Fragile economic recovery faces first big test with June jobs report in the week ahead

The second half of 2020 is nearly here, and now it’s up to the economy to prove that the stock market was right about a sharp comeback in growth.

The first big test will be the June jobs report, out on Thursday instead of its usual Friday release due to the July 4 holiday. According to Refinitiv, economists expect 3 million jobs were created, after May’s surprise gain of 2.5 million payrolls beat forecasts by a whopping 10 million jobs.  

“If it’s stronger, it will suggest that the improvement is quicker, and that’s kind of what we saw in May with better retail sales, confidence was coming back a little and auto sales were better,” said Kevin Cummins, chief U.S. economist at NatWest Markets.

The second quarter winds down in the week ahead as investors are hopeful about the recovery but warily eyeing rising cases of Covid-19 in a number of states. 

Stocks were lower for the week, as markets reacted to rising cases in Texas, Florida and other states. Investors worry about the threat to the economic rebound as those states move to curb some activities. The S&P 500 is up more than 16% so far for the second quarter, and it is down nearly 7% for the year. Friday’s losses wiped out the last of the index’s June gains.

“I think the stock market is looking beyond the valley. It is expecting a V-shaped economic recovery and a solid 2021 earnings picture,” said Sam Stovall, chief investment strategist at CFRA. He expects large-cap company earnings to be up 30% next year, and small-cap profits to bounce back by 140%.

“I think the second half needs to be a ‘show me’ period, proving that our optimism was justified, and we’ll need to see continued improvement in the economic data, and I think we need to see upward revisions to earnings estimates,” Stovall said.

Liz Ann Sonders, chief investment strategist at Charles Schwab, said she expects the recovery will not be as smooth as some expect, particularly considering the resurgence of virus outbreaks in sunbelt states and California.

“Now as I watch what’s happening I think it’s more likely to be rolling Ws,” rather than a V, she said. “It’s not just predicated on a second wave. I’m not sure we ever exited the first wave.”

Even without actual state shutdowns, the virus could slow economic activity. “That doesn’t mean businesses won’t shut themselves down, or consumers won’t back down more,” she said.

In the second half of the year, the market should turn its attention to the election, but Sonders does not expect much reaction to it until after Labor Day. RealClearPolitics average of polls shows Democrat Joe Biden leading President Donald Trump by 10 percentage points, and the odds of a Democratic sweep have been rising.

Biden has said he would raise corporate taxes, and some strategists say a sweep would be bad for business, due to increased regulation and higher taxes. Trump is expected to continue using tariffs, which unsettles the market, though both candidates are expected to take a tough stance on China.

“If it looks like the Senate stays Republican than there’s less to worry about in terms of policy changes,” Sonders said. “I don’t think it’s ever as binary as some people think.”

Stovall said a quick study shows that in the four presidential election years back to 1960, where the first quarter was negative, and the second quarter positive, stocks made gains in the second half.

Those were 1960 when John Kennedy took office, 1968, when Richard Nixon won; 1980 when Ronald Reagan’s was elected to his first term; and 1992, the first win by Bill Clinton. Coincidentally, in all of those years, the opposing party gained control of the White House. 

The stocks market’s strong second-quarter showing came after the Fed and Congress moved quickly to inject the economy with trillions in stimulus. That unlocked credit markets and triggered a stampede by companies to restructure or issue debt. About $2 trillion in fiscal spending was aimed at consumers and businesses, who were in sudden need of cash after the abrupt shutdown of the economy.

Fed Chairman Jerome Powell and Treasury Secretary Steven Mnuchin both testify before the House Financial Services Committee Tuesday on the response to the virus. That will be important as markets look ahead to another fiscal package from Congress this summer, which is expected to provide aid to states and local governments; extend some enhanced benefits for unemployment, and provide more support for businesses.

“So much of it is still so fluid. There are a bunch of fiscal items that are rolling off. There’s talk about another fiscal stimulus payment like they did last time with a $1,200 check,” said Cummins.

Strategists expect Congress to bicker about the size and content of the stimulus package but ultimately come to an agreement before enhanced unemployment benefits run out at the end of July. Cummins said state budgets begin a new year July 1, and states with a critical need for funds may have to start letting workers go, as they cut expenses. 

The Trump administration has indicated the jobs report Thursday could help shape the fiscal package, depending on what it shows. The federal supplement to state unemployment benefits has been $600 a week, but there is opposition to extending that, and strategists expect it to be at least cut in half.

The unemployment rate is expected to fall to 12.2% from 13.3% in May. Cummins said he had expected 7.2 million jobs, well above the consensus, and an unemployment rate of 11.8%.

As of last week, nearly 20 million people were collecting state unemployment benefits, and millions more were collecting under a federal pandemic aid program.

“The magnitude here and whether it’s 3 million or 7 million is kind of hard to handicap to begin with,” Cummins said. Economists have preferred to look at unemployment claims as a better real time read of employment, but they now say those numbers could be impacted by slow reporting or double filing.

“There’s no clarity on how you define the unemployed in the Covid 19 environment,” said Chris Rupkey, chief financial economist at MUFG Union Bank. “If there’s 30 million people receiving insurance, unemployment should be above 20%.

Monday

10:00 a.m. Pending home sales

3:00 p.m. New York Fed President John Williams

 Tuesday

9:00 a.m. S&P/Case-Shiller home prices

9:45 a.m. Chicago PMI

10:00 a.m. Consumer confidence

11:00 a.m. New York Fed’s Williams

12:30 p.m. Fed Chairman Jerome Powell, Treasury Secretary Steven Mnuchin at House Financial Services Committee hearing on oversight of the Treasury Department and the Federal Reserve pandemic response

2:00 p.m. Minneapolis Fed president Neel Kashkari

Wednesday

Monthly vehicle sales

8:15 a.m. ADP employment

9:45 a.m. Manufacturing PMI

10:00 a.m. ISM manufacturing

10:00 a.m. Construction spending

10:00 a.m. Chicago Fed President Charles Evans

2:00 p.m. FOMC meeting minutes

Thursday 

8:30 a.m. Initial jobless claims

8:30 a.m. Employment report

8:30 a.m. International trade

10:00 a.m. Factory orders

Friday

Independence Day holiday