Talking Points
June 05, 2020 | 14:16
How Stocks Learned to Stop Worrying…
Economics
Economics
…and Love the Bond buying (with apologies to Dr. Strangelove). One commentator called it “almost unseemly”, another said “jarring”, but markets forged aggressively higher this week even amid the worst U.S. civil unrest since 1968, deepening frictions with China, and darkening official economic forecasts. The broad-based rally was driven, plain and simple, by rising optimism on the economic reopenings. This sentiment was handed a major boost by Friday’s surprising—nay, shocking—rise in May jobs. While any single data point would normally raise questions on its accuracy, the fact that each of the U.S. payrolls and households reports, as well as Canada’s labour force survey, all sang from the same sheet suggests employment truly turned the corner last month. This reinforced other evidence that the North American economy hit rock bottom in mid-to-late April and has since begun the long road to recovery. |
Even before this week began, many were warning that the equity market rally had become badly over-extended, particularly in light of recent sour news. Riding roughshod through those concerns, the S&P 500 was up by over 5% this week by Friday afternoon, with the TSX following right in that wake. More broadly, the all-world MSCI broke above its 200-day moving average on Wednesday, and is now up more than 35% from the March lows. U.S. equities are now less than 1% below levels prevailing at the start of the year. Borrowing from a survey conducted by our partners in Fixed-Income Strategy, 73% believe that the main driver behind this impressive comeback in stocks has been Federal Reserve policies (i.e., especially asset purchases). And, there is little doubt that rapid and aggressive fiscal and monetary policy responses have played a massive role in backstopping markets, but there are clear signs that confidence in the underlying outlook is fundamentally brightening. Beyond stocks, note that oil prices are resurgent, with WTI up another 10% this week to $39, on prospects of OPEC+ clinching an agreement to extend production cuts. Copper prices have climbed back to levels last seen prior to economic shutdowns in North America, boosted by the ongoing revival in China’s factory and construction activity. Bond yields also moved higher this week, breaking out of a long-standing range, as the U.S. 10-year Treasury yield jumped more than 25 bps to above 0.9% in a significant steepening. Meantime, safe-haven gold retreated almost 4%, despite a weaker U.S. dollar. A variety of emerging market currencies have rallied sharply; even Brazil, which now faces an intense struggle with COVID, has seen its currency rocket 18% from the lows hit three weeks ago. In the thick of this clear-cut risk-on rally, the Canadian dollar has come roaring back, rising another 2.5% this week to 74.5 cents (C$1.342). Like so many other key financial indicators, that brings it all the way back to levels prevailing three months ago, or just before the lockdowns began. Along with the broad upswing in market sentiment, the loonie has also found heavy support from the surprisingly quick comeback in oil prices. However, note that WTI remains roughly $10 below pre-shutdown levels, and it’s very difficult to justify further gains in the Canadian dollar in the absence of further gains in crude. To what extent is this suddenly buoyant market view on the potential recovery supported by the facts on the ground? The first glimpse of economic activity in May from around the world was quite uniform in its message: the rebound has begun, but there is still plenty of work to be done. U.S. vehicle sales are a representative gauge, and blessedly accurate, and they rose to a 12.2 million annual rate last month from 8.6 million in April, but still down from last year’s 17 million tally. For such a specific indicator, that’s an amazingly concise reading on the global economy—sales were up 40% from April’s nadir, but are still nearly 30% below pre-virus levels. We saw that type of result repeated many times this week, from PMI surveys, to home sales in Canada, to oil prices, and finally to the May jobs data. Turning to the employment reports, clearly the ongoing heavy-duty rush of initial jobless claims in the past month threw all forecasters (including in Canada) for a loop. And, we will note that even the ADP survey pegged a job loss of 2.8 million in the month, and they have direct access to payroll data. What likely happened is that the tidal wave of claims has taken a long time to process, and that underlying conditions have, in fact, turned faster than claims would suggest. As well, there is the very real possibility that forecasters in New York and Toronto have been influenced by the tough challenges faced by their very local economies, while openings have been more advanced in much of the rest of North America. For example, Ontario was the only province to report a job decline in May, and New York’s insured unemployment rate is now above 19% (versus, say, 10% in Texas). On the jobs data, the 2.5 million U.S. payroll surge was the largest on record, although it only reversed 11% of the losses of the two prior months. It’s almost the same story in Canada, where the record 289,600 employment rise recouped just under 10% of the 3 million losses in March/April. Curiously, the unemployment rates went in opposite directions, with the U.S. defying all expectations with a 1.4 ppt pullback to 13.3%. In contrast, the Canadian jobless rate rose further (even with a record jobs gain) to a post-war high 13.7%. The story here was a big rebound in Canada’s participation rate; it rose 1.6 ppts to 61.4%, moving back above the U.S. rate of 60.8% (which edged up from 60.2%). Canada’s wage subsidy program rolled out in May, and it likely played a role in boosting both employment and labour force participation last month. Still, no matter how we got here, Canada now suddenly has one of the highest jobless rates in the developed world. While few economies have reported for May, it now appears that only Greece and Spain currently have higher rates than Canada. Not to end on a down-note, this should do little to detract from the bigger theme that all signs suggest that the recovery is truly underway, and May will mark the high-water mark for Canadian joblessness. Do the stunning May jobs figures change the broader economic forecast? It’s certainly a fair question, given that consensus missed U.S. payrolls by almost 11 million people, and Canada by almost 800,000. In a word, no… at least not our GDP forecast. To reiterate, and as we have pointed out many times in recent weeks, we are the least pessimistic among the major forecasters in Canada and distinctly toward that end of the spectrum in the U.S. as well. We have long believed that the economy would begin to revive as the reopenings began in May, and that would be even clearer in the June data. As a result, we have consistently had huge rebounds in Q3 GDP (now looking for about 40% in both Canada and the U.S.) from the spring depths. And we have been quietly encouraged by the early stages of the reopenings. Anecdotally, for all of those who claimed that people “would never go back to normal”, we would respectfully point to the scenes from bars and restaurants in Paris this week as they were allowed to reopen. And, it is even more heart-warming that the NBA and NHL are busily planning to finish the truncated 2020 seasons. (Major league baseball? That’s a whole different ball game, apparently.) While there is little debate that the road to recovery is long, and could yet be bumpy, the first few miles have been remarkably smooth. |