Upside surprise: What the latest U.S. jobs report may indicate

On the latest edition of Market Week in Review, Chief Investment Strategist Erik Ristuben and Head of AIS Business Solutions Sophie Antal Gilbert discussed the European Central Bank (ECB)’s expansion of its bond-purchasing program, the surprising U.S. jobs report for May and the latest movements in markets.

ECB increases size of asset-purchase program

On June 4, ECB President Christine Lagarde announced that the central bank will increase the size of its Pandemic Emergency Purchase Program from €750 billion to €1.35 trillion—a €600 billion increase in government debt purchases, Ristuben stated. “Simply put, the ECB’s bond-buying program consists of an enormous amount of money, as the bank seeks to combat deflationary threats across the eurozone and take control of more countries’ yield curves,” he said.

The additional stimulus helped boost European equity markets the week of June 1, Ristuben noted, in addition to bond markets. Government bond yields fell significantly in countries such as Spain, Italy, Greece and Portugal on the back of the news, he said, as bond prices rallied. “Ultimately, the ECB’s announcement was a big and positive development for markets, as it further confirmed the bank’s no limits policy in regards to monetary support,” Ristuben remarked.

U.S. employment report better than feared

In what Ristuben characterized as a stunning surprise, the U.S. jobs report for May delivered much better news than expected, with 2.5 million nonfarm payroll additions and an unemployment rate that came in at 13.3%—still very high, but significantly lower than feared. “The consensus among economists was that May’s unemployment rate would be around 19%, with another 7 to 8 million jobs lost,” he noted.

So, why did the forecasts miss the mark? Ristuben said it’s been extraordinarily difficult to measure both the extent and permanence of the economic lockdowns wrought by the pandemic, in part due to the unprecedented levels of stimulus pumped into the U.S. economy in an attempt to mitigate the damage. “One of the main ideas behind the CARES Act and other government relief bills was that these measures would help keep small employers—particularly those in vulnerable industries—in business, and not result in permanent widespread job losses. Today’s U.S. employment report offers evidence that maybe this wasn’t such a naïve and ridiculous expectation after all,” he remarked.

The report also lends further credence to the belief that both the U.S. and global economy bottomed out a few weeks ago, Ristuben said. In addition, the Institute for Supply Management’s manufacturing PMI (purchasing managers’ index) for May rose to 43.1%—up from an all-time low of 41.5% in April—while the  PMI for the services sector climbed from 41.8% in April to 45.4% in May. A reading below 50% indicates contractionary conditions, he noted, meaning that while both sectors are still shrinking, they’re doing so at a slower rate than in April.

Markets rise on evidence of economic recovery

For the past two months, equity and bond markets were trading in a fairly narrow channel, Ristuben said. “10-year U.S. Treasury yields, for instance, were trading between about 60 to 75 basis points, with equity markets range-bound as well,” he stated. That all changed the week of June 1, however, with both the S&P 500® Index and the STOXX® Europe 600 Index advancing approximately 4%, as of midday Pacific time on June 5, with the MSCI Emerging Markets Index climbing roughly 6% during the same timeframe.

The 10-year U.S. Treasury note also broke out of its trading range, Ristuben said, with the yield on the benchmark note rising to 0.92%, as of midday Pacific time on June 5. This aligns with his expectation of upward pressure on rates over the next several months, which will likely lead to a modest steepening of the U.S. Treasury yield curve.

“All in all, the recent upward movements in markets are supportive of the idea that a sustainable economic recovery may very well be underway today—and we’re beginning to see some data that supports this belief,” Ristuben concluded.


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