Optimism on a V-shaped US recovery fuels risk sentiment

Oil prices continue momentum as US labor market remains resilient

KUWAIT: The jobs report in June showcased the rebound in the US labor market as all US states started lifting their strict lockdown measures. The labor market made greater progress than expected in June. Thursday’s simultaneous release of the monthly employment report and the weekly jobless claims data offered diverging snapshots of the economy. One reflecting a flood of rehiring, particularly at restaurants and retailers, as state economies reopened.

The other reflecting a jump in new virus cases, which has led many of those same states to halt or even walk back reopening plans. In details, payrolls rose by a more-than-expected 4.8 million in June after an upwardly revised 2.7 million gain in the prior month, according to Labor Department figures. The data, which offer a snapshot of mid-month conditions, also showed the unemployment rate fell for a second month to 11.1 percent. That was a bigger decline than anticipated, but the rate remains far above the prepandemic half-century low of 3.5 percent.

While President Donald Trump said the jobs figures proved the economy is “roaring back,” the pace of recovery may slow or even stall if employers grow cautious and delay rehiring workers. In fact, some have already been laid off a second time. Paired with the coming expiration of the federal government’s extra $600 in weekly unemployment benefits, the economy could take another hit in the months ahead.

Another side of the labor market, the employment population ratio has tumbled from 61.2 percent back in January to 52.8 percent in May. Suggesting 47.2 percent of Americans are unemployed, according to Bureau of Labor Statistics. This ratio takes a wider look at the employment picture. It considers adults not in the labor force and captures those who were discouraged about the prospects of finding a job, whereas the unemployment rate looks at people actively looking for a job. With many Americans jobless, the pace of recovery may take time as the largest economy depends greatly on consumer consumption. US manufacturing rebounds

The US manufacturing ISM PMI jumped to a 14month high of 52.6 for June, from a previous monthly reading of 43.1. A reading above 50 indicates growth, which accounts for 11 percent of the US economy. Economists polled by Reuters predicted earlier a reading of 49.5. Weaker global demand and worries about a second wave of infections may pressure growth prospects.

Equities globally rallied as investors assessed the data coming from global economies and the much talked about V shaped recovery possibility. With labor market data and manufacturing data exceeding expectations, equities flourished. Yet the gains were capped with the US recording record daily corona virus cases and fears of a second wave of infections spurred fear in investors’ sentiment. Since we are at corporate earnings season, the corporate reports should shed some further light on the status of different sectors of the economy.

In the fixed income complex, we saw the US-10year treasury yield fluctuate throughout the week amid a range of positive and negative news, hovering between 0.62 percent and a high of 0.71 percent. Finally retreating to 0.66 percent after the US recorded its highest corona virus daily cases of 50K+. In the FX sphere, the US dollar edged lower last week losing as much as 0.62 percent of its value against major rivals amidst increased risk-taking sentiment. The greenback had its first weekly drop in a month this past week.

Euro lower

French President Emmanuel Macron asked his government, including Prime Minister Edouard Philippe, to resign on Friday as the French president seeks a fresh start after a disastrous municipal election last month. Macron named Jean Castex as his new Prime Minister. As a result to these sudden political changes, the euro slipped to 1.1224 after reaching last week’s high of 1.1303 on Thursday. On the data side, the Eurozone manufacturing PMI came at 47.4 beating expectations of 46.9. Germany and France both recorded higher PMIs than forecasts and previous readings. Nevertheless, global demand remains a constant worry especially with the fears of increased global COVID-19 cases.

UK data

The UK economy is fighting on many fronts to stay resilient and rebound. On one hand we have the ongoing Brexit situation, and on the other we have the effect of the global pandemic that’s pressuring the UK and world economy. Last week, UK’s Q1 GDP final figure report showed that the economy contracted by 2.2 percent on a quarterly basis, worse than the market expected 2 percent contraction. This contraction in the economy indicates that Q2 figures might be worse, as more health restrictions were introduced In the second quarter which might hinder economic activity further.

On another note, the UK eased quarantine rules by exempting arrivals from 50 countries from the 14day quarantine requirement said Transport Secretary Grant Shapps. Meanwhile, Prime Minister Boris Johson urged his fellow Britons to act with responsibility as the leisure sector prepares to open for the first time in 3 months on Saturday. The Sterling pound had a stellar week gaining as much as 1.53 percent on the US dollar and broke the 1.25 level last week before retreating on Friday to 1.2450 levels.

Oil regains traction

Oil prices rose after the highest quarterly increase of 92 percent in almost 30 years following a report pointing to the first drop in US crude stockpiles since May. The report said that inventories shrunk by 8.16 million barrels last week. While inventory levels spurred some optimism, the question remains on the demand outlook for the world’s second largest economy remains blurry with questions on the success of the efforts to contain the outbreak. On a weekly basis, both Brent crude and West Texas Intermediate gained around 4 percent and closed the week at $42.80 and $40.32 respectively.