NFP Blowout and the Union in Europe

The week will go down in history for the biggest miss by economists and forecasters on the US Jobs Data (Non Farm Payroll). Equity markets across US and Europe closed strong on the back of this bumper number, optimism that has been expressed through out the week on economies reopening and strong Fiscal and Monetary action in the Eurozone. US 10 year yields powered through 0.90% to close at 0.9020% while the Dollar was weak and Gold gave up the 1700 level to close the week at 1685.05 against USD.

Here are the three charts and related data points that stood for me:

1.The Blowout NFP number

The forecast was for an ugly 7.5 million job loss after the record shattering 20.7 million tumble in May'20. Instead, the NFP printed a positive 2.5 million which is the strongest gain ever recorded. Leisure and Hospitality industry added 1.239 Million Jobs and lead the gains with Construction and Health care following suit.

The internet is abuzz with the conspiracy theories (rigged) surrounding the surprise positive print but some valid explanations that I found were as follows:

• Mike Mackey of Bloomberg noted : To be eligible for PPP (Payroll Protection Program) companies had to spend 75% on payroll. So people didn’t file for unemployment and went back on the payroll but might not have done any work because of the lock down.
• Also worth noting was all 50 states has some sort of re-opening from the lockdown by May 19th and around 2.9 million (of the 4.5 million) businesses received their PPP funds only after April 27th after which the hiring started to meet the conditions of the PPP program. A total of $510bn has been disbursed under this program.
• Norman Villamin of UBP notes the changes in PPP program. The program now requires 60% of the funds used for payroll down from 75%, the proceeds can be used over 24 weeks from 8 weeks and the period employers must rehire has been extended from June 30th to Dec 31st. He adds, "Ideally a demand stimulus that spurs activity/revenue among small businesses in the coming months would help to ensure that these PPP-rehires turn into more permanent and durably employed."

These changes might have an impact in the pace of rehiring in the coming months. Something we should keenly watch out for

2.The name's Union, European Union!

Europe has not sounded this united in a long long time. The week saw major action from ECB but more importantly, additional fiscal support from Euro zone's largest economy, Germany.

ECB unveiled, additional 600 billion Euros to Emergency bond-buying which increased to 1.35 trillion euros with the program horizon extended until June 2021 and maturing proceeds reinvested at least until end of 2022

Germany in the mean time unveiled their second stimulus package (30% bigger than expected) worth 130 billion Euros. This is on top of their existing, 353.3 billion Euros in direct payments and 819.7 billion Euros in guarantees. All this adds upto 1.3 trillion Euros of support that is about 40% of German GDP. This a major deviation from the so called "back zero" balanced budget policy that Germany has been running for the past many years despite pressure from IMF and others to be more liberal with their budgets.

All this is on top of the Merkel and Macron's groundbreaking agreement for an EU Recovery Fund to help the hardest hit members.

EURUSD rallied in the prior eight trading sessions and closed the week just below 1.1300. New Co-operation is helping peripheral yields compress and narrow spreads against the German Bunds reversing the widening we saw after Lagarde's famous "not here to close spreads" statement.

3. High Cash levels still on the sidelines

Cyclical and Small Caps had a strong week as we continue to see broad based recovery supported by the hope from economies reopening.

Meanwhile, cash as a % of Equity Market Capitalization still remains remarkably high signalling that there is more liquidity that can chase and support the rally if the hope of reopening plays out as expected.

Disclaimer: The views and opinions expressed, if any, are of my own and do not necessarily reflect the official policy or position of the organization I work for.