A 20-million drop in employment in the US (Afternoon analysis 6.05.2020)

The report on employment change in the US provided terrible data, although a slightly more significant decline in employment was expected. The growing spread between government bonds puts a little more pressure on the zloty, although the Polish currency remains fairly stable.

The US President awaits the opening

Despite extremely bad data on the decline in economic activity or warnings from the European Commission about the unstable future of the eurozone, the market sentiment has clearly improved over the day. This is mainly due to the hopes of the reopening of some economies and the associated economic recovery. US President Donald Trump wants to open the economy as soon as possible.

To some extent, this is part of his presidential campaign, as the country's prolonged lockdown reduces his chances of winning the November elections and being re-elected. It is only in Q4 that we will observe (potentially) relatively strong growth, so it will practically take place at the end of the campaign. Nevertheless, this information is positive and only the first macroeconomic data coming out in about a month's time, which will show how fast the recovery is progressing, may slightly cool down the current positive sentiment assuming a very steep growth path.

This path will probably not be easy. The impact of the pandemic on the US economy was shown, among others, by today's ADP report on the change in employment in the non-farm sector in April. It indicated the largest ever decrease in employment in history, by 20.236 million, compared to 149 thousand in March. This is slightly less than expected (21 million), but with these figures, the difference can be ignored. Such a strong fall in employment indicated by ADP suggests that a reading below 20 million should probably not be expected in Friday's official Labor Department report.

The freeze in travelling has affected the hotel and leisure industry, with a fall in employment of up to 8.6 million. Overall, most of the workers in the various industries were made redundant by companies employing more than 500 people - a fall of 8.96 million. However, it is likely that the smallest companies were most affected by the restrictions imposed on the economy. Among those employing 1 to 49 people, there were 6 million job cuts. So far, these data do not affect either the market or the dollar, although if the growth path is not as steep as it is expected in the following months, then we may observe a slight deterioration in sentiment.

In contrast, the zloty remained weaker today for most of the day, as it was influenced by a stronger dollar (the EUR/USD is around 1.08), as well as changes in the global bond market, whose yields were rising. The zloty was even more negatively affected by the widening of the spread between 10-year and 2-year US Treasury bonds. The spread rose to the upper limit from the end of March this year. Despite a slight weakening, the changes in the Polish currency remain within a limited range in the context of recent weeks: today, the USD/PLN exchange rate rose to approx. 4.22, while the EUR/PLN exchange rate rose to around 4.56. Looking ahead, however, the lifting of the restrictions should gradually support the currencies of emerging countries, including the zloty.

Tomorrow's preview

In the morning, another set of macro data from the eurozone will be published. At 8:00 a.m. Destatis will publish industrial production data in Germany in March. A reduction of 7.4% on a monthly basis is expected. If the data on orders in this sector were to be some determinant (-15.6% vs expected -10%), the reading from German industry may be significantly weaker than the mentioned 7.4%, although the data are not perfectly correlated.

Forty-five minutes later, data on industrial production in France (-13.4% consensus) will be available, and at 10:00 a.m., there will be an overview of how retail sales in Italy have changed. These are also data for March, so for the market, they are already historical. However, more macro readings will give a more precise estimate regarding the low point of the economy from which the opening process begins and how hard this process may be.

The market ignores these disastrous data from economies, focusing on the future. It also takes advantage of an unprecedented injection of funds from central banks. Eurozone data may have a limited impact, at least in the short term, and the market may focus slightly more on data from the US. At 2:30 p.m. the number of initial jobless claims submitted last week will be published. The median of market expectations indicates an increase of 3 million, which would, however, be a decrease of about 0.8 million compared to the previous week.

This publication may slightly increase market fluctuations (mainly for the dollar), especially if the reading is well above 3 million, although for a stronger market reaction we should probably wait until Friday, when a report on the US labour market is released. Currently, the market is ignoring the incoming bad news, so it may be similar this time too, although it will probably be the worst labour market report in history.