Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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U.S.: Jobless claims confirm the recovery is continuing sluggishly
Christopher Dembik
Head of Macroeconomic Research
Summary: The most important U.S. data of this week is out. We monitor very closely initial jobless claims and continuing claims as they are two of the best timely indicators we have on the U.S. economy despite the fact that data can be a bit noisy at the moment due to processing lags. There is still probably a high level of churn in the labor market through June and July.
U.S. initial jobless claims and continuing claims are out below consensus – which is rather positive considering the two prior weeks the market consensus was a bit too optimistic. Initial Jobless claims, which does not capture the rate of hiring and rehiring, declined from 1,41m to 1,31m last week (July 4). It is the 16th straight week in which initial claims are above 1 million.
Continuing claims, which represent the current number of insured unemployed workers filing weekly for unemployment insurance benefits, are reported with a two-week lag. In the week ending June 27, it was at 18,0m from 18,7m the prior week.
Looking at state level, initial jobless claims in America’s four largest state economies, that represent roughly 1/3 of U.S. GDP, are still at a very high level, at around half a million (548,159 in the week ending July 4). We notice a slight deterioration in the labor market in California and Texas where continuing jobless claims are increasing a bit, respectively at 2.9m and 1.3m, likely due to the fact that reopening has been put on hold or reversed.
The overall decline in jobless claims over the past weeks is a clear sign that the labor market is healing, but at a very slow path and many downside risks remain. COVID-19 cases climbing across the country (with a total of more than 3,0m confirmed cases and 132,309 deaths as of today) will probably lead in the coming weeks to further economic disruptions that has not been captured yet by today’s figures and might conduct to an increase in jobless claims in the coming weeks. The market needs to get ready to ugly labor market figures if the health crisis is not contained fast. In states where the health crisis is under control and where process of reopening has started, jobless claims are also likely to remain elevated at least until the end of this month, due to the very generous unemployment benefits put in place to cope with the lockdown and that expire in its current form on July 31.
Given the pickup in coronavirus cases, low consumer spending and the fact that the second economic wave characterized by business restructuring and permanent closures has barely started, we remain very careful regarding the evolution of the U.S. labor market. We fear that the worst may be yet to come for the labor market with a sharp rise in layoffs after the summer when businesses will realize that the economy is not going back to normal anytime soon.
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