The great disconnect market reacts with glee to US jobs data
The US economy created a whopping 4.8 million jobs last month, easily beating the 3 million expected, and added to the 2.69 million jobs created in May. This goes some way to clawing back some of the 22 million jobs that have been lost in the US since March, however, with 7.49 million jobs created in the last two months, there is still some way to go before the US is back to full employment territory. The markets surged on this news, US stocks are currently more than 1% higher, while the FTSE 100 is up 1.2% and the Eurostoxx index is some 3% higher. But can this rally last?
US jobs market remains fragile
While we are all in favour of cheering the good economic news when it comes, we believe that the market is too exuberant this time. The NFP report was collated two weeks’ ago, and in that time there has been a massive surge in coronavirus infections across the US. The latest data suggests that more than half of the US has halted or reversed the opening of bars, restaurants and shops on the back of the latest wave of infections. To put this into context, Florida, Arizona, Nevada and Georgia, which represent 13% of the US population do not meet any of the 4 criteria that are recommended by the Federal Government for opening their economies. Some states are trying to get around this, for instance Texas is trying to keep restaurants open with a strict 50% occupancy rate, while Arizona has had to hurriedly shut gyms, cinemas and water parks. This means less economic recovery and more jobs lost; however, these job losses won’t be felt until the July NFP report that will come out in early August.
When the markets don’t reflect the economic reality
Digging deeper into the US Bureau of Labor statistics data, nearly 2.9 million of the jobs created by the US economy last month were in the leisure and hospitality industry and in retail trade. This suggests that the bulk of jobs created in June, as expected, was a result of the reversal of the economic lockdowns to stem the coronavirus. The number of people who were on temporary layoffs fell by 4.8 million in June, suggesting that the return to normal economic activity is crucial for the US jobs data. More timely measures of US jobs, including the Homebase data, which collects real time data on hourly work at small US businesses, paints a more worrying picture of the health of the US jobs market. After showing improvements since bottoming out in April, this data suggests that jobs growth has stalled in the last two weeks, at the same time as the US infection rate has spiked. One would assume that a return to economic lockdown for some states in the US would spook markets, so why is this not happening, and why are global risk assets still rising? Below, we give three factors that we think explain the current market movements.
· Masks: could the spike in infection rates and the ensuing lockdowns be avoided if people in the West start to wear face masks? There has been a backlash towards wearing masks in the US, particularly in some corners of the Republican party, however, if wearing a mask is the difference between keeping economies open and creating jobs, then surely this is a no-brainer. We would also note reports that claim Donald Trump has made a u-turn regarding the wearing of masks, he now thinks that people should wear them. This might endear some of his supporters to wearing them, which could mean the latest lockdowns will be the last ones. Thus, markets may be banking on masks as being the saviour of this week’s upbeat tone for risky assets.
· Central bank support: traders and investors can be a cynical bunch, thus, the market rally on the same day that half of the US is threatened with another economic lockdown could be an anticipation trade that the Fed will step in with even more stimulus. The markets could be betting on yet another Fed put, which is driving risky assets higher. Wednesday night’s Fed minutes suggest that the Fed has other tools up their sleeve, as the committee continues to debate the policy of yield-curve control, where the central bank sets upper limits for bond yields. This policy is extremely powerful and can have a ‘big bazooka’ impact on financial markets, which is one reason why the market may be brushing off the latest news on spiking infection rates across the US.
· Market fundamentals: There has been some good corporate news amongst all of the dire profit warnings, which could also be buoying markets. Today it came from Tesla. It is, once again, the world’s largest car company, after it announced that it had delivered over 90,000 vehicles in the second quarter. This easily beat analyst expectations and suggests that the high-end electric car marker has weathered the economic storm caused by coronavirus extremely well. Shares in Tesla soared more than 9% on the news, which is helping the Nasdaq 100 index to break into fresh record-high territory today. Interestingly, Tesla has outperformed the world’s major car makers, some of whom saw their sales fall 30% plus during the last quarter. This highlights the strength of the Tesla brand, even a pandemic can’t stop demand.
So, as you can see, there could be some logic to the rise in markets today, at the same time as large swathes of the US economy are preparing to enter lockdown once again. We would note, that some investors are obviously hedging their bets, gold is on the rise once more and is up 0.4% so far on Thursday. The yellow metal continues to get stuck around the $1,780 level, however, if global stock indices continue to rise at this pace, we wouldn’t be surprised if gold made fresh record highs in the coming weeks.