The US economy is recovering from the worst of the Covid-19 crisis despite second waves of viral infections over the summer.
Encouragingly, the latest weekly jobless claims data showed first time unemployment benefit applications fell from 1.435 million to 1.186 million new claims. This was the first significant decline in a month as the chart above shows. Continuing claims – a measure of total unemployment - also fell from 16.951 million to 16.107 million and are now down from a high of 25 million in May.
Similarly, July’s employment report on Friday also beat expectations. Payrolls rose by 1.763 million after June’s 4.791 million gains. The US unemployment also fell again from 11.1% to 10.2%. In contrast, the jobless rate had been as high as 14.7% in April.
The US economy still has considerable room to rebound as the Covid-19 pandemic becomes contained in America. Despite May’s, June’s and July’s employment gains, total US payrolls are still almost 13 million less than in February with only 42% of March’s and April’s job losses having been reversed over the last three months.
The main risk to the recovery is the failure of Congress so far to agree upon fresh fiscal stimulus to replace USD1.5 trillion of earlier crisis aid that is now expiring.
This includes temporarily higher jobless benefits of USD600 a week, cheques distributed directly to households, support for companies to keep workers employed under March’s Payroll Protection Programme and federal funds for state and local governments.
Democrats favour larger support while Republicans are concerned about the sharply rising US budget deficit and overall public debt.
In the absence of a new deal, President Trump signed orders over the weekend to extend extra jobless benefits, defer payrolls taxes and student loan payments and support renters. But the executive action only releases limited funds of USD44 billion for temporarily higher unemployment benefits. The extra support would fall from USD600 to USD400 a week and would likely run out after a month. The president’s orders could also be challenged in court as unconstitutional given his acts were not passed by US lawmakers.
To keep America’s recovery on track and replace the USD1.5 trillion of earlier emergency aid, Congress still needs to pass further large-scale fiscal stimulus.
We expect a deal releasing another USD1.0 trillion of support will still be reached by Congress. Neither Democrats nor Republicans will want to be blamed for withholding crisis funds ahead of November’s elections or for causing stock markets to fall.
Fresh fiscal stimulus would bolster investor sentiment and reinforce the current market trends of a weaker USD, very low US yields, record gold prices and buoyant equity markets.
We forecast the EUR to appreciate to 1.25 against the USD over the next 12 months and for 10Y Treasury yields to only rise moderately to 0.90% over the same period. A weaker dollar and still historically low interest rates would keep supporting equities, gold and other risk assets.Disclaimer applicable to recommendation
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Version: July 2020