Market Overview

9 June 2020

Markets Running On Last Week's Fuel

Over the previous couple of working days and even in the early Asian hours of Tuesday, all major global indexes updated their highs again. The pan-European Euro Stoxx 50 composite index has paid back more than 70% of the total pandemic collapse since mid-March. The French CAC 40 stock index is slightly behind the pace and the German Xetra Dax 30 index is ahead of most European markets and about on par with the US broad market S&P 500 index. The latter has already exceeded the 3,230 points mark tonight while another American high-tech benchmark Nasdaq 100 showed nothing less than a new historical records of all time, just about 100 points below the dream level of 10,000.

After these achievements markets are taking a short pause and are relaxed in the afternoon, which does not change the overall assessment of the general uptrend that leaves almost no doubt that all listed instruments may reach new annual peaks as the economy recovers. The shift of US Dollars into the wider basket of world currencies has also been suspended for the time being. However, this looks more like a technical correction since there is no more news that could rise interest in safe haven purchases. The US Federal Open Market Committee’s (FOMC) decisions on Wednesday are not likely to be a surprise since it is simply unthinkable to have any serious theoretical conversation about negative interest rates immediately after the release of fabulous data from the US labour market on Friday.

Employment in the US added more than 2.5 million jobs, according to the methodology of the Bureau of Labor Statistics (BLS). This was amazing considering that more than 21.5 million jobs were lost in March and April. Expert polls suggested that the average possible job losses in May were another 8 million Americans. However, the Non-Farm Payrolls (NFP) statistics came out in a mega-positive way as for the current early period of re-opening, and even showed almost 3.1 million restored jobs in the US private sector, as government payrolls decreased by 585,000. About 1.2 million employees returned to work in the entertainment and hospitality sectors, and almost all the rest to restaurants and cafes. The industrial sector is lagging behind in these terms. This may explain the cautious behaviour of all commodities, including oil, which did not hold at Monday's levels of $43 per barrel after the confirmation of quotas by exporting countries until August, and slipped back under $40.

However, the labour market showed a clear sign of a reversal, and most likely the trend will only be stronger in June. This is already an indisputable fact, even taking into account the heated discussions about the nature of May’s jump with a detailed analysis of the calculation methods and the possible impact of "misclassification errors". This term was used by both the Bureau of Labour Statistics itself and the media that immediately rushed to report on the matter. For example, the Washington Post wrote an article describing how methods made the unemployment rate look better than it was not only in May but also in April, when it could have been 19.7% instead of 14.7%. But even if the method error nature is applied to May data it will lead to a maximum of 16.3% in unemployment instead of the present official 13.3%. If markets consider this, then investors may have to recognise the recovery in jobs from the 19.7% to 16.3% unemployment level that may occur even faster if compared with an official 14.7% to 13.3% version.

The special note at the bottom of the government’s official jobs report said “overall unemployment rate would have been about three percentage points higher than reported", but "BLS and the Census Bureau are investigating why this misclassification error continues to occur and are taking additional steps to address the issue”. The US Bureau of Labour Statistics (BLS) was trying to be as transparent as possible about how hard it is to collect real-time data during a pandemic, as they admitted that some people who should have been classified as “temporarily unemployed” during the shutdown were instead misclassified as employed but “absent” from work for “other reasons.” And the "other reason" category "is normally used for people on vacation, serving jury duty or taking leave to care for a child or relative. These are typically situations where the worker decides to take leave. But in this unusual pandemic circumstance, the “other reason” category was applied to some people who were staying at home and waiting to be called back", according to the Washington Post article.

The unemployment rate comes from a survey where Census workers ask about 60,000 households questions in the week of May 10 to 16. One of the first questions is simple: did the person do any work “for pay or profit?” There are 45 pages more of the additional questions, and one of those questions asks if someone was “temporarily absent” from the job and why that absence happened. One of the responses is “other”, and the BLS instructed surveyors to try to figure out if someone was absent because of the pandemic and, if so, to classify them as on “temporary layoff”. But some people continued to insist they were just “absent” from work during the pandemic, and the BLS has a policy of not changing people’s answers once they are recorded.

The only political appointee at the BLS is the commissioner, who reportedly does not have access to the data and only sees the finalised report. “The commissioner never sees the job report before it is final. As commissioner, I did not have access to the underlying data. This is a highly automated process,” said Erica Groshen, the former BLS commissioner under the US President Barack Obama. “You can 100% discount the possibility that Trump got to the BLS. Not 98% discount, not 99.9% discount, but 100% discount,” tweeted Jason Furman, the former top economist for former president Barack Obama too. “BLS has 2,400 career staff of enormous integrity and one political appointee with no scope to change this number.” That is, even a person from US President Donald Trump rivals' team, and five months before the election, confirms that the possibility of fraud in this case is excluded. So, it may be the most correct thing for today to just agree with the Donald Trump’s phrase, who hailed the report in remarks outside the White House, by saying the rebound “leads us onto a long period of growth.”

Ben Casselman was sceptic as he commented in the New York Times: "While employers recalled temporarily laid-off or furloughed workers in May, the number of permanent job losses rose, a sign that some businesses didn’t survive the shutdown, or expect demand to stay depressed as the economy reopens. Others are bringing back workers at reduced hours: The number of people working part time because they couldn’t find full-time work barely budged. And millions more people have been laid off in the weeks since the data released Friday was collected in mid-May". And Daniel Zhao, senior economist at the career site Glassdoor added: “The surprise to me in this report is that the recovery was earlier than we expected, but the next question is whether it will be faster than we expected. The increase in permanent job losses is a concerning sign for the length of the recovery because every layoff that turns permanent makes a full recovery harder.” Yet, though the United States is confirming more than 20,000 new coronavirus cases a day, the markets look to agree with Mr Trump and are more positive than they have been for a long time.


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Analysis and opinions provided herein are intended solely for informational and educational purposes and don't represent a recommendation or investment advice by TeleTrade.



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