Time's Up

By Matthew Klein |  Friday, July 24

PUC, RIP. Tens of millions of jobless Americans are about to receive their final “Pandemic Unemployment Compensation” payments this weekend. That’s the $600-a-week supplement to normal jobless benefits included in the Cares Act. Those payments were worth about 4% of America’s pre-virus gross domestic product and helped power the remarkable V-shaped recovery in retail spending. Congress hasn’t come up with a plan to extend, modify, or replace the PUC payments, which means a crucial source of income support is being withdrawn even as the economy starts to roll over thanks to a worsening viral outbreak.

The imminent expiration of enhanced unemployment benefits has been on investors’ radar for a while, which may explain why there wasn’t much reaction today. Nevertheless, stocks dropped across the U.S., with particularly notable declines both among the tech-heavy Nasdaq Composite (down 0.9%) and the small-cap Russell 2000 (down 1.5%).

Overall, the S&P 500 was down 0.6%, with 385 components and 10 out of 11 sectors down for the day. The biggest market movements were in the chip sector, with Advanced Micro Devices soaring more than 16% and rival Intel falling 16% in response to news of manufacturing delays.

Gold, meanwhile, continued to break records as real interest rates on TIPS hit new all-time lows. Owning metal bars that pay no interest looks pretty attractive when the inflation-adjusted yields on fixed income are negative. In a related development, the dollar has reversed its coronavirus gains and is now at its lowest level against the euro in almost two years.

While Congress dithers, data imply that the economy was already deteriorating thanks to the ongoing resurgence of the virus. The weekly Household Pulse Survey, which the Census Bureau started producing at the end of April, implies that employment has dropped sharply over the past few weeks. The Federal Reserve Bank of New York’s Weekly Economic Index fell for the first time since the end of April.

As if all this weren’t enough, tensions between the U.S. and China are continuing to get worse. After the U.S. ordered China to close its consulate in Houston in retaliation for espionage, the Chinese government responded on Friday by announcing that the U.S. had to close its consulate in Chengdu. (Among other things, the Chengdu consulate is the one closest to Tibet and Xinjiang.) Chinese investors weren’t pleased, with the Shanghai Composite down almost 4% on Friday.