- U.S. May unemployment report expected to show a continued plunge in U.S. labor market
- ECB gives the markets a pleasant surprise on QE
U.S. May unemployment report expected to show a continued plunge in U.S. labor market — The markets will be watching today’s May unemployment report for any hope that U.S. jobs will return faster than expected, thus cushioning the blow to the economy. Unfortunately, the U.S. labor market in May remained in a full-blown crisis mode with the market expecting today’s May payroll report to plunge by another -7.50 million jobs, adding to April’s -20.537 million debacle.
There was some good news on Wednesday when May ADP jobs fell by -2.76 million, which was much better than market expectations of -9.0 million. However, the ADP uses a different methodology and the smaller-than-expected ADP drop may not translate to today’s payroll report.
Today’s expected May payroll report of -7.5 million would leave the absolute level of payroll jobs at 123.545 million jobs. That would be mean that a total of -29 million jobs have been lost so far from Feb’s record high of 152.5 million. The new 123.545 million job level would be about 7 million jobs below the Great Recession’s trough and would leave jobs at a level last seen 23 years ago in 1997.
There was bad news yesterday on the labor front when both initial and continuing claims were higher than expected, which means that the job losses continued in the past two weeks, though at a slower rate. The markets are expecting some significant improvement in the labor market in June as the U.S. economy starts to reopen. However, the labor market is due for a long slog back to normalcy since many businesses still can’t reopen or can only partially reopen. Unfortunately, many small and medium-sized businesses may never reopen due to insolvency.
The consensus is for today’s May unemployment rate to show a +4.4 point increase to 19.1%, 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. Today’s expected unemployment rate of 19.1% would be a fresh post-war record, although it would at least remain below the all-time U.S. record high of 24.9% posted during the Great Depression.
An unemployment rate today of 19.1% would indicate that nearly 1 in 5 people are out of work. Moreover, the unemployment situation is actually much worse after taking into account discouraged workers, underemployed workers, and people who lost unreported jobs who aren’t even counted in the government’s statistics.
The extent of the pain in the labor market can be seen in the broader unemployment measures. For example, the U-6 U.S. unemployment rate, which includes discouraged and under-employed works, already soared to 22.8% in April. Today’s U-6 unemployment rate is likely headed above 25%, which means at least 1 of 4 Americans is either unemployed or underemployed.
The consensus is for today’s May average hourly earnings report to show a sharp increase of +1.0% m/m and +8.5% y/y, adding to April’s report of +4.7% m/m and +7.9% y/y. In normal times, that would be fantastic news for workers since it would indicate a sharp increase in wages and income. In the current environment, however, the surge in hourly earnings is simply a quirk in the data caused by the fact that mostly lower-paid workers have been laid off, leaving higher-paid workers to temporarily inflate the average hourly earnings data.
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 G DP 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.
ECB gives the markets a pleasant surprise on QE — The ECB on Thursday surprised the market with a larger-than-expected expansion of its QE program. The ECB raised the size of its Pandemic Emergency Purchase Program (PEPP) by +600 billion euros from the current level of 750 billion euros, which was more than the consensus of +500 billion euros. The ECB also extended the program from the end of this year until at least June 2021.
Importantly, the ECB also delivered the good news that it will reinvest the proceeds from maturing securities until at least the end of 2022. That means that there is no chance that the ECB’s balance sheet will start dropping until at leat 2023. The markets were pleased with the certainty that the ECB won’t be draining permanent reserves from the Eurozone financial system with a balance sheet drawdown until at least 2023.
The ECB also made clear that it will not be cowed by the German Constitutional Court’s recent opinion that there were German constitutional problems with the ECB’s original QE program. The ECB on Thursday said that its PEPP securities buying will be conducted in a “flexible manner over time, across asset classes and among jurisdictions.” That was a clear notification that the ECB will keep buying Italian, Greek, Spanish, and other troubled bonds in whatever quantity is necessary to keep the markets stable, regardless of capital key considerations (i.e., that QE purchases should roughly equal the proportional size of each country). The 10-year Italian bond yield on Thursday fell sharply by -13 bp to 1.42%, and the 10-year Italian spread against bunds dropped by 17 bp to 174 bp.
