COVID-19 Resurgence Crimps Spending, Travel Recovery​​​​​​

A COVID-19 resurgence this summer has caused consumers to turn cautious, while investors trim their investments in a travel sector still struggling to recover, the Associated Press reported. Retail sales dipped a surprising 1.1% in July as consumers spent less on clothing, furniture and sporting goods. At the same time, investors have been retreating from cruise lines, airlines and other travel-related stocks as those companies face another potential stall in activity as cases of COVID-19 are surging because of the highly contagious delta variant. Some of the pullback in consumer spending on goods was expected as people increased spending on services. The services sector, including restaurants, started to bounce back with growth accelerating to a record pace in July, according to The Institute for Supply Management. Several airlines have warned that the virus surge could ground their recoveries. Southwest Airlines no longer expects to be profitable in the third quarter, after recovering enough to post a profit during the second quarter. Spirit Airlines has said that a service meltdown that started in late July and a rise in COVID-19 cases are causing more last-minute cancellations and softer bookings. Major retailers have not yet signaled concerns over the resurgent virus keeping shoppers at home; both Walmart and Target have given investors an upbeat forecast for the remainder of the year. Investors are signaling more caution, however. The S&P 500’s consumer discretionary sector, which includes clothing companies and other retailers that rely on discretionary spending and in-person services, is down nearly 1.5% in August after gaining only 0.5% in July. The sector rose just under 3.8% in June.​​

Jobless Claims Rise Slightly with Benefits Cliff Looming​​​​​​

New applications for jobless benefits rose slightly last week on a seasonally adjusted basis, but declined without seasonal adjustment, according to data released today by the Labor Department, The Hill reported. In the week ending Aug. 21, initial claims for unemployment insurance totaled 353,000 after seasonal adjustments, rising 5,000 from the previous week’s revised total of 348,000. The four-week moving average of claims, however, declined by 11,500 to 366,500, the lowest level since March 14, 2020. Without adjusting for the 15,864-claim decline the Labor Department attributed to seasonal factors, claims totaled 297,765 last week, falling by 11,699. Even so, claims for Pandemic Unemployment Assistance (PUA) rose for the second consecutive week, increasing by 9,628 to 117,709. Claims for PUA, a temporary program created for the pandemic, are not seasonally adjusted. Roughly 12 million people were on some form of jobless aid as of Aug. 7, but that number is set to drop dramatically when pandemic unemployment programs expire on Labor Day. More than 7.5 million jobless workers are set to lose their benefits upon the expiration of PUA and additional weeks of unemployment insurance on Sept. 6. Millions more will lose a substantial portion of their unemployment support when the $300 weekly boost to benefits also expires after Labor Day.​​

SPACs Are Having Their Day — in Court​​​​​​

Blank-check companies are booming again—in the courts. Two law professors are aiming at high-profile targets, filing suits that question the legality of a specific type of special-purpose acquisition company (SPAC), the Wall Street Journal reported. Among them are billionaire William Ackman’s $4 billion Pershing Square Tontine Holdings Ltd.; Go Acquisition Corp., co-founded by veteran entrepreneur Noam Gottesman; and E.Merge Technology Acquisition Corp. Another line of legal attack is more typical, focusing on SPACs whose shares suffer big falls. These are targeting once-hot companies like electric truck maker Nikola Corp., whose class-action suits claim defrauded investors. So far this year, there have been 19 of these more typical class-action lawsuits concerning SPACs filed in federal court. Five were filed in all of 2020, according to insurance brokerage Woodruff Sawyer & Co. In 2019, before the SPAC boom lit up the markets, there were two suits. SPACs were a more popular target for federal class-action lawsuits in the first half of this year than other hot-button litigation areas, such as COVID-19 or cryptocurrencies, according to consulting firm Cornerstone Research. This sharp uptick is likely just the beginning, insurance brokers and lawyers say. (Subscription required.)​​

The Pandemic Is Testing the Federal Reserve’s New Policy Plan​​​​​​

When Jerome H. Powell speaks at the Federal Reserve’s biggest annual conference tomorrow, he will do so at a tense economic moment, as prices are rising rapidly while millions of jobs remain missing from the labor market. That combination promises to test the meaning of the quiet revolution the central bank chair ushered in one year ago, the New York Times reported. Powell used his remarks at last year’s conference, known as the Jackson Hole economic symposium and held by the Federal Reserve Bank of Kansas City, to announce that Fed officials would no longer raise interest rates to cool off the economy just because joblessness was falling and inflation was expected to heat up. They first wanted proof that prices were climbing sustainably, and they would welcome gains slightly above their 2 percent goal. He was laying the groundwork for a far more patient Fed approach, acknowledging the grim reality that across advanced economies, interest rates, growth and inflation had spent the 21st century slipping lower in a strength-sapping downward spiral. The goal was to stop the decline. But a year later, that backdrop has shifted, at least superficially. Big government spending in response to the pandemic has pushed consumption and growth higher in the U.S., and inflation has rocketed to levels not seen in more than a decade. The labor market is swiftly healing, though it has yet to fully recover. Now it falls to Powell to explain why full-blast support from the Fed remains necessary. Investors initially expected Powell to use Friday’s remarks at the Jackson Hole conference to lay out the Fed’s plan for “tapering” — or slowing down — a large-scale bond-buying program it has been using to support the economy. Fed officials are debating the timing of such a move, which will mark their first step toward a more normal policy setting. But after minutes from the central bank’s July meeting suggested that the discussion remained far from resolved, and as the Delta variant pushes coronavirus infections higher and threatens the economic outlook, few now anticipate a clear announcement.​​

New Appetite for Mortgage Bonds that Sidestep Fannie and Freddie​​​​​​

Wall Street is diving back into the business of turning home loans into bonds, injecting new competition into a market long dominated by government-backed mortgage giants Fannie Mae and Freddie Mac, the Wall Street Journal reported. The so-called private-label mortgage market — in which financial firms serve the middleman role of creating giant pools of loans and selling them to investors — had more than $42 billion of issuance in the second quarter. That is the most since the pandemic started and almost the most for any quarter since the last financial crisis, according to Inside Mortgage Finance, an industry research firm. This market still made up a mere 4% of all mortgage bonds issued last quarter. Fannie Mae and Freddie Mac, which issue bonds that come with a federal guarantee that investors will get paid, remain the industry’s dominant players. But mortgage investors expect the private market to keep growing as a repository of loans that Fannie and Freddie can’t or won’t purchase, such as those tied to investment properties, super-expensive homes or self-employed borrowers. Recent issuers include Goldman Sachs Group Inc., Morgan Stanley and JPMorgan Chase & Co., as well as a growing array of banks and real estate firms. (Subscription required.)​​

Report: U.S. August Auto Sales Expected to Fall as Supply Constraints Continue​​​​​​

U.S. auto retail sales are expected to fall in August, as the global semiconductor shortage coupled with the fast spreading Delta variant of the coronavirus squeezed inventory at dealerships, consultants J.D. Power and LMC Automotive said, Reuters reported. Retail sales of new vehicles are expected to fall 14.3% to 987,100 in August from a year earlier, they said in a report released today. The chip shortage continues to weigh on manufacturing activity, with automakers cutting production despite strong demand for personal transportation during the COVID-19 crisis. "Global light vehicle demand remains under pressure from the severe inventory constraints caused by the semiconductor shortage as well as disruption from the COVID-19 Delta variant," said Jeff Schuster, president of Americas operations and global vehicle forecasts at LMC. Dealers currently have about 942,000 vehicles in inventory, compared with about 3 million two years ago, according to the report.​​

Companies Find It’s a Good Time to Push Pension Obligations Off Balance Sheets​​​​​​

Finance chiefs are stepping up their efforts to move pension obligations off company balance sheets through annuity purchases and other financial tools, taking advantage of well-funded plans and a respite from the scramble over the past year to deal with the COVID-19 pandemic, the Wall Street Journal reported. For years, sponsors of single-employer pension plans have purchased annuities from an insurer for all or some of their employees with vested benefits, thus shrinking a plan’s assets and liabilities and simultaneously strengthening a company’s balance sheet. Pension plans often fluctuate in size based on market volatility and interest rate changes that can create unexpected difficulties for chief financial officers. Companies spent $8.7 billion on annuitizations in the first half of the year, up nearly 30% from the prior-year period, according to consulting firm Mercer LLC. At the start of the pandemic, many companies paused these transfers as finance chiefs focused on preserving cash, operating remotely and generally addressing Covid. But funding levels at the plans have improved overall in recent months, due in part to the strength of the stock market. Also, a March law allowed some sponsors of single-employer plans to reduce the contributions they will have to make in coming years. The funded level of defined-benefit plans — those that pay out fixed sums to retirees for years — sponsored by S&P 1500 companies rose 14 percentage points to 93% as of July 31, compared with the prior-year period, Mercer data showed. The estimated aggregate deficit of the plans fell 68% to $178 billion from the prior-year period, due in part to a small rise in the high-quality corporate bond yield. (Subscription required.)​​

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