May 8, 2020

US Unemployment Rate Set To Print 16% And The US Stock Market Is Ignorant Of This

US Unemployment Rate Set To Print 16% And The US Stock Market Is Ignorant Of This

The mother of all economic data is going to be released later today. The upcoming reading is likely to give us much better information about the US economy as compared to the previous month. The weekly jobless claims data (3.1 million actual against 3.0 million forecast) confirmed yesterday that more Americans have filled for jobless claims. This has set a negative tone for today’s number.

The surge in the weekly jobless claim number indicates that the US unemployment rate is going to print an unemployment rate that we have not seen in decades. The unemployment rate is set to surge over 16% in the US –the biggest economy of the world- and yet the US stock market has paid little to no attention to this. For instance, the NASDAQ index has become positive for this year, it has recovered all of its losses. The S&P500 index is not far off from achieving the same status, it is likely to be only a matter of weeks, if not days, before the index recovers its losses for this year given its upward momentum.

This is certainly an alarming situation and the are several reasons for this. Firstly, we all know that the economy isn’t going to get back to its normal level like turning on a switch. The path to recovery is long and difficult. It will take some serious efforts for the US economy to get back to the previous productivity level.

Secondly, the threat of a second wave of coronavirus is real. Countries have started to lift the lockdown measures, but the public has become more careless. The number of people who are actually practicing social distance measures is very small and this number is only going to get smaller in the coming weeks or so.

Thirdly, if we have learned anything from the current earning period, it is this that the provision of bad debt surged among banks. Clearly, banks are not sure if they will recover a large portion of their debt. Companies are more uncertain about their future guidance than ever before. Cutting more jobs is going to remain the major theme in the coming months and quarters as companies adapt to new normal.

Fourthly, Washington and Beijing are embroiled in a tussle war and the timing of this cannot be any worse. Donald Trump, the US president, has blamed China for Coronavirus, while Chinese president, Xi Jinping, has denied those accusations. President Trump has threatened to slap more tariffs on China and markets have not paid much attention to this yet. The origin of the virus is likely to remain the key issue between the two countries for the rest of this year.  If the tariff situation becomes a reality, it will not only suffocate the US economy in the short term but also in the long term.

During the pandemic period, one factor has become acute: China has provided more help to other countries. It has strengthened its relationship with EU countries, and this could accelerate the rebalancing of global economic power. The deteriorating relationship between the US and the rest of the world would makes its position a lot weaker.

Having said all of the above, it is important to acknowledge that financial support in terms of monetary and fiscal policy has been unprecedented in the US. Without this, the damage would have been mammoth. The support by the US government and the Fed has fueled the rally in the US stock market.

Market participants are also hopeful about a treatment for Coronavirus, and there are some chances that by the end of this year we may have a vaccine. This has lessened the fear of the second wave of Coronavirus to some extent. Traders do know that the economic numbers are going to print fearmongering flashing numbers, but they are likely to be noise rather than long term damage to the economy. However, time will dictate the difference between reality and illusion.

See a trading opportunity? Open an account now!

Follow our corona virus business updates!