Monday Macro Morning - Good Job !

08 June 2020


The strong upside surprise in US job data appears to have sparked a key market debate: is the cycle starting to inflect higher? We think it is. And it’s not just the economic cycle. It’s the liquidity and political cycles too. They’re now moving in the same direction, thus reinforcing each other. The recovery is following a U-shaped path when it comes to getting back to pre-crisis levels of activity. But it's taking a V-shaped path not just in markets. It also is V-shaped in the rate of change in the macro indicators, which are improving from depressed levels. This improvement is what markets reward at turning points.

The economic cycle | Inflecting higher: Everyone got the latest US payroll number wrong – and by a large margin. Consensus was expecting 7.5 million fewer jobs. We got 2.5 million extra jobs. The US consumer is one of the two key drivers of the global economic cycle. It has a solid balance sheet and its job prospects are likely to get better from here. The other driver is China. Its economy has responded positively to the lifting of the lockdown. As the first-ever recession by government decree ends and reopening starts, both the US consumer and China should pick up momentum.

The liquidity cycle | Keeping the taps open: Central banks have been, and remain, a crucial pillar of the crisis-fighting effort. The Fed is the key driver of the global liquidity cycle, given the dominance of the US dollar as a reserve currency. Relative to the size of its economy, it’s now buying more assets than in the three phases of quantitative easing combined. The European Central Bank is the driver of the European liquidity cycle. At its latest policy meeting, it surprised to the upside by boosting the pandemic emergency purchase programme by EUR 600 billion and extending the horizon for these purchases to at least the end of June 2021.

The political cycle | Boosting demand: Politics is more local. Governments control everything other than monetary policy, and so the political cycle has to do with fiscal policy (and trade tensions). While austerity was the typical response to the global financial crisis a decade ago, the ongoing health crisis is all about stimulus. The US has so far engineered the largest boost, but other countries are catching up. Last week, Germany surprised to the upside with a EUR 130 billion package – 30% larger than expected. Japan has recently come up with very sizeable fiscal measures too.

Here’s why this matters:

Reality check: A typical pattern at turning points is that consensus expectations tend to be too bullish on the way down (when growth starts slowing) and too bearish on the way up (when it starts accelerating). As markets realise that things could turn out to be much worse than expected, money flows into safe-haven money markets and US Treasuries. Now that things are getting better relative to depressed near-term forecasts, this flow is normalising. While it’s too soon to say that’s reversing sustainably, it’s flowing into other assets.

The flow of money: Broker reports suggest that we just got the largest weekly inflow into global bonds on record. Almost all of it, about USD 32 billion, is flowing into credit – two-thirds into investment grade corporate bonds and the rest into high yield. Money markets are seeing chunky outflows for nearly USD 17 billion. Same for US Treasury funds. Global equities, conversely, are getting inflows for more than USD 6 billion. The US dollar is weakening, in line with our call, but at a faster pace. For markets, the nature and durability of these flows may matter more than “the real economy” at this juncture.

Meanwhile, get ready for another round of stimulus.

Policy response still in play: The Fed will likely stay on hold this week, but its message should be a dovish one. Next week, the Bank of England is set to announce an extra round of asset purchases, but no negative rates. Both the US and the UK should probably come up with a further fiscal package, which we expect as early as next month. In Europe, the Eurogroup of finance ministers this week and the EU Council of political leaders next week will discuss the EU recovery fund – a key catalyst.

Daniele Antonucci, Chief Economist & Macro Strategist

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