As equity markets push to go higher, US jobs data suggests the worst is yet to come
Job losses will have a profound effect on retail sales, consumer spending and GDP, says Gaurav Kashyap
Riskier assets received a nice bump in trading last week, with a number of sectors largely green across the board. US stocks were particularly strong gainers, with the near month US30 Futures contract rallying 4.26 per cent on the week, the Nasdaq tech index rallying 7.05 per cent while the S&P500 near month future contract closed 5.11 per cent higher.
Oil closed higher for the second week in a row, with the June contract up 28.97 per cent on the week. In the currency markets, the euro and British pound slid lower against the greenback – down 1.18 per cent and 0.58 per cent respectively. Meanwhile, the overall US Dollar Index, a measure of the value of the US dollar against a basket of weighted major currencies, closed 1.17 per cent higher and spot gold was little changed.
Equity markets and commodities are clearly continuing to push higher on the idea that the worst of the coronavirus is behind us, but Friday's US non-farm payrolls report suggests otherwise. Throughout the crisis, the US jobs scenario has been a key focus for market analysts. The effects of the drag from the pile-up in job losses will no doubt have a profound effect on metrics such as retail sales, consumer spending and, ultimately, overall gross domestic product.
The weekly jobless claims report, which measures the number of unemployment benefit claims, now attracts a lot more attention as it indicates that more than 30 million Americans are out of work. While first-time filings for unemployment claims hit 3.17 million in the first week of the month, the total over the seven weeks leading up to that week hit 33.5 million. So, perhaps last week's non-farm payrolls report did not catch markets off guard and instead the reaction had already been priced in. Often considered the godfather of the US economic calendar, the payrolls report confirmed that 20.5 million Americans were out of work with the overall unemployment rate coming in at 14.7 per cent. The latest report was of particular interest as it encapsulated the full extent of the lockdown measures. The difference between these numbers and the jobless claims figures indicate that the data might have been skewed by reporting and classification issues and the overall US employment scenario is much worse.
To put things into perspective, on March 31 I wrote that to achieve record Great Depression unemployment levels the US economy would take around three months to hit 25 per cent unemployment. One month of full jobs data and we are halfway there. These data points will continue to worsen through the weeks and the recent rally could stall as we move towards the early part of June.
Another theme to re-emerge is the US-China geopolitical tensions. This was a key issue going into the end of last year, which culminated with a very welcome development when the US and China agreed to a “phase-one” deal. The pact saw the US roll back some of its existing tariffs and China agree to buying more US goods and services. However, tension appears to be bubbling up again. An escalation of finger pointing on the handling of the virus outbreak could escalate to potential future tariffs, which would severely hit global risk appetite.
This week, keep an eye on Wednesday’s UK GDP release, with the year-on-year figure expected to contract to -2.1 per cent from a previous 1.1 per cent. Quarterly the UK economy contracted by 2.5 per cent from a previous 0.0 per cent. Weekly US crude inventories, released the same day, will shed more light on the demand/supply scenario. Friday's US retail sales data, meanwhile, is expected to drop 8.6 per cent on the month.
Finally, long positions on gold, which we set a target of between $1,735 and $1,750 have not yet filled, topping out at $1,722. We will continue to hold these with $1,735 as our near-term target. While gold has been rather range bound, the safety of this asset makes it my favourite going forward.
Gaurav Kashyap is a market strategist at Equiti Global Markets. The views and opinions expressed in this article are those of the author and do not reflect the views of Equiti
Updated: May 12, 2020 05:27 PM