We have got used to record breaking economic data since the pandemic hit – weak data that is. But on Friday, we had record strong data on US employment. Instead of falling by 7 million as the consensus expected, private payrolls in the US rose by 3 million. That’s the biggest increase and the biggest forecast error since records began. Despite some mis-classification problems with the unemployment rate, it seems genuine. The biggest increases were in healthcare – unsurprisingly, and also in hotels, restaurants and retail, some of the hardest hit sectors during the lockdown. It seems that US businesses are hiring heavily ahead of the expected easing of the lockdown.
Why did we get it wrong?
I said that I expected equities to suffer a setback if there was evidence of a second wave from the early easing of lockdowns in Europe or disappointing news on the Oxford vaccine. As far as the vaccine is concerned, there has been no news even though the researchers have had the results of the of the first mass trials of adults for over a week. We don’t know for sure why, but it’s likely they are being very cautious. As for second waves, there have been, for example, in Germany, but it has been more of a ripple than a wave.
As for the UK, the latest data from the Office for National Statistics reports a dramatic decline in the number of people with the virus. That’s a big change from their report just a week ago, which showed a flat profile.
So, the markets seem to have got it right with their optimism on the recovery in the economy and hence profits. China is our best template for this, and activity is pointing to a clear V-shaped recovery.
The US: most vulnerable and most important
The country most vulnerable to second waves of infection is also the most important economically: the US. And the current wave of protests across the country makes it very difficult adhere to social distancing. The US’ profile of the virus spread matched Europe on the way up; however, since the peak of infections, the fatalities in the US have been falling more slowly. That may reflect problems with the healthcare system or the less severe lockdowns. Second waves look set to be bigger in the US than any major country, especially in the areas most affected by the protests or where lockdowns have been eased the fastest.
What about bonds?
In my updates I have talked a lot about equity markets, but what about bonds? Government bonds used to deliver a return with low risk; now they offer risk with a low return. You get less than 1% from 10-year US Treasuries, less than half a percent on equivalent UK gilts and German bund yields are negative.
Credit currently offers a higher yield than government bonds and tends to perform well when equity markets rally. Nervous investors may prefer cash, especially sterling or US dollars, where you can get a positive return.
A correct prediction for oil
Richard Nixon once said of his economic advisers: frequently wrong, never in doubt. And the majority of my profession, including myself, got it wrong last week. But there was one prediction I did get right and still holds. At the end of April, I said fill up your tank, as the oil price would start to head higher, Brent crude was around $20 per barrel then, it’s now double that, and set to increase further.