The May Jobs Report Shocker left one TV economist and market participants alike “gobsmacked,” as Non-Farm Payrolls gained 2.5 million jobs, compared to an expected loss of -8 million. Given the multitude of challenges in front of the nascent recovery, the best news from the week may just be that the US Economy is incredibly resilient. The unemployment rate improved by 1.4% to 13.3%:
As Cam Hui pointed out, “Nearly all of the 2.5 million in job gains came from the Service-Providing Industries. Half of that was attributable to "leisure and hospitality," with additional major gains from "retail trade" and "health care and social assistance." There was also talk about whether PPP may have moved people from unemployment to "employed" even if they weren't working (overstating the number of actual jobs created). With this new information in hand, it will be helpful to see how the FOMC responds when it meets next week- will they hint at any policy changes?
Growth Rate Vs. Level. There has been quite a bit of discussion around the shape of the recovery (V or L or W, etc.). As Paul McCulley reminded Consuelo Mack on WealthTrack, “the growth rate will be large and ‘V’ shaped,” but re-achieving the prior level of economic prosperity will take “a number of years.” According to the CBO, as reported this week in the WSJ, “it may take nearly a decade for the US economy to fully recover from the coronavirus pandemic and related shutdowns.”
You can monitor V’s, L’s and even Nike Swoosh growth rates by checking Bill McBride’s “6-High Frequency Indicators for the Eventual Recovery.” “Eventual” may be the operative word, as it may not yet be appropriate to assume we are out of the woods. Julien Bittel made this historical observation on Thursday, “Once GDP peaks vs. potential late in the cycle, peak-to-trough, this process lasts 11Q on avg. The output gap only just started to widen following the longest US economic expansion ever. A 43Q expansion to reset after a 1Q widening in GDP vs. potential? Somehow, I don’t think so.”
More Stimulus Plans? Nine weeks into the CARES Act economic relief program (the largest in history), about 70% of the funds have been disbursed. With the Economic Impact Payments (stimulus checks) largely now in the hands of recipients and the additional unemployment supplement ($600/week “top-up”) set to fully expire the end of July, the question remains what pro-growth stimulus plans may be next. NEC Director Larry Kudlow, in an interview Friday with Bloomberg TV said, “I don’t want to rush into anything and neither does the President.” Instead, Mr. Kudlow said he would like to take some time to assess how the economy is responding to the measures already in place. “We will come back, I recon, after July 4th and have a good discussion.”
Watch Hong Kong. China’s assertion of authority over Hong Kong has placed the special administrative region of China in a precarious position. As Josh Rogin Wrote in the Washington Post, “The new law essentially crushes the relative autonomy that Hong Kong enjoyed to date, makes a mockery out of the principle of “one country, two systems,” and speeds the city’s path toward a tragic fate.” As Ian Bremmer pointed out, “this year, it’s illegal for Hong Kong residents to commemorate the Tiananmen Square massacre.” But they did it anyway. The Hang Seng Index rallied 7.88% on the week, along with global equities.
The Search for Safe Yield. After a period of rising interest rates that coordinated with the Fed’s tightening cycle, CD rates are now in a downward trend, as illustrated by Bankrate.com’s CD index. With 6-mo, 1-yr and 5-yr rates diving further below the current inflation rate of 1.4%, there is no end to financial repression in sight. Low rates force consumers to “reach for yield” to replace income, but the added risk exposes hard earned capital to loss of principal, should asset prices weaken further.
I will close here for the week. Have a great weekend.