May U.S. jobs report stuns—hello V-shaped recovery?

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?

Good news is good news

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.

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But there are still serious problems in this labor market

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.

Where do we go from here?

In light of the latest jobs report, we think it’s most prudent to focus our attention on three issues in the coming weeks:

Rising U.S. interest rates

The stock market appears to have learned to stop worrying about boring fundamentals and decided instead to coast on historic levels of U.S. Federal Reserve (Fed) liquidity and rock-bottom interest rates; even we economist folks understand the rationale behind this approach. It’s also easy to see how a relatively weaker USD is likely to add more fuel to the risk-on fire. Naturally, surprisingly positive economic data helps, too; however, it’s worth noting that the 10-year U.S. Treasury yield has been sharply rising since June 2.² While we aren’t overly concerned about the impact that higher yields can have on the stock market at this stage, we believe it’s likely to leave the Fed in a slightly awkward situation.

In our view, the main question that Fed officials will need to answer in the coming months is this: Can the Fed justify keeping interest rates at ultra-low levels when the economy seems to be staging a robust recovery much earlier than expected? While it’s entirely reasonable for the Fed to reference existing macroeconomic challenges and continue to telegraph its intention to keep rates low for a very long time through forward guidance, it’s unlikely to be able to build a convincing case for introducing yield curve control. More than likely, the monetary hawks will become more vocal in their opposition to additional easing policies as economic data improves, triggering further rises in yields.
Fiscal disappointment

While there can be little doubt that monetary policy has gone a long way to reducing the tail risk for financial markets, we believe fiscal spending is what will ultimately facilitate an extension in upside risk, but there’s a more than reasonable chance that we won’t see much development on this front in the coming weeks.

Like most of our peers, we believe that the U.S. government will eventually agree on an additional fiscal package of some kind; however, fiscal hawks are likely to get louder as economic data improves, potentially limiting the size and scope of new packages. Meanwhile, policymakers could soon find themselves racing against time to agree on new measures before unemployment insurance benefits run out at the end of July.

On May 29, Senate Majority Leader Mitch McConnell said that Congress could decide on whether to proceed with a final coronavirus relief package in the next few weeks³; a delay is now looking likely as the federal government devotes resources to calm nationwide protests. In addition, disagreements over the size and scope of relief required remain wide among key players.
Old-skool macro factors to monitor

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.

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The implications of recent trade policies on Greater China equities

The latest development in tariff-centric trading policies has been on the market’s radar, with a recent retaliatory announcement by China that imposed a 34% levy on all US-imported goods. In this note, we examine the measures more deeply and assess their impact on Greater China equities.

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Quick thoughts on US reciprocal tariffs

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Certain sub-funds concentrate their investments in a single country and/or a particular industry sector are subject to greater risks than diversified investments in several countries and/or regions and across sectors.
Certain sub-funds may invest directly in certain China A shares via Stock Connect, which may involve in risk related to Investments via Stock Connect and Mainland China investment.
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The sub-funds do not guarantee distribution of dividends, the frequency of distribution, and the amount/rate of dividends. A sub-fund may at its discretion pay dividend out of capital or gross income while charging / paying all or part of its fees and expenses out of its capital. This amounts to a return or withdrawal of part of an investor’s original investment or from any capital gains attributable to that original investment, and may result in an immediate reduction of the net asset value per share of the respective share classes after the distribution date.
Certain sub-funds with significant exposure to Renminbi (“RMB”) bonds/equity/assets or emerging markets, may involve debt instrument, credit/counterparty, concentration, liquidity, volatility, currency, tax, economic, foreign exchange/multi-currency conversion, down-grading, regulatory and political risks and these risks could be substantially higher than the risks normally associated with the world's more established markets.
A bond sub-fund may hold a significant portion of assets in deposits if there are not sufficient RMB instruments for it to invest in. This may adversely affect its return and performance.
Certain sub-funds using invest directly in debt instruments/shares via QFII regime, the Bond Connect and/or the Foreign Access Regime are subject to various requirements and restrictions under the laws of Mainland China related to investment in QFII and/or China Interbank Bond Market and custodial risks.
RMB is not freely convertible and is subject to exchange controls and restrictions.
Certain sub-funds may have significant concentrated exposures to particular industry sectors and geography's, which subjects investors to concentration and equity market risk.
Certain sub-funds may invest in equities of small- and mid-capitalization companies, which can expose investors to liquidity and volatility risks, and is subject to greater risk than is customarily associated with investments in larger capitalization companies.
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General Risk Disclosure

Funds offered on this platform may invest in equity, fixed income securities, exchange-traded funds, collective investment schemes and/or other instruments, including derivatives, and each of which has its specific investment objective/ policy with its specific features and different risk profile.
Distribution of dividends, the frequency of distribution and the amount/rate of dividends are not guaranteed. Dividend of certain share/unit classes, at the fund or the investment manager’s discretion, may be paid out of capital or gross income while charging / paying all or part of its fees and expenses out of its capital. This amounts to a return or withdrawal of part of an investor’s original investment or from any capital gains attributable to that original investment, and may result in an immediate reduction of the net asset value per share/unit of the respective share/unit classes after the distribution date.
Some funds may invest in bonds or debt securities which may be subject to credit, liquidity, counterparty and market risks.
Some funds may invest in non-investment grade bonds and unrated securities which may be subject to greater credit and liquidity risks, and may be more volatile than higher rated securities. Some funds may invest in investment grade debt securities, which may be subject to ratings downgrades by the rating agencies that may affect the net asset value of the fund.
Some funds may invest in derivative instruments which may involve additional risks. (For example, leverage may cause greater volatility.)
Some funds may make extensive use of derivatives including more complex derivative instruments or strategies to achieve the investment objective, this may give rise to additional exposure in that performance may rise or fall more than it would have done otherwise. In adverse situations, the fund’s use of derivative instruments may become ineffective and the fund may suffer significant losses. The use of derivatives may give rise to leverage, liquidity, counterparty and valuation risks.
Some funds may invest in emerging economies or markets, where special risks, including liquidity, volatility, government policies, taxation, currency, currency repatriation, political and regulatory risks, may be substantially higher than the risks normally associated with more developed economies or markets.
Some funds may invest in securities of small and/or medium sized companies in the relevant markets. This can involve greater risk than is customarily associated with investments in larger and more established companies.
Some funds may invest in a single country/region and/or a particular industry sector which may be concentrated and subject to greater risks than diversified investments in several countries and/or regions and across sectors.
Some funds may invest directly in certain China A shares via the Stock Connect, which may involve risks related to investments via the Stock Connect and Mainland China investment.
Some funds may have significant exposure to Renminbi ("RMB") bonds/equity/assets or emerging markets, which will be subject to debt instrument, credit/counterparty, concentration, liquidity, volatility, currency, tax, economic, foreign exchange/multi-currency conversion, down-grading, regulatory and political risks and these risks could be substantially higher than the risks normally associated with more established markets.
Some funds with significant exposure to RMB bonds/equity/assets may hold a significant portion of assets in deposits if there are not sufficient RMB instruments to invest in. This may adversely affect the funds’ return and performance.
Some funds using Qualified Foreign Institutional Investor (“QFII”) quota to invest directly in debt instruments/shares in Mainland China may be subject to various requirements and restrictions under the laws of Mainland China related to QFII investment and custodial risks.
Some funds are subject to the risks of investing in other funds and the risks relating to asset allocation strategy and/or downside risk management process.
As RMB is not freely convertible, currency conversion is subject to exchange controls and restrictions. There can be no assurance that RMB will not be subject to devaluation. Insufficient amount of RMB for currency conversion or devaluation of RMB could adversely affect the value of investors’ investments in the RMB denominated class(es) of certain funds. The “Dim Sum” bond market is still a relatively small market which is more susceptible to volatility and illiquidity. Due to RMB concentration risk, the value of the funds with substantial RMB exposure may be more volatile than that of a fund having a more diverse portfolio of investments.
Some funds’ performance will be closely tied to the economic, political, regulatory, geopolitical, market, currency or other conditions in the European Economic Area and may be subject to increased liquidity, price, and foreign exchange risk.
Some funds may invest in Russia and some investments in Russian securities may be unlisted securities not dealt on a regulated market. The Russian market presents specific risks in relation to the settlement and safekeeping of securities.
Investment involves risk. Investors may expose to capital loss and should not invest solely based on the information on this website alone and should read the offering documents for details including the associated risk factors, charges and features of the funds and their share/unit classes. Past performance information is not indicative of future performance.

Manulife Global Fund

Manulife Global Fund is an umbrella fund comprising a number of sub-funds investing in equity and/or fixed income securities, each of which has a different investment objective and risk profile and may involve equity market, geographical concentration, sovereign debt, liquidity, volatility, credit downgrade, interest rate, counterparty risks. Certain investors may also be subject to the risk relating to RMB hedged share class.
The relevant distributing class of the sub-funds does not guarantee distribution of dividends, the frequency of distribution and the amount/rate of dividends. Dividends may be paid out of income, realized capital gains and/or out of capital of certain sub-funds in respect of Inc share class(es). Dividends may be paid out of realized capital gains, capital and/or gross income while charging all or part of their fees and expenses to capital (i.e. payment of fees and expenses out of capital) in respect of MDIST (G), R MDIST (G) and F MDIST (G) share class(es). Dividends paid out of capital of these sub-funds amounts to a return or withdrawal of part of the amount of an investor’s original investment or from any capital gains attributable to that original investment and may result in an immediate decrease in the net asset value per share in respect of such class(es) of the sub-funds. Fixed yield share classes pay out a pre-determined annualized fixed percentage of their NAV, which can be adjusted by the Directors with at least one month’s prior notice, do not entirely reflect the actual or expected income or performance of the Fund. These distributions may exceed the actual income, leading to capital erosion, especially during negative returns or losses, and may reduce future capital growth. A positive distribution yield does not guarantee a positive return, and the absolute distributions vary with the NAV, resulting in fluctuating monthly payouts for investors.
Certain sub-funds invest in emerging economies or markets, where special risks, including liquidity, volatility, government policies, taxation, currency, currency repatriation, political and regulatory risks, may be substantially higher than the risks normally associated with more developed economies or markets.
Certain sub-funds invest in securities of small and medium sized companies in the relevant markets. This can involve greater risk than is customarily associated with investments in larger and more established companies.
Certain sub-funds concentrate their investments in a single country and/or a particular industry sector are subject to greater risks than diversified investments in several countries and/or regions and across sectors.
Certain sub-funds may invest directly in certain China A shares via Stock Connect, which may involve in risk related to Investments via Stock Connect and Mainland China investment.
Investment involves risk. The sub-funds may expose their investors to capital loss. Investors should not invest solely based on this material and should read the offering document for details including the risk factors, charges and features of the sub-funds and their share classes.
Each sub-fund intends to use financial derivative instruments (“FDIs”) for investment, efficient portfolio management and/or hedging purposes. The use of FDIs exposes the Fund to additional risks, including counterparty/credit risk, liquidity risk, valuation risk, volatility risk and over-the-counter transaction risk.
Given RMB is currently not a freely convertible currency, payment of redemptions and/or dividend payment in RMB may be delayed due to the exchange controls and restrictions applicable to RMB. As offshore RMB (CNH) will be used for the valuation of RMB denominated Class(es), CNH rate may be at a premium or discount to the exchange rate for onshore RMB (CNY) and there may be significant bid and offer spreads and thus the value of the RMB denominated Class(es) will be subject to fluctuation. Any devaluation of RMB could adversely affect the value of investors’ investments in the RMB denominated Class(es) of certain sub-funds.

Manulife Advanced Fund SPC

Manulife Advanced Fund SPC is an umbrella fund comprising a number of sub-funds investing primarily in equity and bond securities, each of which has a different investment objective and risk level.
The sub-funds do not guarantee distribution of dividends, the frequency of distribution, and the amount/rate of dividends. A sub-fund may at its discretion pay dividend out of capital or gross income while charging / paying all or part of its fees and expenses out of its capital. This amounts to a return or withdrawal of part of an investor’s original investment or from any capital gains attributable to that original investment, and may result in an immediate reduction of the net asset value per share of the respective share classes after the distribution date.
Certain sub-funds with significant exposure to Renminbi (“RMB”) bonds/equity/assets or emerging markets, may involve debt instrument, credit/counterparty, concentration, liquidity, volatility, currency, tax, economic, foreign exchange/multi-currency conversion, down-grading, regulatory and political risks and these risks could be substantially higher than the risks normally associated with the world's more established markets.
A bond sub-fund may hold a significant portion of assets in deposits if there are not sufficient RMB instruments for it to invest in. This may adversely affect its return and performance.
Certain sub-funds using invest directly in debt instruments/shares via QFII regime, the Bond Connect and/or the Foreign Access Regime are subject to various requirements and restrictions under the laws of Mainland China related to investment in QFII and/or China Interbank Bond Market and custodial risks.
RMB is not freely convertible and is subject to exchange controls and restrictions.
Certain sub-funds may have significant concentrated exposures to particular industry sectors and geography's, which subjects investors to concentration and equity market risk.
Certain sub-funds may invest in equities of small- and mid-capitalization companies, which can expose investors to liquidity and volatility risks, and is subject to greater risk than is customarily associated with investments in larger capitalization companies.
Investment involves risk. The sub-funds may expose to a high risk of capital loss. Investors should not invest solely based on this material and should read the offering document for details including the risk factors, charges and features of the sub-funds.

Manulife Hong Kong Series

Manulife Hong Kong Series (“the Series”) is an open-ended unit trust comprising a number of funds primarily investing in equities, debt securities, exchange-traded funds and/or collective investment schemes, each of which has a different investment objective and risk level.
The funds do not guarantee distribution of dividends, the frequency of distribution, and the amount/rate of dividends. Dividends may be paid out of capital and/or out of gross income of certain funds in respect of Inc classes, while charging/paying all or part of certain funds’ fees and expenses to/out of capital of certain funds. This represents a return or a withdrawal of part of an investor's original investment amount or capital gain attributable to that amount. Distributions will result in an immediate decrease in the net asset value of the relevant units. Class AA (RMB) Inc Hedged Unit of certain funds is subject to higher distribution risks than other non-hedged unit classes.
Certain funds may involve equity market, emerging markets, Dim Sum bond market, concentration, volatility, liquidity, credit, credit ratings, below investment grade and unrated securities, credit rating downgrading, interest rates, valuation, sovereign debt, unlisted debt securities, political and regulatory, currency, foreign exchange, derivative and structured product, hedging, and distribution risks. Certain investors may also be subject to the risk relating to RMB hedged share class..
Certain funds are subject to the risks of investing in other funds and the risks relating to asset allocation strategy and/or downside risk management process.
Certain fund is subject to the risks relating to investment in exchange traded funds, Strategic and Tactical Asset Rebalancing Strategy (“STARS”), small- and mid-capped companies, convertible bonds and the risks associated with securitised debt instruments and investments in loss-absorption features. Certain fund is a feeder fund that invests all or substantially all of its assets in another collective investment scheme (the “master fund”) and is therefore subject to the risks of investing in the master fund.
Certain fund will not have direct investments other than cash, cash equivalents and financial derivative instruments (such as futures, options and forwards).
Investment involves risk. The funds may expose its investors to capital loss. Investors should not make investment decisions based on this material alone but should read the offering document for details, including the risk factors, charges and features of the Fund and its unit classes.