The best gauge for the economy

The most important jobless claims release is upon us.  Two weeks ago, jobless claims surged to a record 3.3 million, more than doubling the consensus estimate, but fell shy of the some of the loftier forecasts.  The reaction saw a risk-on rally take global equities higher and made the dollar soften against the euro and yen.  Last week’s jobless claims surged to more than 6.6 million, exceeding economists’ expectations of 3.1 million, and bringing the coronavirus-induced economic shutdown total to about 10 million.  The dollar initially declined but finished the day stronger, while US equities quickly sold off but still managed to finish the day higher.

  • Initial Jobless Claims expected to have another gigantic print of 5 million
  • Volatility should be high as the forecast range is 2.5-7.5 million jobless claims
  • Do or die time for energy markets, fate of oil prices hang on OPEC++ production cuts

This week’s median estimate for unemployment filings is 5 million, with some economists eyeing a reading in the 7-million area.  Another fresh record high in jobless claims could be the straw that breaks this recent stock market rally’s back and see a return to the flight-to-safety trade.   The broader market rally was initially supported on stimulus policies and now on optimism that the virus is peaking in global hot spots.  Over the next few weeks, the total amount of jobless claims could eventually soar as high as 20 million, if not higher.  The damage done to the economy will do lasting harm to the US consumer and eventually that will have to weigh down on this temporary bull-market rally.  The efforts by the US government will start to provide some support to this week’s data as well, but the numbers are still expected to be extraordinarily high.

The US economy outlook will remain fragile for the rest of the year as the consumer will grapple with pay cuts, job losses, and difficulty finding work in the many industries, especially the travel and entertainment space .  This jobless claim release will give a sense of how far the unemployment rate will surge.  Before the coronavirus pandemic, the robust labor market employed 160 million with a record low unemployment rate of 3.5%. The upcoming recession will be severe as the unemployment will skyrocket to the high mid-teens, much worse than the 10% seen during the global financial crisis.

Cut time for OPEC ++

The following 24 hours will be critical for global oil prices, market share among the top energy producers, and for the energy industry which appears to be on the verge of collapse.  The crash in oil prices appears to have found some support now that the world’s top energy producers appear ready to deliver some production cuts that will help bring supply and demand closer to balance.

With global storage tanks nearing capacity, this OPEC members and allied producers meeting should see some consensus reached, otherwise ugly uncoordinated production cuts could happen over the next couple of months.  Optimism for a deal improved after both Russia signaled they could cut by 1.6 million bpd and Texas Railroad Commissioner Ryan Sitton stated that US producers will cut at least 4million bpd the next 3 months “organically.

As is with any OPEC meeting, a turn for the worse could happen, but right now all sides should be motivated to make a deal.  If the agreed production total is 15 million bpd or better, WTI crude jump above the $30 a barrel, but eventually see that rally faded.  A 10-million production might not trigger much of rally and probably eventually seeing selling pressure drive crude back to the low-mid $20s.  A failure of deal could see oil prices crashing below the $20 level.

Stable oil prices should provide some key support for the Canadian dollar, Norwegian krone, and Russian ruble.

By Ed Moya