Morning Markets Brief 6-5-2020

Summary and Price Action Rundown

Global risk assets are advancing this morning amid expectations for better-than-feared US labor market and an impending OPEC agreement to extend price-supportive supply cuts. S&P 500 futures point to a 0.8% higher open, which would add to week-to-date gains of 2.2% that have reduced year-to-date downside to 3.7% and the decline from February’s record high to 8.1%. Equities in the EU are soaring after a week of massive fiscal and monetary stimulus in the bloc, while Asian stocks also posted gains overnight. Longer-dated Treasury yields are extending their breakout from their two-month trading range, with the 10-year yield rising to 0.87% even before the nonfarm payroll data is out, while the dollar remains in a steep downtrend. Crude oil is jumping to a new multi-month high as OPEC prepares to extend supply cuts (more below).

Recovery Hopes Build to a Crescendo Ahead of Nonfarm Payrolls

After yesterday’s somewhat disappointing jobless claims figures contrasted with the more upbeat ADP payroll estimates earlier this week, markets are poised for a positive signal from this morning’s May nonfarm payroll numbers. Later this morning, the BLS will release the official May Employment Report, where expectations are for 7.5 million job losses and an unemployment rate of 19.1%. Markets are leaning toward a better-than-expected release, however, with the 10-year Treasury yield breaking to its highest level since late March and US equity futures soaring ahead of the open. For context, the US economy lost 20.5 million jobs in April, better than consensus estimates of 22 million, which followed 870K losses in March. April’s tally was the largest monthly decline in US employment ever recorded, and the unemployment rate jumped to 14.7%, the highest in the history of the series but still below consensus expectations of 16%. The number of unemployed persons rose by 15.9 million to 23.1 million. However, the real rate is another 5% higher, as the BLS does not include people who are not looking for a job as unemployed. 18.1 million of the newly unemployed characterized themselves as only temporarily laid off and expect to return to work once restrictions are loosened. The labor force participation rate decreased by 2.5% points to 60.2%, the lowest rate since January 1973. Earlier this week, labor market data has conveyed some mixed signals. Thursday’s release showed that 1.9 million Americans filed for unemployment benefits last week, the lowest amount since the coronavirus crisis began, but slightly above market expectations of 1.8 million. This puts the total reported since March 21st at 42.6 million. Meanwhile, continuing claims unexpectedly rose to 21.5 million in the week ended May 23rd, above expectations of 20 million. On the brighter side, payroll company ADP estimated that in May private businesses laid off 2.8 million workers, after shedding a downwardly revised 19.6 million in April, which was much better than market forecasts of a 9.0 million job loss.

OPEC Goes Back to the Negotiating Table

Oil prices are advancing this morning as OPEC and its allies (collectively known as OPEC+) have agreed to meet tomorrow to agree on an extension of ongoing supply reduction agreements. For context, oil prices had retreated from multi-month highs earlier this week as OPEC+ and its allies looked set to push their June meeting back for weeks over issues of noncompliance with ongoing production cut commitments, with Nigeria and Iraq meeting less than half the cuts necessary in May. The energy ministers of the delinquent cartel members reconfirmed their quota commitments on Tuesday, however, and Russia and Saudi subsequently affirmed their tentative agreement to extend current supply cut levels of 9.7 million barrels per day through July, putting a floor under crude prices. In addition to cartel supply cuts, the continued oil uptrend over the past month has been underwritten by resumed economic activity in China, the slow lifting of lockdown measures worldwide, and declining production from the US shale patch. Yesterday, the Energy Information Administration reported a 2.1 million barrel decrease in US stockpiles from last week. Brent crude has now retraced nearly half of its 2020 decline from $69 per barrel in January down to $19 in April.

Additional Themes

Air Travel Remains a US-China Sticking Point – US airlines rebuffed China’s announcement earlier this week that it would begin lifting restrictions on foreign carries beginning Monday, calling it a step in the right direction but insufficient to address their concerns. News on Wednesday afternoon that the US would block Chinese airlines in a tit-for-tat exchange for China’s restrictions on US carriers was largely overlooked by market participants, who have dialed back concerns of a significant rupture in US-China relations.

PPP Revisions Pass the Senate – Yesterday, the Senate passed legislation that will allow small businesses more flexibility in using the rescue-loan funds from the Paycheck Protection Program (PPP). This comes as Congress and the Trump administration prepare to negotiate the next round of fiscal spending to cushion the economic blow of the pandemic.