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Old 30-05-2020, 06:45
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Default Re: Tickmill UK Fundamental Analysis

“Absurd” Employment Situation in the US and Possible Consumption Shock in August

The rally in equities was brought to a halt with mild retracement in the US stocks observed on Thursday. Asian and Europe equities followed suit today, erasing from 0.1 to 1.5%. The driver of declines is largely a precautionary sell-off as Trump is going to lay out a plan today on how he is going to increase pressure on China.

Earlier, Mike Pompeo said that the US no longer considers Hong Kong an autonomous region, which was the first significant reaction of the US government to the decision of China to annul the superiority of local Hong Kong law (regarding security matters) over the national one. Pompeo’s comment seems to look like a standard attempt by an American politician to label an unwanted step by the rival country but given that there is 1992 Hong Kong policy act (which is based on Hong Kong’s autonomy from China), Pompeo’s statement puts under question the future of this law. And this is already far-reaching economic and political consequences. Let’s see what Trump will say today.

JP Morgan Bank analyst Marko Kolanovich, who in early March recommended investors to buy the dip in stocks and then consistently maintained his bullish stance for almost two months, said this week that increased political risks justify limiting exposure to US equities. In other words, the analyst doubts about further stock market rally due to tensions of the US with China. A month ago, Kolanovich forecasted that in the first quarter of 2021, the S&P 500 could renew historic highs.

Initial claims for unemployment benefits rose by 2.12 million, which is slightly higher than the forecast (2.1 million). Since the beginning of sanitary restrictions, the number of applications has reached 41 million. At the same time, continuing claims showed a larger than expected reduction – from 24.9 million to 21.05 million, with a forecast of 25.7 million.

Undoubtedly, some of the workers returned to work, but conclusions about a strong trend in the recovery of employment may be premature – some of the unemployed also receive benefits under the so-called pandemic program, where the number of continuing claims is more than 30 million.

In the analysis of all these figures for employment, unemployment claims, it is important to keep in mind one important point. In the United States, there is a federal program for extra unemployment benefits in the amount of $600 (until the end of July). This means that some unemployed Americans now receive almost $ 1,000 a week. For some industries, in fact, an absurd situation arises where lounging is more profitable than working. A study by the University of Chicago showed that 68% of those who receive benefits now have more income than when they worked, and for 20% of those who lose their job, the benefits will be twice as much as earnings. In other words, workers now have little incentive to look for job, and this can continue until the end of July. The most interesting thing is when the program comes to an end – income will fall sharply, there may be fewer vacancies, and therefore a consumption shock may occur.

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