U.S. indices advanced as headline employment data gave rise to optimism about economic recovery, although the details indicate that more stimulus is needed. Gold prices raced above $2,000/oz as bond yields remain near all-time lows.
Economic Events (last week)
- U.S. Manufacturing Purchasing Managers Index (PMI) – A survey of purchasing managers in the manufacturing industry in July posted a reading of 54.2, which beat market expectations of 53.6. Not only did this reading depict the respondents' positive views of the economy, but it also reflected an economy that was expanding, as evidenced by the second consecutive print over 50.
- Reserve Bank of Australia (RBA) Monetary Policy – The RBA left interest rates unchanged, citing an uncertain outlook given that the "recovery is expected to be only gradual and its shape is dependent on containment of the virus." In reaching this decision, the board recognized that "fiscal and monetary stimulus will be required for some time given the outlook for the economy and the labor market" and reiterated its pledge to "not increase the cash rate target until progress is being made towards full employment."
- New Zealand Employment (quarterly) – The surprising decline in the quarterly unemployment rate to 4.0% when forecasts called for a rise to 5.8% was a bit misleading given that the participation rate also fell. Expectations are for a sharp rise in the September quarter's reading and for the Reserve Bank of New Zealand (RBNZ) to acknowledge that by providing further stimulus measures at its next meeting.
- U.S. Institute for Supply Management (ISM) Non-Manufacturing PMI – A survey of purchasing managers in industries other than manufacturing posted a reading of 58.1, beating the 55.0 consensus. This report, released by the ISM, was recently renamed "Services PMI" to better reflect its scope. Like the Manufacturing PMI released earlier in the week, this report showed an economy that was in the expansion stage.
- New Zealand Inflation Expectations (quarterly) – A survey on inflation expectations in New Zealand posted a 1.43% reading, which was higher than last quarter's 1.24% but still conveyed that a majority of survey participants expect inflation to be at the lower end of the RBNZ's 1% to 3% target range.
- Bank of England (BOE) Monetary Policy – As expected, the BOE voted unanimously to leave benchmark interest rates, currently at historical lows of 0.1%, and the bond-buying program, currently at £745 billion ($975.8 billion), unchanged. The obligatory warning about the severity of the hit to second quarter GDP aside, the committee shared that consumer spending and household consumption data looked promising. Furthermore, the committee stated that it would "continue to review the appropriateness of a negative policy rate as a policy tool alongside its broader toolkit." So, to summarize, no serious though has been given to negative rates, and additional stimulus would be provided should the need arise.
- U.S. Unemployment Claims (weekly) – U.S. jobless claims were 1.19 million, marking the 20th straight week above 1 million. On the bright side, it was about 250,000 lower than last week's number and the lowest reported figure since the lockdowns were imposed.
- Canada Employment – The Canadian economy added 418,500 jobs in July, surpassing expectations of a rise of 395,000, and the unemployment dipped to 10.9%, also bettering expectations of 11.1%. To put this in context, the pandemic-induced lockdown led to job losses of 3,004,500 in March and April. The rebound in May, June, and now July has recouped 1,661,000 of those losses, or about 55%. While this report has to be viewed optimistically, the pace of job recovery appears to have slowed, raising concerns that a return to pre-pandemic employment levels might take much longer to become a reality.
- U.S. Employment – U.S. non-farm payrolls (NFP) for July rose by 1.76 million, surpassing consensus forecasts of 1.53 million, and the unemployment rate dipped to 10.2%, also bettering expectation of 10.5%. Job growth since April's NFP posted a loss of 20 million-plus jobs has recovered by approximately 44% (9,063,000 ÷ 20,537,000). Average hourly earnings, the main wage measure, beat expectations of -0.5% by posting a 0.2% month-to-month reading, although last month's print was revised lower to -1.3%. This metric is likely skewed by the fact that a lot of low-income earners have either been fired or laid off. The average workweek fell by 0.1 hours to 34.5 hours.
Global Markets Performance
|FX & Index Performance|
|Index||Russell 2000||Nasdaq 100||DOW 30||DAX 30||S&P 500||Nikkei 225||Nifty 50||China A50|
|Best Performer||Worst Performer|
The Australian dollar (AUD) was the best performing major last week, as it gained against all its major brethren. The rise in iron ore prices and coordinated fiscal and monetary policy initiatives appear to have given the Aussie a bid. The Canadian dollar (CAD), Swiss franc (CHF), euro (EUR), and Japanese yen (JPY) all ended the week on a net positive note. The rest of the majors ended the week net negative, with the New Zealand dollar (NZD) being the worst performer for the second consecutive week.
|Best Performer||Worst Performer|
|Russell 2000||China A50|
A closer look at NFP reveals a more dire picture than the headline numbers suggest. In short, the rate of job growth appears to be decelerating. July's figure of 1.76 million was lower than the figures for the prior two months. Furthermore, as per the Bureau of Labor Statistics (BLS) release, non-farm employment "was lower than its February level by 12.9 million, or 8.4 percent."
Additionally, the underemployment rate (U6) is at 16.5%, which, while lower than June's reading of 18.0%, is still much worse than July 2019's reading of 7.3%. U6 gives a more comprehensive picture of the labor market than does the official unemployment rate (U3) and has often been cited by the Federal Reserve Board (Fed) as providing a more accurate picture of the U.S. labor market.
A snapshot of the current employment situation reveals that 31.4 million Americans filed for unemployment insurance (UI) benefits as of July 18, 2020. These benefits, totaling $600 per week, ended on July 31, 2020, which means that the consumption patterns of these recipients will be adversely affected until and unless that loss of income is replenished. This decrease in demand can only hamper the reopening process, leading to a higher rate of unemployment.
Factor in reports of a resurgence in COVID-19 cases, and the odds that the United States will get back to pre-pandemic employment levels any time soon are not high. So, in a nutshell, future NFP data will be dependent on keeping COVID-19 contained and lawmakers providing the needed support to unemployed Americans until the promise of a vaccine becomes reality. The Fed acknowledged this when it stressed that Congress may need to provide further support quickly. The markets are keenly aware of this.
The Russell 2000 was the best performing index last week, as it surged about 6%, while China A50 was the worst performer, although it ended the week up 0.15%. The small-cap Russell 2000 likely benefited from earnings that were not as bad as feared and investor belief that Congress has no choice but to approve another round of stimulus measures that should boost markets, as has been the case for the past few months. Chinese stocks are being affected by the ongoing U.S.-China tensions. The technology-heavy NASDAQ and large-cap S&P 500 also rose, with the former rising to record highs while the latter is within shouting distance of its all time peak.
Oil, Yields, and Gold
U.S.10-year and German bund yields ended the week marginally higher, although the T-note did make new lows prior to retracing on the payroll report. Crude oil (WTI) ended the week higher on signs of emerging global demand and declining inventories. Geopolitical tensions, a weak U.S. dollar, and rock-bottom interest rates are all contributing to the continued rise in gold as it surges past the $2,000/oz.
Key Economic Events (next week)
|August 10||9:30 PM||Australia - NAB Business Confidence|
|August 11||2:00 AM||U.K. - Claimant Count Change|
|10:00 PM||New Zealand - RBNZ Monetary Policy|
|August 12||2:00 AM||U.K. - Preliminary GDP (quarterly)|
|8:30 AM||U.S. - CPI|
|9:30 PM||Australia - Employment|
|August 13||8:30 AM||U.S. - Unemployment Claims (weekly)|
|August 14||8:30 AM||U.S. - Retail Sales|
|10:00 AM||U.S. - UM Consumer Sentiment|
Chart(s) of Interest – Russell 2000
The Russell 2000 has lagged its more popular brethren in terms of the recovery from the COVID-19 induced plunge. That said, last week's price action seems to suggest that it is trying to catch up. Last week's close above a key resistance level at 1,541 opens the way for a test of 1,608, which, if breached successfully, would see 1,713 come into play. Conversely, retracement should be contained by previous resistance, now turned support levels, at 1,541, 1,510, and 1,453.
Pivot Points and Fibonacci Retracement Levels
The pivot point is calculated from the previous trading periods' price action and can be used to determine the short-term trend. If the instrument on the following period trades above the pivot point, it is thought to be exhibiting bullish sentiment, whereas trading below the pivot point is seen as bearish. The Fibonacci retracement is the potential reversal of the instrument's original move in price.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.