Morning Commentary: Fade the Rise

Foreign Exchange - Morning Commentary
Fade the Rise
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
The markets find themselves back in risk off as last night’s tech earnings have provided the markets with a reality check.  Equity prices around the world have been rising due to massive amounts of fiscal and monetary stimulus.  This rise in stocks has created a large disconnect between stocks and the real economy, who’s headwinds can be seen by the historic number of jobs lost.    

Over the past 6 weeks, over 30 million jobless claims have been filed in the US and countries around the world show similar trends.  Interestingly, Mexico’s unemployment rate for March actually dropped to 3.3% from 3.7% in February, a result that is drastically different from both what was expected due to social distancing measures and temporary business shutdown measures.  However, as with everything, the details matter and these details suggest that the unemployment rate could be sending an inaccurate signal.  

Specifically, there are two points worth noting.  The first point is that there was a drop in the participation rate which works to undermine the narrative that strong job creation could be the driving force behind the drop in unemployment.  The second point concerns the rise in underemployment that rose from 7.4% in January to 9.3% in March.  

These two points are important when you consider the methodology for how unemployment is calculated.   The unemployment survey considers a person to be unemployed if he or she did not work for at least one hour or seek employment during the survey’s reference week.  This means the drop in the participation rate (people looking for a job) and the rise in underemployment (working in a job that doesn’t make full use of skills or abilities) both suggest that unemployment is worse than the jobless rate, on its own, indicates.  

Job creation data, which should be accurate due to being a formal data point and not a survey, actually illustrates this point.  Employers register or deregister workers at the social security institute and are required to pay a monthly fee for each registered employee which should increase the accuracy around this number.  Taken at face value, 130 thousand formal jobs were lost in March, a number that would increase unemployment by 0.2% holding all else constant.  

Regardless of what data series you look at, there is little uncertainty that the labor market will suffer acute deterioration over the upcoming months.  The greater uncertainty is whether or not the unemployment rate will accurately reflect this given the unreliability of surveys and the methodology on how the unemployment rate is calculated.  
  • US-China tensions have ramped up again with Trump threatening to seek compensation from China with multiple avenues being evaluated.  Possible options include use of tariffs, banning government retirement funds from investing in Chinese stocks and cancelling part of the US’s debt obligation to China.  The belief is that these conversation are currently preliminary, but the fact that they are being discussed is notable.  Clearly, a ramp up in tensions is the last thing the global economy needs right now.   
  • The final UK manufacturing PMI number came in at 32.6 versus the preliminary print of 32.9.  Additionally, the country is working on a comprehensive plan to re-start the economy with the use of a contact tracking via a phone app.  
  • Inflation data in Japan showed a drop in inflation as expected.  New headlines suggest that the state of emergency in Japan may be extended by another month.  
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