Covid-19's effect on the US labour market will be staggering
The recent rally in equity markets is short-term with more losses expected when the global economic fallout becomes clearer, says Gaurav Kashyap
Financial markets have traded higher this week on the back of interim boosts to risk sentiment. US equity markets have also been building on gains after bouncing off multi-year lows last week.
Gold also traded higher, testing as high as $1,644. The only weaker market of those I track has been the Dollar Index. The one key measure of risk moods these days, the Dollar Index was down 4.63 per cent at the end last week.
At the height of the Great Depression, unemployment peaked at 25 per cent. If we had 25 per unemployment today, that would mean around 40 million Americans would be out of work.
The reversal in riskier assets is curious; the number of confirmed coronavirus cases globally has eclipsed 787,000, according to Johns Hopkins University, with a mortality rate of 4.8 per cent at the time of writing. It is encouraging that the original centres of Italy and China are showing waning infection numbers, however, the growth of cases in the US and other pockets of the world has the virus now multiplying at its fastest rate.
The recent rally in risk markets is down to a short squeeze. As markets have been so strongly sold, or shorted, since February, the covering of these built-up short positions is seeing upward market moves. This particularly picked up this week as we cross into April and funds rush to rebalance their portfolios before the books close on the first quarter.
These factors are short-term, so expect financial markets to move a leg lower. With the virus really picking up momentum over the past month, the effects on some of the more mature economies have not been fully felt yet. The fallout from job losses as a result of city lockdowns has not been fully priced in and this will see another move lower as the economic docket starts releasing figures in April and May.
Perhaps the first eye-opening US economic data point amid Covid-19 was last week’s weekly jobless claims. This report, released every Thursday at 8:30am EST, is a US labour report which measures the number of new jobless claim benefits filed by individuals. It’s a really important and timely market indicator followed by analysts like me, particularly now as more cities go into lockdown. Last week's figure came in at 3.28 million Americans. This hammered the previous record of 695,000 jobs lost in a week back in 1982. To put this number in perspective, 665,000 unemployment benefits were claimed in the worst week during the 2008 financial crisis.
The effect the virus could have on the labour market is staggering. At the height of the Great Depression, unemployment peaked at 25 per cent. If we had 25 per cent unemployment today, that would mean around 40 million Americans would be out of work; the current US labour force consists of 165 million people. If you take this 3.28 million figure from last week, it would take around three months to hit that 25 per cent unemployment rate seen in the 1930s. The US unemployment rate currently sits below 4 per cent. However, this figure could go even higher.
While the ferocity of the pace of claims will fall over time, consider this: the US service sector, which will be the most impacted, comprises around 70 per cent of the total US workforce, or around 115 million Americans. The hospitality sector which employs roughly 20 million will also be affected and this is without accounting for the aviation, education and retail sectors. A Monday report from CNBC showed that economists from the Federal Reserve Bank of St. Louis projected job losses of around 47 million which would take their projected unemployment rate to 32.1 per cent.
This Thursday's weekly jobless claims report will be critical and Friday’s US nonfarm payrolls report, which will document the March employment rate, will be another key indicator. While we had a muted market reaction after last week’s weekly jobless claims, as markets probably anticipated the big losses, this Friday’s payrolls report will have more of an impact on markets so expect volatility to pick up.
Amid all the uncertainty, avoid building large positional trades in this time. Wait for more clarity about a vaccine or new antibody first. The US dollar should strengthen over the weeks, with the Dollar Index moving above 100 in the short term. I am a big fan of long gold positions amid the uncertainty, so expect the precious metal to make another run towards $1,703 levels with strong support kicking in the channel between $1,580 and $1,600.
On a positive note, Abbott Laboratories recently said it has Food and Drug Administration approval for a Covid-19 test they have developed. A quick and easy to administer testing kit hitting shelves in a matter of weeks is a welcome development. Abbott Laboratories moved as high as $82.86, gaining 11 per cent on the announcement. Johnson & Johnson also offered some hope for investors when it said it will begin clinical trials of its coronavirus vaccine by September with a goal of delivering the first batches for emergency use by early 2021. The stock surged as much as 9 per cent in trading on Monday following the news.
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: March 31, 2020 03:14 PM