Worst Unemployment for Nearly 100 Years
US UNEMPLOYMENT FORECAST TO SURGE TO 20% (PEAK?
Last month’s US nonfarm payrolls plunged by 20.5 million and the unemployment rate jumped up to 14.7%. Timelier weekly initial jobless claims have continued to rise, but the pace of increase is moderating. Latest initial claims rose by 2.12 million for the week ending 23 May and continued to surpass anything seen during the global financial crisis, but they are down from the peak weekly rise of nearly 7 million at the end of March. Continuing claims, meanwhile, fell for the first time during the pandemic to 21.1 million for the week ending 16 May from 24.9 million in the prior week. For next week’s monthly data, we forecast a further drop in payrolls of 10 million in May and a rise in the unemployment rate to 20%, the highest since the Great Depression. These official figures will be preceded by the ADP payroll report (Wed), while the ISM manufacturing and non-manufacturing surveys (Mon/Wed) are expected to show modest improvements but remain in contraction territory. We also forecast US April construction output (Mon) and factory orders (Wed) to fall by 12.0% and 12.4% respectively.
US JOBS DATA AND ECB DECISION IN FOCUS The main focus for next week is the US May labour market report (Fri) and the European Central Bank policy announcement (Thu). Meanwhile, UK-EU negotiations on the future relationship will resume. Chinese PMI surveys for May (from Sun) will be released, while UK data interest will be on final PMIs (Mon/Wed), Bank of England credit data (Tue), new car registrations (Thu) and GfK consumer confidence (Fri). Eurozone final PMIs (Tue/Thu) and German unemployment claims (Wed) and factory orders (Fri) are also due. More broadly, the impact of rising US-China geopolitical tensions on market sentiment, especially in relation to the latter’s new security law in Hong Kong, will continue to spar with global recovery optimism as economies reopen. Risk assets were supported, but sentiment cooled towards the end of the week. Central bank policy action maintained low benchmark bond yields, while euro peripheral spreads narrowed after the European Commission proposed a €750bn recovery fund. That supported the euro, while the pound also recovered.
ECB PEPP TALK The ECB launched its Pandemic Emergency Purchase Programme (PEPP) in March, pledging to buy €750bn of bonds under the scheme this year and to continue until the “Covid-19 crisis phase is over”. There is impetus for more policy stimulus to be announced, especially after President Lagarde said that Eurozone GDP is expected to fall by between 8% and 12% in 2020, representing its ‘medium’ and ‘severe’ scenarios, rather than the ‘mild’ scenario of a 5% decline. Eurozone CPI inflation also fell to just 0.1%y/y in May, according to this week’s flash eatimate. The minutes of the last meeting in April, moreover, stated that policymakers “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”. An update to the staff macroeconomic forecasts will show a sharp downward revision to economic growth from the March projections which still predicted 0.8% for 2020. Inflation forecasts of 1.4% in 2021 and 1.6% in 2022 are also likely to be revised lower. Overall, the ECB is expected to announce a €500bn increase to its PEPP, although there is a risk it could be smaller or even deferred, while interest rates are forecast to be unchanged. Markets will be looking for more detail from Ms Lagarde about the purchases under the scheme. She may also be asked about the German Consitutional Court ruling which questioned the legality of the ECB’s asset purchases under its Asset Purchase Programme (APP) launched in 2015.
FROSTY TALKS WITH THE EU? The final round of UK-EU talks on the future relationship, led by the UK’s David Frost and the EU’s Michel Barnier, is scheduled to take place next week before the end-June deadline to extend the transition period beyond 31 December 2020. The UK has said it will not ask for an extension to the transition period. Both sides, however, reportedly remain apart on some key matters especially relating to a level playing field in return for access to the single market. The UK insists it only wants a deal that has been given to other countries. If there is no extension to the transition period, intense negotiations will probably resume in the second half of the year, with markets continuing to assess the risk of the possibility of no agreement. Reports suggest PM Johnson might hold face-to-face talks with his EU counterparts after the European Council meeting on 19 June. Next week’s UK data releases including the final readings for the May PMI surveys. We think the headline indices may show modest upward revisions to 40.8 for manufacturing and 28.2 for services, based on later returns taking into account the easing in lockdown restrictions. Both, however, will remain well below the 50 level separating expansion and contraction. GfK consumer confidence for May is expected to be steady at -34, compared with the earlier reading for the month, with the potential silver lining being that personal finances for the next twelve months are becoming slightly less negative.
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