US labor market shows further cracks

May raise chance of further fiscal stimulus

Chart of the Day

The US unemployment claims data brought bad news, with initial and continuing claims both jumping by around 200k more than economists had forecast. The fall in employment in the December jobs report was skewed heavily toward hospitality jobs, and the key question now is whether rising claims are still concentrated in that sector, or whether they are now spreading elsewhere. Nevertheless, the speedy start to vaccinations means investors continue to focus on the longer-term, and it was Biden’s economic plan for a further stimulus of near $2 trn that took the headlines. Biden may find such a plan easier to pass if the economy is showing renewed signs of weakness.

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Germany confirmed that GDP fell by 5% last year, a marginally better performance than in the Great Recession.

China has in some ways benefitted from the pandemic. Reduced spending on services in many economies has lifted China’s goods exports sharply, for instance, and it recorded its highest-ever trade surplus in December.

China’s central bank has been concerned about signs of excess though - we saw earlier this week that the headline credit impulse turned down slightly in December. Here we calculate a six-month credit impulse, which points to a much sharper slowdown to come.

Markets

Many are getting excited about Chinese equities again, but the credit impulse is often a good leading indicator, so the chart above implies they may face tougher times ahead (not that the credit impulse mattered much in 2015 though).

In the US, the Russell 2000 small-cap index continues to surge, now up by 30% since the start of 2020, versus the 18% gain in the S&P 500 - an astonishing turnaround.

Cyclical sectors generally did well following the early release of details of Biden’s economic plan, although it was the energy sector that stole the show yesterday and which has gained almost 8% in the past week.

Despite that gain, it is still the worst-performing sector since the pandemic started.

The early headlines about Biden’s economic plan put only modest upward pressure on US bond yields - perhaps a sign that a sizeable plan was already priced in. Bond yields in Italy have been rising following renewed political drama there.

Finally, bitcoin and ethereum have largely made up for their giant falls at the start of the week.

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