it hit a record high in February. Overall, the index is up more than 40% from its March 23 closing low on the back of stimulus measures from the Federal Reserve and U.S. government.
Earnings are expected to turn around in 2021, but investors will be looking for signs that the profit trend is improving.
That is especially important as many companies have been pulling guidance, giving analysts and investors little information on the outlook for earnings.
Second-quarter outlooks from S&P 500 companies totaled just 62 as of Wednesday, far below the 171 average number of quarterly pre-announcements going back to 1997, based on Refinitiv data.
Moreover, in recent months, some investors had begun to speculate on whether companies globally may report earnings before interest, taxes, depreciation, amortization - and coronavirus, or "EBITDAC," which would add to the uncertainty surrounding the profit picture.
Worries have been mounting as states reopen and new coronavirus cases increase in parts of the United States, forcing some states to reverse course and shut businesses down again.
Still, another stimulus bill could boost earnings. Negotiations over a new relief bill had been expected to pick up in July.
Nicholas Colas, co-founder of DataTrek Research, said earnings expectations could be too low if Congress passes further economic stimulus this month.
Though not as bad as the second quarter, third- and fourth-quarter earnings still look pretty dire. Analysts see a 24.7% year-over-year decline in earnings for the third quarter and a 13.1% fall in the fourth, while first-quarter 2021 earnings are expected to jump 12.1%, based on Refinitiv's data.
For a graphic on U.S. quarterly profit performance since 1968:
https://fingfx.thomsonreuters.com/gfx/editorcharts/azgvorldjpd/eikon.png
All 11 S&P 500 sectors are slated to see a decline in earnings for the second quarter, with energy, consumer discretionary and industrials among the hardest hit, but utilities and technology showing the smallest declines.
Sandy Villere, a portfolio manager at New Orleans-based Villere Funds, said he is increasingly focused on companies that have the ability to give earnings and revenue projections for the second half of this year or into 2021.
"The ones that truly can't give guidance are ones that we would steer away from," Villere said.
There is a chance investors will find reasons to reward some companies this earnings season, said Sam Stovall, chief investment strategist at CFRA Research in New York, pointing to FedEx (NYSE:FDX), whose shares jumped last week after better-than-expected quarterly profit and revenue.
David Ellison, a portfolio manager at Hennessy Funds, said investors will likely continue to look past poor results as long as parts of the economy remain shuttered.
"A tsunami hit and there's going to be a couple of quarters for them to figure it out," he said.
SAN FRANCISCO (Reuters) - The San Francisco Federal Reserve Bank, which last year hosted the U.S. central bank's first conference on the economics of climate change, said Thursday it will next week launch a series of biweekly research seminars on the topic.
The announcement suggests the potential implications of climate change for monetary, supervisory and trade policy are of concern for the Fed even as it put much of its research power in recent months into understanding and battling the coronavirus pandemic. The U.S. central bank has lagged its global peers in attention to the impact of climate change on the economy and in crafting responses.
WASHINGTON (Reuters) - The Trump administration could allow families to use federal education funding elsewhere if the local public school does not open during the coronavirus pandemic, the U.S. education secretary said on Thursday as the Trump administration seeks to pressure states and cities to fully resume in-person classes.
"If schools aren't going to reopen, we're not suggesting pulling funding from education but instead allowing families ... (to) take that money and figure out where their kids can get educated if their schools are going to refuse to open," Betsy DeVos told Fox News in an interview.
DeVos, a proponent of private and religious education who has long pushed "school choice," gave no details on the administration's plan.
U.S. schools are scrambling to prepare for the upcoming academic year as the pandemic surges nationwide, topping 3 million confirmed cases. President Donald Trump has called on schools to reopen, but there is no federal plan to coordinate the effort.
Local administrators must weigh the needs of children and families and also teachers and staff. In addition to health concerns, the economic consequences are vast. Many working parents rely on schools for child care as well as education.
Trump, who has made the economy a top issue ahead of the Nov. 3 presidential election, on Wednesday threatened to cut school funding and blasted his own administration's guidelines for schools to reopen as "impractical" and "expensive."
Later, Vice President Mike Pence said the U.S. Centers for Disease Control and Prevention (CDC) would clarify the guidance next week.
On Thursday, CDC Director Dr. Robert Redfield, asked whether the agency was taking political direction to change its advice after Trump criticism, told ABC News the agency was not revising its guidelines but would "provide additional information."
It was unclear how the administration planned to redirect federal education dollars. The U.S. Congress would have to approve any change in appropriations, which would likely face resistance by Democrats who control the House of Representatives.
House Speaker Nancy Pelosi said everyone wants to open schools "but it must be safe for the children."
Most public schools are run and funded by local governments, with supplemental funding from the federal government. State and city budgets are hemorrhaging due to the economic slowdown during the pandemic.
On Wednesday, Pence told reporters the administration would work with Congress, which is weighing another coronavirus aid package, to give states incentive "to get kids back to school."
White House spokeswoman Kayleigh McEnany said Trump wanted to tie federal funds directly to students, and not their school district if it closes.
While the highly contagious and potentially fatal disease appears to be less harmful to most younger people, its full impact on youth or their ability to transmit it remains unclear.
School administrators are weighing a variety of measures, including adjusting the school calendar and utilizing online classes, to help keep the virus in check.
But DeVos argued schools can safely re-open now, something echoed by some of Trump's fellow Republicans in Congress.
"If we can work to reopen bars, restaurants, and casinos, we can work together to responsibly open our schools and day cares," House Republican leader Kevin McCarthy said.
But health experts have said the restart of such economic activity has driven a wave of new cases, particularly in Texas, Florida and Arizona.
Maryland Governor Larry Hogan, a Republican and head of the National Governors Association, said Trump's funding threat was "unfortunate" but that he did not expect schools to lose money.
His state, he told MSNBC, would base its decision on input from scientists, teachers and parents. "We're not going to be bullied or threatened by the president."
NEW DELHI (Reuters) - The United States is in talks with India on market access for its goods in exchange for reinstating New Delhi's trade concessions under the Generalised System Of Preferences (GSP), U.S. ambassador to India Kenneth Juster said on Thursday.
"The GSP by law requires that there be some market opening measures in recipience of that preferential system, and that's what we have been trying to reach an agreement on with the government of India," Juster said at India Global Week 2020, an online business summit.
Last year, Washington scrapped India's trade concessions under the GSP programme that allowed duty-free entry to the U.S. market for up to $5.6 billion of Indian exports in retaliation for New Delhi's high tariffs and rules on e-commerce.
Juster also said India and the United States needed to move to a free trade pact.
(Bloomberg) -- Mortgage rates in the U.S. hit a record low for the sixth time since the coronavirus outbreak began roiling financial markets.
The average for a 30-year fixed loan was 3.03%, the lowest in almost 50 years of data-keeping by Freddie Mac (OTC:FMCC). The previous record was 3.07%, which held for a week. Rates have plunged as the Federal Reserve holds its benchmark rate near zero and buys mortgage bonds as part of its plan to stimulate the economy.
Analysts have argued that rates could dip below 3% this year.
Low borrowing costs have fueled demand for homes, even with the pandemic battering the economy. Americans stuck at home have been looking to trade up for more space, while a shortage of available inventory has helped prop up prices.
Social-distancing measures kept some buyers and sellers on the sidelines in recent months, but the market is bouncing back, according to Lawrence Yun, chief economist at the National Association of Realtors.
“The residential market has seen a swift rebound of activity as numerous states have begun to ease mandatory stay-at-home orders,” Yun said in a statement.
©2020 Bloomberg L.P.
(Bloomberg) -- U.S. consumer confidence cooled for the first time in seven weeks, raising the prospects of a tempering in the economic recovery as a pickup in Covid-19 infections prompts several states to dial back reopenings.
The Bloomberg Consumer Comfort Index slipped 0.4 point to 42.9 in the week ended July 5, according to data out Thursday. A measure of attitudes about the buying climate and a gauge of sentiment among respondents in the South, where outbreaks have been prominent, both dropped to three-week lows.
The pause in the overall gauge’s upward momentum since a six-year low in mid-May highlights the link between Americans’ concerns about the pandemic and the outlook for consumer spending. With some states freezing or rolling back their economic reopenings, the health concerns and uncertainty threaten to slow the recovery speed for an economy that entered a recession in February.
The CCI is 24.4 points below its two-decade high in late January and 8.2 points higher than the May low.
The gauge of personal finances also dropped last week as consumers remained cautious about their incomes. At the same time, an index of sentiment about the national economy advanced to an almost three-month high in the wake of consecutive monthly record increases in payrolls.
Further declines in consumer sentiment could add to concerns that the recent bounceback in the economy is beginning to level off. Some workers who were rehired have already been fired again amid a pause in reopenings. Concerns about the opening of schools in the fall also add to trepidation about recovery.
The comfort figures also showed the gender gap in confidence narrowed to its smallest point since March 2017 as confidence among women strengthened.
©2020 Bloomberg L.P.
By Imani Moise
(Reuters) - Wells Fargo & Co (N:WFC) will donate over $400 million toward helping small businesses recover from the coronavirus pandemic, giving away all proceeds from its participation in the Payroll Protection Program.
At least $28 million is earmarked for non-profit community lenders catering to Black entrepreneurs, the bank said.
"The hardest hit business in this are minority owned," president of consumer banking Mary Mack said in an interview.
"If we look at the communities we serve and the intent and spirit of the program, we believe it was to lean in to help those businesses that were perhaps the most fragile."
More than half of all small business owners do not expect to grow revenue over the next 12 months, a Wells Fargo survey found. The pandemic has shuttered Black owned-businesses at twice the rate of small businesses overall.
Other major lenders, including Citigroup Inc (N:C), have made similar pledges not to profit from the government stimulus program meant to help small businesses hard hit by mandatory COVID-19 related shutdowns. But those banks have said they will use some of the fees generated to cover costs associated with quickly rolling out the hulking infrastructure needed to run the program.
As of June, Wells Fargo funded $10.1 billion in PPP loans and focused its participation on smaller business owners, the bank said. Out of 179,000 loans Wells Fargo processed, 84% went to companies with fewer than 10 employees and 60% were under $25,000.
Its average loan size was $56,000, the bank said. That compares with an average loan size of $123,00 at JPMorgan Chase & Co (N:JPM).
Chase and Bank of America Corp (N:BAC) provided 4,258 and 3,345 loans of $1 million or more, compared with Wells Fargo’s 929, according to a Reuters analysis of program data released on Monday.
By Arno Schuetze, Sabine Wollrab and Patricia Uhlig
FRANKFURT (Reuters) - On the night of June 18, Wirecard AG’s new compliance chief stayed up late at his office in the company’s low-rise headquarters in the Munich suburb of Aschheim to pore over the payment firm’s books.
It was James Freis’ first formal day on the job after his start date had suddenly been accelerated by the refusal that morning of Wirecard’s auditors to sign off on the 2019 accounts and the company’s suspension of its chief operating officer. As Freis, a former financial investigator at the U.S. Treasury, scanned the books he was struck by Wirecard’s unusual practice of relying on a third party to hold large sums of money in escrow on behalf of its subsidiaries that are present in countries where it doesn't have its own operating licenses, according to a person with knowledge of the matter.
The evidence that fraud had probably been committed was obvious to anyone with financial market experience, this person said. The next day, Wirecard’s long-time chief executive officer resigned and Freis became interim CEO.
Over the following week, the 49-year old American was involved in a rapid wave of decisions that culminated in Wirecard filing for insolvency, according to people involved in talks on restructuring its debts. In the end, the process left creditors with scant hope of recovering $4 billion they are owed and investors holding shares that were nearly worthless.
Prosecutors are now investigating Wirecard’s other senior managers on suspicion of fraud, breach of trust, false accounting and market manipulation. They have arrested former CEO Markus Braun, have a warrant out for the former chief operating officer and have widened the field of suspects to include all management board members except Freis. No charges have been filed.
Wirecard and its supervisory board chairman declined to comment on events in the week leading up to the company’s insolvency filing and the accounting issues. The company has acknowledged that the funds likely didn’t exist but hasn’t publicly identified who it believes to be responsible. It has said the decision to file for insolvency was because Wirecard was over-indebted and not in a position to meet its financial commitments.
Braun, who has been released on bail, has denied wrongdoing. A lawyer for the former CEO did not respond to a request for comment but has previously declined to comment.
The former chief operating officer, Jan Marsalek, remains at large and his whereabouts are unknown. His lawyer declined to comment. The company fired Marsalek on June 22.
Freis moved to Frankfurt from Washington six years ago to become head of compliance at Deutsche Boerse (DE:DB1Gn), which runs the Frankfurt Stock Exchange.
Wirecard announced Freis’ appointment as Chief Compliance Officer on May 8, ten days after forensic accountants at KPMG had publicly raised red flags about Wirecard’s accounting for the three prior years saying they had been unable to verify the existence either of revenue from the third-party partners or the balances held in escrow.
Freis was in the Bavarian capital ahead of his official July 1 start date to house hunt, when Wirecard issued a surprise statement. On June 18, the company announced that its long-time audit firm EY, previously known as Ernst & Young, could not confirm the existence of 1.9 billion euros ($2.1 billion) supposedly held in trust at two Asian banks - a quarter of its balance sheet.
That evening, Wirecard suspended Marsalek, the COO, and announced Freis would assume his new post with immediate effect.
Freis appeared in a video statement posted by Braun on Wirecard’s website late that night. In the video, Braun introduced the new compliance chief, who nodded awkwardly in acknowledgment. Braun also said in the video that Wirecard may have been the victim of a fraud "of substantial dimensions," without specifying who may have been responsible.
It was that night that Freis spent looking through the company’s books. The next morning, Freis reported his initial findings to the supervisory board, according to the person with knowledge of the matter. Within hours, Braun had resigned.
Freis also personally wrote a corporate statement that disclosed the findings, the person with knowledge of the matter said. The statement, released by the company in the pre-dawn hours of the morning of Monday June 22, said the management board assessed the "prevailing likelihood" that the 1.9 billion euros held in trustee accounts "do not exist.”
EY, which had audited Wirecard for more than a decade, has said it uncovered a sophisticated fraud and reported its findings immediately to the supervisory board. The audit firm declined further comment.
Freis was also under pressure from Wirecard’s lenders. EY's refusal to sign off on the accounts meant that creditors would be able to call in some 2 billion euros in loans. Freis worked over the weekend with Wirecard’s freshly appointed restructuring advisers to get a dialogue going with creditors, according to sources with knowledge of the matter.
Some 15 banks agreed on the Monday to roll over their credit line to Wirecard. But, by Wednesday, it had become clear that a move by Germany's financial regulator, BaFin, to ring-fence Wirecard's banking subsidiary from the rest of the group would tie Freis' hands.
The problem Freis faced, according to a person involved in the talks between Wirecard and its lenders, was that he would be unable to pay the company’s bills if the regulator blocked access to the necessary account at Wirecard Bank.
Freis saw that, even if the loans were rolled over, Wirecard would probably to have to file for insolvency in three to six months, the person involved in the talks said. But by postponing the inevitable, he risked criminal liability, this person added. Delaying insolvency is a criminal offence in Germany. The next day, June 25, Wirecard announced it would file for insolvency.
Freis continues to oversee day-to-day operations at the company while the administrator sells of the remnants of Wirecard.
By Manas Mishra
(Reuters) - A new $1 billion fund backed by 20 drugmakers including Merck & Co Inc (N:MRK) and Pfizer Inc (N:PFE) is aiming to bolster struggling antibiotic companies and sustain a pipeline for new treatments, an industry group said on Thursday.
Antibiotic makers have struggled with anemic investment and bankruptcies, even after the approval of new drugs, as fears of drug-resistant microbes force hospitals to adopt a more conservative approach toward such treatments.
Public health authorities have raised alarms about a looming health crisis, saying deaths from antibiotic-resistant bacteria could dwarf that from the coronavirus pandemic.
The new fund, led by the International Federation of Pharmaceutical Manufacturers & Associations, has raised nearly $1 billion so far and aims to help shore up investment in smaller biotech companies after several large drugmakers, such as Sanofi SA (PA:SASY) bowed out of the space.
The initiative "gives these biotechs access to the kinds of capabilities that large pharmaceutical companies have, such as manufacturing and regulatory," said Silas Holland, head of external affairs for the fund and director of global public policy at Merck.
An independent scientific panel will review and recommend funding for companies developing promising novel antibiotics, Holland said. The group's goal is to bring two to four new antibiotics to patients within a decade.
The fund seeks to serve as a temporary solution until new legislation can offer a more permanent fix.
"This is intended to help temporarily sustain this pipeline while policymakers put in place incentives," Holland said.
LONDON (Reuters) - British culture minister Oliver Dowden will hold a news conference, a spokesman for Prime Minister Boris Johnson said on Thursday, when the government is expected to set out the next stages in its easing of the coronavirus lockdown.
Johnson had said the government would outline the next steps in its plan to reopen the economy this week, with new guidelines for nail bars and gyms expected to be set out.