- Another drop in continuing claims today would be a positive labor market signal
- U.S. trade deficit expected to widen as exports plunge
- ECB expected to expand its Pandemic QE program
Another drop in continuing claims today would be a positive labor market signal — The markets are cautious about placing too much weight on the unemployment claims data considering the slew of recent mistakes by state reporting offices and the delays in processing millions of claims.
Nevertheless, the stock market would be very pleased if the continuing claims series continues to fall today, suggesting that people are being rehired faster than they are being laid off. A fast rehiring rate is what the economy needs to get back on its feet and reignite consumer spending.
The consensus is that today’s weekly continuing claims series will drop by -1.002 million to 20.050 million, adding to last week’s -3.86 million decline to 21.052 million. A further 1 million person drop in the number of people receiving unemployment benefits would mean that a net 1 million more people were rehired than were laid off and came onto the job rolls for the first time. The continuing claims series last week dropped sharply by -3.86 million, but the markets are waiting to see if the peak has been reached and if the number of people receiving unemployment benefits will continue to decline.
While a drop in continuing claims would be welcome, there is still a very long way to go since there were 19 million more people on the unemployment rolls in the latest reporting week than before the pandemic. That means that 19 million more people need to find jobs before the unemployment claims series can return to normal.
The consensus is for today’s initial unemployment claims report to drop by -280,000 to 1.843 million following last week’s report -323,000 to 2.123 million. The decline in initial claims is a step in the right direction, but 1.843 million new claims is still a massive level of new claims.
The markets will be paying less attention to the initial claims report because that series has been overstating the unemployment situation, likely because people have been filing multiple claims due to delays in getting their earlier applications approved or because of confusion about the different federal unemployment benefits available under the CARES Act. Just because an initial unemployment claim is filed doesn’t mean that it is approved and that person is put into the continuing claims series.
The markets were mildly encouraged by yesterday’s news that the May ADP employment report fell by -2.76 million to 106.818 million jobs, which showed a better labor market than expectations for a much larger -9.0 million drop to about 100 million jobs.
Wednesday’s ADP report raised some hopes that Friday’s May payroll report might not be as bad as the consensus of -8.0 million jobs. Friday’s expected -8.0 million decline in payroll jobs in May would add to April’s plunge of -20.537 million and would leave the payroll level at 123.0 million, down by a total of -29.4 million jobs from February’s record high of 152.5 million jobs.
Meanwhile, the consensus is for Friday’s May unemployment rate to show a +4.8 point increase to 19.5%, adding to April’s +10.3 point increase to 14.7%. April’s unemployment rate of 14.7% was already a post-war record high. Tomorrow’s expected unemployment rate of 19.5% would be a fresh post-war record, although it would remain below the all-time U.S. record high of 24.9% posted during the Great Depression.
There are now only a few weeks left in Q2, which will likely see the largest quarterly GDP drop in American history. The consensus is for a Q2 GDP plunge of -34.2% q/q annualized and -9.9% q/q. The expected report would produce an overall peak-to-drop in GDP in the first half of 2020 of -11.1% when combined with the -1.2% q/q drop in Q1. The expected peak-to-trough drop of -11.1% would easily be a post-war record and would exceed the common definition of a depression of a drop of more than -10%. However, it would be less than half the -26% GDP drop seen during the Great Depression.
U.S. trade deficit expected to widen as exports plunge — Today’s Apr U.S. trade deficit is expected to widen to a 6-month high of -$49.2 billion from -$44.4 billion in March. Today’s expected report would be close to the 12-month trend average of -$49.0 billion. The trade deficit is widening as exports fall faster than imports due to the pandemic-related disruptions in trade. In March, exports plunged by -9.6% m/m, which was more than the -6.2% m/m decline in imports.
ECB expected to expand its Pandemic QE program — The consensus is that the ECB at its meeting today will expand its Pandemic Emergency Purchase Program (PEPP) by 500 billion euros from the current level of 750 billion euros. The ECB isn’t under pressure to announce an increase today since it has only bought 235 billion euros of securities under that program so far and won’t hit the 750 billion euro limit until autumn.
Nevertheless, the ECB in the minutes of its last meeting on April 28-29 virtually promised a hike in the PEPP program at today’s meeting when it said, “At the June meeting, more information would be available, including new Eurosystem staff macroeconomic projections. At that point, the Governing Council would have to stand ready to adjust the PEPP and potentially other instruments if it saw that the scale of the stimulus was falling short of what was needed.”
ECB President Lagarde recently said that the ECB now expects the Eurozone recession to be between its medium and worst assumptions, meaning the ECB has reason to announce stimulus measures as soon as possible to bolster consumer, business, and market confidence.
