US Non-Farm Payrolls surprised to the upside once again, but doubts about the sustainability remain prevalent. Valeria Bednarik, Joseph Trevisani, and Yohay Elam discuss the market reaction, the state of coronavirus, politics, and more as a hot summer begins.
Yohay Elam: The US gained 4.8 million jobs in June, far better three million expected. S&P futures have advanced, but the dollar is slow to react. Is the wide range of forecasts behind the lack of reaction? Are currency traders unable to digest these kinds of numbers? Any other explanation for the lack of an immediate reaction in forex?
Valeria Bednarik: Well, I won't say lack or reaction.. take a look at US indexes marching towards all-time highs. The key here is sentiment. An upbeat US report in a crisis scenario boost equities, which in turn weigh on the safe-haven greenback. For this to change, meaning strong US data backing stocks and the greenback, the market usually needs on average three months of substantial gains in data.
Yohay Elam: Great point. Three months to move from risk/risk-off to a normal currency reaction where good news is just good news for the currency, that is.
Valeria Bednarik: Exactly, and the unwanted factor that's still present: the pandemic. For sure, we have hopes on progress on vaccines and economic comebacks. The truth is, contagions are out of control in the US. That means things could take a turn to the worst any moment and without notice. In fact, we are getting some "notices," as lockdowns are back, or re-openings delayed...
Yohay Elam: Indeed, that's the big question. The NFP surveys are from June 12, just before things began deteriorating, with people fearing going out due to the rise in infections, even before the new lockdown. So, should we refocus on higher frequency data? Such as jobless claims.
Valeria Bednarik: Well, for sure, the surprise factor there is gone. We could focus on that ones, but will only have an impact if the outcome diverges from forecasts.
Yohay Elam: I have a minor deja vu from February when markets focused on good news and ignored the upcoming storm, but apart from the weather, several things changed
Valeria Bednarik: Could be for sure...
Yohay Elam: $3 trillion in new Fed money for fiscal stimulus
Valeria Bednarik: Yeah that lil detail. Also, a confident Powell is also a good reason to be optimistic
Yohay Elam: His message has been unequivocal
Valeria Bednarik: As usual. The best ever central bank's head, IMHO, and I don't mean just the US
Yohay Elam: I would vouch for Mario Draghi as he faced an existential crisis
Valeria Bednarik: The EU is an existential crisis...
Yohay Elam: Perpetual
Valeria Bednarik: Not sure if it is worth our time, really. For decades we have been seeing countries discussing to go beyond having a common central bank. A common fiscal policy today is a utopia. They can't even agree on a rescue fund!
Yohay Elam: They seem like a company that is too busy with meetings to get work done, deciding only to decide in the next meeting. Back to the NFP, President Donald Trump is about to hold a press conference, probably taking a victory lap on the figures
Valeria Bednarik: As usual, yeah, a good point in his campaign, or at least that's what he believes
Yohay Elam: Opinion polls show that Trump leads Biden on handling the economy, but loses on everything else. We are four months ahead of the vote, will markets begin examining data also according to its political impact? For example, the unemployment rate is more important politically than for investors, as they also look at the participation rate
Valeria Bednarik: Could be. It's clear that Trump's victory is Wall Street's victory. The market won't be able to ignore the numbers as we approach the election date
Yohay Elam: Today's figures may lower the chances that Democrats take a clean sweep that will allow them to make substantial changes, but the road is long
Valeria Bednarik: Yeah... who can plan 4-month ahead in the current context? We could have a vaccine, or we could have another pandemic-virus running. And that's relevant because a vaccine will mean economic recovery, and a virus running a steeper downturn
Yohay Elam: Indeed, progress on a vaccine has been encouraging. Wednesday's announcement by Pfizer and BioNTech provided some support to markets
Joseph Trevisani: One thing we must remember - the elections campaign has not started The parallel is 2016 when Clinton led in all polls throughout the summer and they did not close until the fall
Yohay Elam: Anything can happen, Trump is clearly the underdog now
Valeria Bednarik: Anyway, too early to think about what could or could not happen in four months
Joseph Trevisani: Yes, I would agree, and also agree that is why the markets are ignoring the polls at the moment
Yohay Elam: Indeed, when the NFP is not the leading indicator, four months is a lot of time
Joseph Trevisani: It is a rather difficult prediction here. Markets are solely focused on the economy. A question is if the re-instituted closures start to show up in economic data..will the market react? I think it will.
Yohay Elam: Consumers began reacting before the reclosures. The virus is stronger than the governors. I think markets will react, but they are also awash with cash, so a repeat of March is unlikely perhaps not even half of March. There's no risk to the financial system, thanks to Powell
Joseph Trevisani: Agreed it is not likely. That standard is hard to top
Valeria Bednarik: "Consumers began reacting before the reclosures." That's the key.
Joseph Trevisani: As for the election, the mayhem that has been taking place in many cities is not supported by most Americans. The right to protest yes, but riots and the wholesales destruction of monuments is not. Because of media coverage, the if it bleeds it leads syndrome, such actions dominate the news but they also provide a very effective campaign strategy for the Republicans in the fall.
Yohay Elam: Data from Homebase, among others
Joseph Trevisani: Much depends on how extensive and draconian the closures are and how they impact consumption.
Valeria Bednarik: And fears. I read that almost 50% of Americans are unwilling to have a vaccine. Let extrapolate data, and think that 50% of the population is scared of getting ill
Joseph Trevisani: An interesting question is what part the protests play in the re-invigoration of the virus spread.
Valeria Bednarik: Could be that the economy takes much longer to recover
Yohay Elam: The current surge of coronavirus is due to reopening
Joseph Trevisani: I have my doubts that 50% of the US is afraid of the vaccine
Yohay Elam: The second wave hits confidence harder
Valeria Bednarik: Unwilling, not afraid, but go one step further and cut by half, to 25%
Yohay Elam: Businesses that held up may now throw the towel. Anti-vaxxers are indeed an issue...
Joseph Trevisani: It could also be due to the protests, the logic to contact and spread it the same.
Yohay Elam: The virus spreads much more indoors than outdoors, and many of them wore masks, but hopefully, Trump is coming around to masks now
Joseph Trevisani: True, but close contact is essential, precisely the situation in May protests. No doubt both contributed...
Valeria Bednarik: Agreed
Yohay Elam: The seeds for the second wave were sown well before the protests. White House guidance expired at the end of April
Joseph Trevisani: We are again entering a situation with many unknowns... I think we can agree that the reaction, both in markets and in general will be quite different
Yohay Elam: America failed the marshmallow test
Joseph Trevisani: The bar for reaction has been set very high by the panic in March
Yohay Elam: Indeed, apart from Fed funds, there is no alternative. Commercial real estate is not attractive, bond yields are down
Valeria Bednarik: Wait, just wait, and in the meantime, economic downturns
Joseph Trevisani: What is the marshmallow test?
Yohay Elam: In this study, a child was offered a choice between one small but immediate reward, or two small rewards if they waited for a period of time. During this time, the researcher left the room for about 15 minutes and then returned. The reward was either a marshmallow or pretzel stick, depending on the child's preference. In follow-up studies, the researchers found that children who were able to wait longer for the preferred rewards tended to have better life outcomes, as measured by SAT scores (Source: Wikipedia). The NFP was a small prize for reopening early, but there's no second marshmallow, as the second wave is already here
Valeria Bednarik: True
Joseph Trevisani: For the millions out of work, it was not a choice between a sweet or a pretzel but their livelihood.
Yohay Elam: Continuing claims remain high. The US the richest country in the world. It can pay to keep people at home like the UK does. It's being done in the US as well, and it provides lots of relief
Joseph Trevisani: The US is not the UK, we do thing differently
Yohay Elam: Differently indeed. The NFP has shown many jobs have been restored, and that's good news
Joseph Trevisani: Remember California, as well as Texas, reopened
Yohay Elam: But perhaps somewhat lagging given the fast pace of events
Valeria Bednarik: The IRS sent 1.1 million stimulus checks to dead people totaling $1.4 billion, according to a new report from a government watchdog agency
Yohay Elam: California went too fast in reopening
Valeria Bednarik: And is now closing back
Yohay Elam: "They see dead people"
Joseph Trevisani: But Georgia was the first to reopen and has had only limited problems
Valeria Bednarik: Georgia having limited problems is irrelevant, when the country has 40,000 new cases per day...
Yohay Elam: 50K
Valeria Bednarik: Yeah, some states are doing better than others, but the country is doing really bad
Yohay Elam: New York acted late in closing, but now seems prudent with reopening
Valeria Bednarik: Of course, less populated places do better. Big cities will remain under fire
Joseph Trevisani: Cases are based on both spread and test. One issue is that the news coverage has become politicized
Yohay Elam: The positive test rate is rising and hospitals are under strain. Not only testing. The Non-Farm Payrolls beat expectations and that is great news. However, in coronavirus times, things are moving fast, and a report that is three weeks old seems just a bit lagging. Higher-frequency data may come into focus for markets
Valeria Bednarik: Anyway! a swallow doesn't make a summer, and seems neither can do two encouraging NFP reports. As it was said at the beginning, the US has recovered just part of the jobs' lost in March/April. There's a long and uncertain path ahead, and elections are in the way. At least we can agree entertainment could be taken for granted
Joseph Trevisani: The unknowns in the situation keep returning. The economic impact of the second wave is uncertain. NFP is by definition a lagging indicator and the new closure orders must have an impact on employment. No doubt Washington will pass another stimulus package but the real determinant is the pandemic. The more extensive the shutdowns and the longer the greater the economic damage. That much is obvious but little else is
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