10 June, 2020
Frances Donald, Chief Economist
The latest U.S. monthly jobs report is that rare beast—an unexpectedly strong economic data point that catches even the most optimistic economist off guard, inspiring a massive stock market rally. Is it a game changer that requires investors and policymakers to recalibrate the way they’ve been thinking about the pandemic?
As cautious as we are about the medium-term economic outlook, there’s plenty of positive news in Friday’s May jobs report that should be fully incorporated into everyone’s U.S. economic outlook. In short, it does make us more bullish about the near-term economic recovery.
In our view, we’re now firmly in the first phase of the recovery—an initial V-shaped rebound that will play out over the next three months. Like a beachball breaking free from being held underwater, we may very well see the economy post a series of best-ever economic data as it recoups most—but not all—of its COVID-19-related losses.
During this period, it’s likely that many more economists (including us) will be caught out by the ferocity of the initial rebound; however, be warned that the next stage of the recovery will be—in our humble opinion—decidedly more challenging when reacceleration slows significantly and begins to pressure financial markets. No, it isn’t quite the sunny outlook we’d all prefer but, for now, let’s bask in the sunshine for as long as it lasts.
That said, unemployment peaking at 13.3%¹ is undeniably better than the U.S. unemployment rate hitting 19.0%, as had been expected, and it should absolutely be acknowledged as such. Crucially, market reaction to Friday’s data—rates rose, stocks surged, but the U.S. dollar (USD) did not strengthen—sends a bullish signal about risk appetite in the short term, in our view.
Better income – Preferred securities
Over the past three years, preferred securities showed slightly higher volatility than US Treasuries, but less volatile than other rate-sensitive assets like US mortgage-backed securities (MBS) and US investment-grade bonds. Preferreds also demonstrated a relatively better return than US Treasuries, MBS and investment-grade bonds.
Hong Kong/Mainland China market update
Mainland China’s Third Plenum 2024 concluded with structural reforms in key areas, and the government introduced some concrete measures. The Greater China Equities Team believes that mainland China is focusing not only on long-term structural reform but also on short-term economic targets. The series of fiscal and monetary announcements, along with greater subsidies and infrastructure spending, should support a faster recovery in domestic demand.
Better income: Global multi-asset diversified income
The Global Multi-Asset Diversified Income approach remains focused on generating higher, sustainable natural yields from a range of assets with lower correlations and expected relatively lower volatilities.
In hindsight, it’s worth trying to understand how economists collectively misread the U.S. labor market by such a huge margin and what we could learn from it. This is what we think: While recent data indicated that the worst of the month-over-month declines had taken place by mid-April, none of the traditionally reliable leading indicators of labor market activity (e.g., ISM subindexes, NFIB small business surveys) suggested that we would see job gains in June, much less in May.
This basically underscores how challenging it can be to rely on traditional data in such turbulent times. Even the U.S. Bureau of Labor Statistics highlighted their methodological challenges in categorizing those who were employed versus unemployed. The agency stated that if “workers who were recorded as employed but absent from work due to ‘other reasons’ had been classified as unemployed on temporary layoff, the overall unemployment rate would have been about three percentage points higher than reported.”¹ All things considered, even when taking the headline numbers at face value, we continue to believe there are indeed reasons to be cautious.
Here’s why:
The U.S. economy added (back) 2.5 million jobs in May, which represents roughly 11% of the total number of jobs lost in March and April.² However, to return to pre-COVID-19 levels, the United States still has to create another 19.6 million jobs. Put differently, even if hiring were to continue at the current breakneck pace, it would still take another 10 months to get the labor market back to where it was before COVID-19 struck—and that’s a big if. In our view, the hiring activities we saw in May are likely to be low hanging fruit—jobs that can be reinstated easily. Once that’s done, job growth is likely to slow dramatically in the second phase of the recovery.
It’s also worth noting that the employment-to-population ratio in the United States is 52.3.² In other words, for every American who’s working, there’s one who isn’t. This can translate into other kinds of problems in the future—for instance, if the federal government were to introduce a payroll tax cut as a form of stimulus, almost half of all Americans wouldn’t benefit from it. It’s also likely to have important social and political implications that should be carefully monitored.
Unemployment duration, or the length of time it takes an active job seeker to find work, is another metric that warrants investor attention. Data from April shows that 60% of the unemployed had been out of work for less than 5 weeks. May’s jobs report paints a rapidly deteriorating picture—71% of those who are unemployed had now been out of work for between 5 and 14 weeks.¹ The point here is one that many of us can relate to: The longer a job seeker stays out of work, the harder it becomes to find work. At some point, a downward spiral takes shape; confidence shocks and disenchantment set in, a development that could lead many able workers to drop out of the labor force. We’ve seen this happen before—in the aftermath of the global financial crisis—and there’s no reason to think why it wouldn’t happen again.
In light of the latest jobs report, we think it’s most prudent to focus our attention on three issues in the coming weeks:
Traditional fundamentals may seem to be taking a back seat at the moment, but we’d like to highlight the following macroeconomic issues that could drive market movements in the coming month.
U.S.-China tensions
In truth, these tensions never really went away, but this issue has been relegated to the back of our minds as the trauma related to the COVID-19 outbreak unfolded. Headlines in the past week suggest tensions have been escalating. No macro issue worries us more than the potential for U.S.-China trade disruption.
COVID-19—a second wave
We’re still in pandemic territory—we may be emerging from lockdown rules, but we’re not out of the woods yet. A second wave of outbreak will no doubt prolong the economic pain.
U.S. elections
The upcoming U.S. presidential election will become an increasingly prominent feature in investment commentary as we get closer to the main event in November. While the election will undoubtedly draw the most attention, we think it’s just as important to keep an eye on the composition of the entire government. Election outcomes are rarely predictable, and given the current context, could be even more difficult to forecast. As we approach November, certain segments of the market could begin to react to opinion polls in a more pronounced manner—something that investors should bear in mind.
1 “Employment Situation Summary,” U.S. Bureau of Labor Statistics, June 5, 2020.
2 Bloomberg, as of June 4, 2020.
3 “Next coronavirus stimulus bill will be the ‘final one,’ Mitch McConnel says,” cnbc.com, May 29, 2020.
Better income – Preferred securities
Over the past three years, preferred securities showed slightly higher volatility than US Treasuries, but less volatile than other rate-sensitive assets like US mortgage-backed securities (MBS) and US investment-grade bonds. Preferreds also demonstrated a relatively better return than US Treasuries, MBS and investment-grade bonds.
Hong Kong/Mainland China market update
Mainland China’s Third Plenum 2024 concluded with structural reforms in key areas, and the government introduced some concrete measures. The Greater China Equities Team believes that mainland China is focusing not only on long-term structural reform but also on short-term economic targets. The series of fiscal and monetary announcements, along with greater subsidies and infrastructure spending, should support a faster recovery in domestic demand.
Better income: Global multi-asset diversified income
The Global Multi-Asset Diversified Income approach remains focused on generating higher, sustainable natural yields from a range of assets with lower correlations and expected relatively lower volatilities.
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