Risk sentiment whistles past an appalling jobs report

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Many years ago, when my hair was a lot fuller, I joined a derivatives swaps desk in Hong Kong. Two senior colleagues, Andy and Alan, explained to me the importance of working late on the first Friday of the month.

This was my introduction to the monthly US employment report, and yes, all the big banks located across Asia lit up the phone boards asking for dollar swap prices after the jobs figures flashed across the screen. The switch to business journalism only cemented the importance of US non-farm payrolls, revealing how investors around the world await this update on hiring and wages from the country that anchors the global financial system.

In terms of reports down some three decades, nothing matches what arrived on Friday for the month of April. A historic decline was expected and a record loss of 20.5m jobs (in the postwar era) illustrates the scale of the evolving economic damage and its likely deep resonance. A prospect that equity markets in broad terms are looking past with some confidence at the moment.

The unemployment rate rose to 14.7 per cent (the highest since records began in 1948) and this year the unemployment rate has swung from its lowest level in half a century to a peak not seen in nearly eight decades.

Unfortunately, the jobs data do not capture the full force of the economic lockdown. The Conference Board notes:

“The unemployment rate underestimates the amount of slack currently in the labour market. 5.1 million additional workers are now working part-time even though they prefer a full-time job. And the number of people outside the labour force grew by 6.6 million, showing many are currently discouraged to even try to find a job.”

A glimmer is that more than 70 per cent of jobs lost last month (led by 7.7m lost in the leisure & hospitality sector alone) were marked as being “temporarily laid off”.

Brian Coulton, chief economist at Fitch Ratings, says this “at least gives some grounds for hope that a lot of jobs will come back, provided the lockdown does not last too long”.

But the risk is that a slow restoration of activity and rising bankruptcies result in many furloughed workers being left on the sidelines.

Back in the world of computer dominated financial markets (see Quick Hits), the woe engulfing Main Street is viewed in a colder light of day (or what some dub the “non-empathy factor”). A grim number was expected and looks like it is the peak, so it does not shift the current narrative for investors. Namely, that the economy will begin rebounding once lockdowns ease, while central banks have flooded the financial system with plenty of cash that needs to find a home.

Alan Ruskin at Deutsche Bank says:

“Since late March there has been an extraordinary divergence between the real economy and financial risk, with the latter helped by unprecedented policy accommodation. Just getting the worst jobs report in history out, is at the margins helpful for risky assets.”

A looming issue is when does asset price prosperity run a significant risk of spurring a nasty backlash from those without jobs and waving goodbye to their businesses. Ultimately, a sustained drop in consumption is not going to help companies return to pre-Covid-19 cash flows and profits.

Oxford Economics warns:

“We anticipate that the severe income loss, elevated precautionary savings and lingering virus fear will curtail consumer demand well past the lockdowns.”

Therein rests the potential consumer sting in the tale that will test equity market sentiment before long.

Here, Alan cautions:

“Markets know the real economy data is awful. They are much less sure of how long financial markets aided by policy, can defy the real economy, if the growth improvement is slow. Solving that dilemma is for the days ahead, and probably not for today.”

Now there was plenty of Feedback on the new layout of the newsletter and thanks for all your comments. Clearly the way quotes are highlighted has failed the reader test. The curators are working on improving the look, and in the meantime, the quotes will no longer be highlighted.

A good weekend to all readers and Market Forces will resume on Tuesday.

Quick Hits — What’s on the markets radar

Appalling economic news does not derail equities. Wall Street opened firmer and held that tone with the Nasdaq ending the week with a rise of 6 per cent that has seen the tech-heavy benchmark erase its losses for the year. European equities closed higher. Over in the Treasury market, two-year notes set a record intraday low of 0.10 per cent, reflecting the grim tone of recent and expected data. Expect a forceful pushback from Federal Reserve officials about negative interest rates soon.

But the cost of funding a surging US deficit is weighing on long-dated Treasuries, pushing up yields in the 10- and 30-year sectors ahead of big sales of new debt next week, including the return of a 20-year bond for the first time since 1986. The scale of demand for this long-end paper certainly bears watching.

Tradeweb highlight that the difference between 10- and 30-year Treasury yields has expanded to about 0.71 percentage points. This relationship has not been so steep since Donald Trump claimed the presidency, but there is a temptation to see this as the bond market making long-term debt a little more attractive before new supply arrives. After all, there is a central bank ready to buy bonds in the secondary market.

The three largest equity markets outside of Japan saw further outflows last week, notes EPFR. China led the way with more than $1bn leaving equity funds, while India and South Korea also experienced withdrawals. EPFR said:

“Redemptions from Korea Equity Funds slowed, but this fund group posted its sixth consecutive outflow with investors looking beyond its widely praised handling of the pandemic to the country’s high levels of household debt, dependence on trade and potential vulnerability to a new surge in Covid-19 cases.”



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