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Futures drop on US Jobless claims
Long and slow: the road to recovery is a winding one. US initial jobless claims rose to 870k last week, indicating ongoing weakness in the labour market as the country struggles out of recession. This was a small increase on the week before and was ahead of market expectations.
Continuing claims declined only a fraction, to 12.58m. The previous week’s level was revised up 119,000 from 12,628,000 to 12,747,000. Unemployment fell marginally to 8.6% after the previous week’s number was revised up to 8.7%.
On a more encouraging note, the total number of people claiming benefits in all programs for the week ending September 5th was 26,044,952, a decrease of 3,723,513 from the previous week.
Nevertheless, the more recent rise in initial claims is a worry that the momentum in the labour market has faded, which would chime with the kind of warnings that Fed officials have been laying on thick this week.
Futures dropped sharply with the Dow called down ~120 pts around 26,640 and the S&P 500 down ~20pts around 3,214 which would take out the week’s low at 3,229, a two-month trough that sits neatly on the 10% correction level from the recent all-time intra-day high at 3,588. Immediate support emerged at 3212.
Sentiment appears very weak with the downside bias in favour. With economic indicators failing to deliver lift-off and stimulus apparently off the table before the election, there needs to be a positive catalyst to get the bulls back in the game.
Otherwise with election risks and a worsening outlook for the recovery, we need to consider further losses as we approach the election.
US jobless claims data beats expectations – but Wall Street struggles
Global stock markets are struggling around or below opening levels today despite an improvement in US jobless data.
Jobless claims drop, but the overall picture remains bleak
Markets are little cheered by the latest labour market data, with investors instead awaiting any news of progress as lawmakers continue to argue over a new stimulus bill. The proximity of tomorrow’s nonfarm payrolls report is also keeping markets soft.
This is despite initial weekly jobless claims printing at 1.186 million – well below the 1.415 million expected by analysts and also the lowest reading since the pandemic sent claims jumping by nearly 7 million at the end of March.
Continuing claims – which counts those claiming benefits for two or more consecutive weeks – have dropped from 16.95 million to 16.10 million, again below forecasts.
While this points to improving labour market conditions, the bigger picture remains bleak. This is the 20th straight week that the US has registered more than a million new weekly claims. 31 million Americans remain unemployed.
The figures have further complicated the outlook for the labour market, which had been showing signs of weakening again. Yesterday’s ADP private payrolls report showed jobs growth of just 167,000 compared to expectations of over 1 million.
Nonfarm payrolls in focus – is the jobs recovery under threat?
The latest numbers will put tomorrow’s nonfarm payrolls report under even greater scrutiny, as markets look for more clarity over the direction of the labour market.
Economists expect payrolls grew by 1.6 million, which represents a sharp slowdown in jobs gains after payrolls jumped 2.7 million in May and 4.8 million in June. However, payrolls returned to growth more quickly than expected.
President Donald Trump has promised “big jobs numbers are coming on Friday”.
Stocks slide on US-China tensions, weak US jobs report
European exceptionalism? Led by a rebound in France and Germany, business activity in the Eurozone picked up sharply in July, whilst the dogged British shopper has lifted UK retail sales back to pre-Covid levels. At the same time, US jobless claims unexpectedly rose amid a surge in cases which is being replicated in many other large economies, but not so much in Europe. Could Europe and the UK be handling the reopening phase of the pandemic better, and does this suggest economic outperformance? The obvious answer is that it’s not that simple – more on this below.
Stocks and other risk assets slid sharply as rising US-China tensions and a concerning US jobs report conspired to take the shine off the equity market gloss, with a decline in US big tech names weighing heavily on the broader market. The DAX fell 2% in early European trade and the FTSE 100 fell back under the 6,100 level after Chinese shares led Asian markets lower in a brutal session.
The S&P 500 declined over 1% yesterday fell as big tech shares slid. When big tech falls so does the whole market. The S&P big five – Amazon, Apple, Alphabet, Facebook and Microsoft – which now make up almost a quarter of the index by market capitalization – were all down more than 3%, with Apple off 4.5% after a note from Goldman Sachs called the rally in the stock ‘unsustainable’. Intel share plunged 10% after it warned on delays to the next generation of microchips which is having a clear read across to European technology sector this morning.
US-China tensions are a concern as the latter retaliated for the closure of its consulate in Houston by telling its American friends in Chengdu to shut their consulate. I would reiterate that this kind of tit-for-tat is not new; a trade war has been raging for years – what’s new is the coronavirus and a presidential election in a few months.
The weekly US jobs report was very disappointing and indicated that the progress made as lockdown ended has not just stalled but gone into reverse as various states rolled back their reopening. Against expectations for a flat reading of 1.3m, initial claims in the week to July 18th actually rose 100k from the week before to 1.4m. Continuing claims were better than expected at 16.2m vs the 17m anticipated. It looks like the surge in coronavirus cases across the ‘Sun Belt’ and other areas of the country, which caused many states to pause or roll back reopening of the economy, resulted in an increase in layoffs. The question we will continue to ask is how much is temporary and how much is permanent?
Futures indicate the S&P 500 to open lower and down marginally for the week, which has been quite a volatile one. Monday’s aggressive rally at the close was countered by a sharp reversal in the last hour of trade on Tuesday before the uptrend resumed to take the broad market to its best level since February. What we are seeing is a slow grind and lots of indecision, which could be the hallmark of the next 6 months with a largely sideways but volatile market.
Watching the data remains a tough ask – PMIs will show rebounding sentiment, but these are full of flaws and may not be entirely relied upon. Harder data like the unemployment claims report is not as sensitive to mood swings and will continue to indicate a long hard slog before we get back to pre-Covid levels.
Nevertheless, we are seeing some better data here in Europe. Germany’s manufacturing PMI rebounded into positive territory for the first time in 19 months, whilst France’s services PMI accelerated at a healthy clip. Combined, the Eurozone composite PMI moved up to 54.8 from 48.5 in June and was ahead of the 51.1 expected. I would issue the usual caveats about the nature of these diffusion indices, which only ask survey participants if things were better, worse or the same as the previous month. But at least they are positive – things are clearly looking up, albeit from a very low base level during lockdown. Can it last is the big question, and with backlogs of work declining and costs rising the picture for employment is not good. On the face of the headline numbers are encouraging, but these mask some real trouble ahead and a long, hard slog to get back to pre-Covid activity levels.
And today’s UK retail sales print is encouraging in some ways. Sales rebounded 13.9% in June, which easily beat expectations and came after May’s 12.3% jump. Taken together, the increases in the volume of retail sales in May and June have brought total sales back to a level similar to as before the pandemic. Ex-fuel, total retail sales are better than they were a year before. But on-food and fuel sales, while up sharply, are still not back to where they were before the lockdown took hold. High streets are being stripped bare, but at least you can now stick a four-storey block of flats without any planning permission where the grocer used to have his shop.
Gold continued to push up as US real rates edged even lower with the rally only encountering resistance close at the $1,900 round number and a retest of this level looks likely. US 10yr TIPS declined again to –0.90% as benchmark 10yr Treasury yields slipped under 0.6%. The record at $1,921 is well within sight and the bulls are not about to let go of this opportunity to set an all-time high.
In FX, the euro continues to make ground against a faltering dollar as DXY slips to its weakest in almost two years. EURUSD has notched 5 straight positive sessions and momentum to the upside appears strong. The pair has broken free from the Jan 2019 resistance around 1.1570 and is trying to make 1.16 stick. Decent German PMI data helped sentiment towards the euro this morning, with the composite reading up to 55.5, ahead of expectation. However, the broad risk off tone to the market on Friday is underpinning some bid for the dollar which could see the rally falter, at least in the near-term.
GBPUSD held gains above 1.27 and moved clear of the 200-day SMA in a bid to clear out the descending trend resistance, even as the tone from the Brexit negotiators yesterday did not bode well for the chances of securing a deal. If cable can make this move stick it opens the path back to 1.30 despite the Brexit worries, chiefly as the long dollar trade unwinds.
Chief negotiator for the EU, Michel Barnier, said a deal was unlikely by the end of the year. We should also remember that the pound faces multiple downside risks in terms running large twin deficits, a protracted economic recession from Covid that is forecast to be greater in magnitude than Europe and the RoW, and talk of negative rates still holding water. However, we can also look are record low and negative gilt yields as a sign that the UK is not seen in any real danger of exploding debt loads. Britain still has some friendly strangers to count on, or perhaps just a sign that central bank intervention is working well.
US jobless claims cast shadow
US jobless claims cast a shadow: stocks remained under the cosh a bit as US initial jobless claims were worse than expected and show a levelling off in the week-on-week improvements we have seen over the last couple of months. The mild risk-off tone to the start of the US session is keeping stocks in the red after a softer European session, although we note a White House presser later on the session so this needs to be watched. The S&P 500 seems well controlled by the 3200 round number support and the resistance just below 3240 for now. Breaks either side of these may be chased.
In the week ending July 11th, the seasonally adjusted initial claims hit 1.3m a decrease of 10,000 from the previous week’s revised level. The improving trend has all but halted and may reflect the spike in coronavirus cases that has coincided with renewed lockdown measures in a number of economically-important states such as Texas and Florida. California’s decision to roll back reopening signals there may be worse could be ahead.
Continuing claims came in at 17.3m vs the 18m last week and was a little better than the 17.6m expected. Moreover, there were some more encouraging signs the total number of people claiming benefits in all programs for the week ending June 27th fell to 32,003,330, a decrease of 433,005 from the previous week. However, this number may well deteriorate again as it reflects the imposition of new lockdown restrictions in California and others.
Unadjusted figures are less encouraging. The advance number of actual initial claims under state programs, unadjusted, rose 108k, or 7.8%, to 1.5m. The advance unadjusted unemployment rate was 11.9% during the week ending July 4th, an increase of 0.6 percentage points from the prior week.
Flattening the curve…
Retail sales in June bounced 7.5% vs the 5% expected and 17.7% in the prior month – the $600-a-week stimulus cheques are being spent, but these are due to come to an abrupt
The weaker-than-expected initial claims number left markets on the back foot, with no new vaccine reports to lift the mood we have to focus on the rather downbeat economic data which simply underscores the fact the recovery will be slow, hard-won and very uneven.
Meanwhile, the ECB left rates on hold as expected and Christine Lagarde appeared to push back against the tapering chatter by saying the ECB would use the full PEPP envelope of €1.35tn ‘barring surprises’. At the same time the emphasis is very much on the EU member states to agree on the recovery fund at the summit starting tomorrow, with the ECB’s assumption that a deal will be worked out.
Italian 10-yr yields sank to the lowest level since late March, while EURUSD was almost unchanged at 1.140 despite a choppy couple of hours. Lagarde also suggested the EU is in a ‘good place’ which presumably refers to historically advantageous geographic position as the Eurasian rump which has enabled it to play an outsized influence on global affairs, rather than anything relating to the current economic outlook. In that sense, the UK is in an even better place.
Stocks retreat before ECB, US + UK jobless numbers in focus
European stocks pulled back a little after a rally in the previous session as upward pressure on equities continues to hold firm despite rising case numbers as hopes for a vaccine are the new hopes for a US-China trade deal. Moderna has reported encouraging results from initial trials, while there is a lot of hope being pinned on AstraZeneca’s phase one trials, results of which are due to be published July 20th.
Whilst nothing is certain, it seems things are moving in the right direction for a vaccine to emerge by next year.
Shanghai fell 4% and Hong Kong was down almost 2% overnight after a mixed bag of Chinese economic data. US stocks rallied yesterday with the S&P 500 posting its highest close since the June peak, though futures point to the index opening around 20 points lower. The Dow is seen opening about 200 points lower.
UK jobless data reveals first wage drop in six years
The number of employees on payrolls in the UK fell by 650,000 between March and June, but the worst of the employment is still in front of us. Vacancies are at their lowest level since records began in 2001, earnings fell for the first time in six years, and the ONS noted that the standard definition of unemployment does not include half a million employees temporarily away from their jobs specifically for coronavirus-related reasons, who are receiving no pay while their job was on hold.
Unemployment claims were better than feared but we can pin this on furlough schemes which are extending the pretence, delaying the worst and providing a soft landing; but the jobless numbers clearly do not reflect the true extent of what’s coming. Meanwhile the number of hours worked – a key metric for the nation’s productivity – has collapsed.
China GDP rebounds, consumption lags
Chinese GDP grew 3.2% in Q2, up from the –6.8% contraction in Q1, which was better than forecast, albeit we apply the usual caveats about Chinese economic data. Industrial production rebounded 4.8%, but retail sales were down –1.8% vs an expected +0.3% improvement. Richemont flagged a strong recovery in China despite sales globally falling 47% in its first quarter, with luxury goods stocks weaker. Burberry shares fell another 3%.
US data was solid enough, with industrial production +5.4% in June whilst the Empire State manufacturing index hit 17.2, a beat on the 10 expected and a big jump from the –0.2 in the prior month. It remains to seen however to what extent the rate of change in the recovery turns lower as data starts to reflect the ‘second wave’ of cases and the imposing of some fresh lockdown restrictions in some key states.
In the Fed’s Beige Book, the Dallas Fed noted that while the outlook has improved, the upward trend in new COVID-19 cases has increased uncertainty. “Economic activity increased in almost all Districts, but remained well below where it was prior to the COVID-19 pandemic,” the national summary read.
US-China tensions are bubbling away – plans by the White House to impose travel restrictions on millions of Chinese Communist party members is the latest in the saga.
Goldman Sachs earnings crushed expectations with a stunning quarter of trading revenues. Bond trading revenue jump 150% to $4.24bn, while equities trading revenue climbed 46% to $2.94bn. For me all it did was underscore the divergence we are seeing between the real economy and the market, which is benefitting hugely from two-pronged monetary and fiscal stimulus.
Oil still rangebound after OPEC agrees to begin tapering production cuts
Oil couldn’t break free from its narrow range as OPEC+ extended cuts but began tapering with production curbs in August down from 9.7m barrels per day to 7.7m bpd, although the total effective cuts will be around 8.1m-8.3m barrels a day as countries which overproduced in May and June would make additional compensation cuts in August and September. OPEC will need to play this carefully – the longer its barrels are off the market the more it could encourage higher cost US oil to come back on.
Inventory data from the States was bullish with the –7.5m drawdown much higher than the –1.3m expected. Gasoline inventories also fell by more than expected at –3m. WTI (Aug) rallied from the medium-term trend support around $39.20 yesterday to press on the $41 handle but it continues to lack momentum – the CCI divergence on the daily timeframe chart points to the rally running out of legs and buyer exhaustion that could call for a further pullback.
In focus today: ECB, Netflix, US jobless claims and retail sales
Lots coming up today…
ECB meeting: Following the top-up to the PEPP programme in June to €1.35tn, the European Central Bank should be keeping its powder dry with the key EU summit starting tomorrow to hammer out the budget.
I expect Christine Lagarde to stress the importance of the fiscal side and leave policy unchanged but stress that ECB’s accommodative position – this is not the time for a discussion of tapering or the details of how much of the envelope you need to use.
In a recent interview she said the central bank had ‘done so much that we have quite a bit of time to assess [the incoming economic data] carefully’. The EU recovery fund is more important for EUR crosses right now – agreement this week may push EURUSD beyond the key 1.15 level.
Netflix earnings: The ultimate stay-at-home company, Netflix (NFLX) has made hay in the pandemic, with the stock hitting an all-time high and clearing $520. In the March quarter, Netflix added 15.77m new subscribers, which was more than double the original forecast of 7m net adds.
The company has forecast 7.5m new adds in the June quarter and may easily beat this with around 10m subscriber additions. Sequentially lower net adds should not weigh on the stock given the exceptional performance in the first quarter. ARPU could benefit from a depreciation in the dollar since it last reported.
As Netflix itself noted in its Q1 report, there is a lot of unknown to its forecasts. “Given the uncertainty on home confinement timing, this is mostly guesswork. The actual Q2 numbers could end up well below or well above that, depending on many factors including when people can go back to their social lives in various countries and how much people take a break from television after the lockdown.”
The market expects $6.1bn in sales and EPS of $1.8, with paid subscribers to hit 190m.
US weekly unemployment claims: Last Thursday’s data was better than expected for the week ending Jun 27th, however the total number of people claiming benefits in all programmes, including both regular state and all others, and including Covid-related programmes, rose 1.4m to 32.9m in the week to Jun 20th.
Initial claims today are seen falling again to 1250k from 1314k the previous week, with continuing claims seen down to 17500k from 18062k last week.
US retail sales: Expect to see continued improvement as the economy recovers off the lockdown lows. Retail sales should print another strong reading as consumers binge on their $600-a-week stimulus checks, which are due to finish this month.
Week Ahead: Pressure builds on RBA to go negative, high hopes for US ISM
Coming up this week – can Eurozone retail sales follow in Germany’s forecast-shattering footsteps; will the US ISM Nonmanufacturing Index return to growth against expectations, and is the pressure mounting on the RBA to push interest rates into negative territory?
Read on for your full breakdown of the key events to watch this week.
Eurozone confidence and retail sales
Investor confidence in the Eurozone improved last month, although the Sentix index missed expectations with a rise from -41.8 to -24.8 against forecasts of a rebound to -22.5.
It still represented a solid rebound after May’s index barely moved, and participants reported a much more positive outlook than before. Since then we’ve had a lot of positive data in terms of PMIs and forecast-crushing German retail sales, which grew 13.9% on the month in May, against expectations of 3.9%, which could prompt another uptick in confidence when the next reading is published on Monday.
Eurozone retail sales figures are also due on Monday. Forecasts are for growth of 7.8% on the month after May’s -11.7% decline.
Surprise return to growth on the cards for US ISM Nonmanufacturing Index?
Last week’s US ISM Manufacturing Index smashed expectations with a surprise leap back into growth territory. Economists had expected the index to recover to 49.5, just shy of the 50 level that shows no change, but the index instead jumped to 52.6, with the majority of industries surveyed reporting expansion, in particular improvements in employment, production, and new orders.
This week’s nonmanufacturing index is predicted to improve from 45.4 to 49, but after the strength seen in the manufacturing counterpart, markets will be hoping to see a reading above 50 here as well to reinforce hopes of a quick recovery for the US economy.
Markets bet on Reserve Bank of Australia rate cut
The Reserve Bank of Australia held interest rates at 0.25% during its last policy meeting. ASX 30 Day Interbank Cash Rate Futures show the market is pricing in a 60% chance that the RBA will cut rates to 0% during the next board meeting. Doing so would effectively take rates negative, which policymakers have been reluctant to do.
However, pressure is mounting after localised spikes in coronavirus infections forced the government to lockdown parts of Melbourne. A further spread of infections could hamper Australia’s economic recovery, forcing the RBA to unleash more stimulus.
Corporate earnings: Paychex, Walgreens Boots Alliance
Paychex is expected to report earnings of $0.61 per share for the quarter ended May 2020, down -3.1% on the same period the previous year. Revenue is projected -7% lower compared to Q4 of the previous fiscal year at $911 million. The stock has moved largely in tandem with the S&P 500 all year, although since the March selloff Paychex has struggled to recoup losses as quickly, leaving it down -10% on the year, compared to -4% for the S&P 500.
Walgreens Boots Alliance stock is up 11% from its year-to-date low, but remains over 30% lower since January 1st. According to research from Thompson Reuters, the stock has an average “Hold” rating amongst 21 analysts – you can download the full report from the Key Statistics tab in the platform. Q3 earnings are due ahead of the market open on July 9th.
Weekly US jobless claims remain in focus
US weekly jobless claims figures have proven stubbornly high over the past few weeks, despite having come down significantly from the record high of 6.6 million reported on April 5th. However, while initial claims have continued to disappoint forecasts, the number of continuing claims has come down a bit more than expected – although at 19.5 million it remains remarkably high and shows just how far there is to go to restoring anything like normal levels of employment.
The latest figures are due on Thursday.
Highlights on XRay this Week
Read the full schedule of financial market analysis and training.
|07.15 UTC||Daily||European Morning Call|
|20.00 UTC||06-Jul||10 Trading Rules to Live By|
|From 15.30 UTC||07-Jul||Weekly Gold, Silver, and Oil Forecasts|
|17.00 UTC||08-Jul||Blonde Markets|
|09.00 UTC||09-Jul||How to Use the 200-day Moving Average Indicator|
Key Events this Week
Watch out for the biggest events on the economic calendar this week:
|08.30 UTC||06-Jul||Eurozone Sentix Investor Confidence Index|
|09.00 UTC||06-Jul||Eurozone Retail Sales|
|14.00 UTC||06-Jul||US ISM Nonmanufacturing|
|14.30 UTC||06-Jul||CA BOC Business Outlook Survey|
|04.30 UTC||07-Jul||RBA Official Cash Rate Decision|
|06.00 UTC||07-Jul||German Industrial Production|
|Pre-Market||07-Jul||Paychex – Q4 2020|
|After-Market||07-Jul||Levi’s – Q2 2020|
|05.00 UTC||08-Jul||Japan Eco Watchers Survey|
|14.30 UTC||08-Jul||US EIA Crude Oil Inventories|
|08-Jul||FirstGroup – Q4 2020 (Preliminary)|
|Pre-Market||09-Jul||Walgreens Boots Alliance – Q3 2020|
|12.30 UTC||09-Jul||US Weekly Jobless Claims|
|14.30 UTC||09-Jul||US EIA Natural Gas Storage|
|12.30 UTC||10-Jul||Canada Employment Change & Unemployment Rate|
Stocks weaker as US continuing claims rise, ECB goes big
European shares held losses and Wall Street opened lower as the June rally in stocks paused for a wee breather, with tensions around Hong Kong resurfacing and US jobs data indicating a lacklustre recovery in the labour force.
The ECB seems to have passed the test today but we are still unsure on OPEC’s moves and the ensuing effects on oil prices, which could affect other risk assets. Meanwhile US jobs numbers were disappointing.
US initial jobless claims fell to 1.9m but the key continuing claims number rose 650k from last week to 21.5m, which was ahead of expectations. It’s a worry that we are not seeing this number coming down as it suggests employers are not calling their staff back as quickly as had been hoped.
Tomorrow is nonfarm payrolls day, of course, with expectations for the headline print to come in at –8m jobs but we note the ADP number yesterday was just –2.76m vs –9m expected.
Meanwhile risk sentiment looked to be a little weaker as scuffles were reported in Hong Kong as protestors try to mark the Tiananmen Square anniversary. The situation in Hong Kong and related US-China tensions remain a significant, under-appreciated tail risk for equity markets.
The S&P 500 opened about a third of one percent lower but held 3100 even as the Vix declined to take a 25 handle. After the ECB meeting the DAX tested lows of the day at 12,321 before recovering to the 12,400 support.
The ECB surprised with a slightly bigger expansion of its Pandemic Emergency Purchase Programme (PEPP) than was expected, perhaps as it saw this as a good opportunity to front load the scheme rather trying to top up later down the line as limits approach. This does provide it ample room for the rest of the year without the market chatter resurfacing about whether and when it needs to do more.
The ECB took three steps: the PEPP envelope is being widened by an additional €600bn to €1.35bn, the scheme will last at least until June 2021 and it will reinvest proceeds at least until the end of 2022. This is emergency QE forever – or at least we are in a situation where the ECB has no option but to be on a war footing just to keep the show on the road. What price peace?
Staff projections were interesting – inflation is now seen at just 0.3% in 2020 vs 1.1% expected in March before magically picking up over the next two years. May showed outright deflation in 12 of the 19 countries using the euro and the weakest HICP inflation in four years. Growth is seen –8.7% under the ECB’s baseline scenario.
Christine Lagarde said she expects a rebound in Q3 and the staff projections indicate growth bouncing back to 5.2% in 2021. But she cautioned that weaker demand will exert a longer-lasting pressure on inflation. Inflation for 2022 is seen at just 1.3%, down from 1.5%, despite this massive amount of stimulus.
This is already well short of the 2% target and of course the ECB is very good at missing its target when the stimulus as ever has decreasing marginal effects. What’s clear is that we are at the limits of monetary policy efficacy.
More interesting perhaps for the future of the EZ – Finland has just said it cannot accept the EC’s recovery package as it stands – it will be a long slog getting this budget and bailout fund approved by all members.
German bund yields reversed their earlier fall to trade flat, whilst the euro pared some of its gains after spiking through the important Fibonacci level at 1.1230, with EURUSD last at 1.1350. GBPUSD was off its lows having bounced off the 1.2510 support to move back to 1.2540.