The Market Today

Labor Market Shows Unexpected Evidence of Improvement in May

by Craig Dismuke, Dudley Carter


Vining Sparks Coronavirus Chartbook (PDF) (Link) (Updated by 9:00 a.m. CT)

Monitoring the Headlines on Reopening: A relatively quiet day of virus headlines left investors focused on the break higher in longer Treasury yields (more below). New York Governor Cuomo said outdoor dining would be part of the state’s second phase, a step New York City Mayor De Blasio said he hopes the Big Apple could take in July. New Jersey’s governor announced that non-essential retail could open on June 15 with 50% occupancy but would require customers to wear face coverings. The NBA’s plans for an abbreviated season later this summer, announced yesterday, was officially approved by the league’s Board of Governors. The CDC announced it was developing a dual test that can test for both the flu and COVID-19 and the Gates Foundation announced a $100MM pledge to purchase vaccines.

Monitoring the Headlines on Stimulus: Reports indicated the White House believes the next round of stimulus could total $1T but has postponed serious discussions until next month. German Chancellor Merkel said her government must act “decisively” to fight the effects of the virus, but warned the reduction in the VAT must expire at the end of this year to prevent an unsustainable drop in revenues over a longer period.

Deferment/Forbearance Survey: We are continuing to track/monitor the levels of deferment occurring.  Over the last several weeks, we have seen a stabilization of deferment percentages.  We also have many institutions that have their deferment periods beginning to end and payments resuming.  With this in mind, our latest survey looks to capture current levels of deferment as well as how other factors like deposits and credit card utilization have changed over the last several months.  Please take a few minutes to complete the latest survey – Deferment Survey 6-1. For reference, click here to see the previous survey results.



Nonfarm Payrolls Beat Estimates by 10 Million in May: Total nonfarm payrolls rose 2.5 million in May, beating expectations for a 7.5 million job loss by over 10 million.  While the labor market has still lost 19.6 million payrolls from its February peak, the rebound in May’s payroll data is the best evidence yet that economic activity may be resuming more quickly than expected. This is a critically important development.  The longer activity remains shuttered, the more lasting damage that is likely to be done. However, there is a potential risk in declaring a turnaround too quickly given the incentives built into the PPP loan program to report employees as being on payroll.

Broad-Based Improvement: Private payrolls grew 3.1 million while government jobs fell 585k.  The rebound in jobs after April’s 20.7 million loss was widespread by sector.  The leisure sector, which had borne the brunt of the initial wave of job loss, rebounded 1.24 million (+14.4% increase in leisure sector jobs).  Construction was also particularly strong, adding 464k payrolls (+7.1% gain).  Retail added 368k jobs and manufacturing added 225k.

Unemployment Rate Does Not Rise to 20%, Falls to 13.3%: In the household report, the unemployment rate fell from 14.7% to 13.3%.  It was expected to rise to 19.0% based on the initial jobless claims tallies over the past eleven weeks.  The number of employed persons rose 3.8 million while the number of unemployed fell 2.1 million.  The number of people participating in the labor market rose 1.7 million, bringing the participation rate up from 60.2% to 60.8%.  Complicating the analysis, BLS officials continue to struggle to categorize people properly.  The number of people being reported unemployed-on-temporary layoff continues to fluctuate significantly each month.  According to the BLS release, “household survey interviewers were instructed to classify employed persons absent from work due to coronavirus-related business closures as unemployed on temporary layoff. However, it is apparent that not all such workers were so classified. BLS and the Census Bureau are investigating why this misclassification error continues to occur and are taking additional steps to address the issue. … If the workers who were recorded as employed but absent from work due to “other reasons” (over and above the number absent for other reasons in a typical May) had been classified as unemployed on temporary layoff, the overall unemployment rate would have been about 3 percentage points higher.”

Bottom Line: First Sign of Activity Rebounding: Regardless of the potential miscategorizations, both the establishment and the household labor surveys for May show evidence that the labor market improved in May, which is sooner than expected.  Presuming the PPP rules are not skewing the reporting, this is the best evidence of a rebound yet seen.  This is a key development as the duration of the economic stoppage is likely to determine the pace of the recovery.  President Trump has scheduled a 9:00 a.m. CT news conference.


Longer Treasury Yields Fall Even as Stocks Lose Luster: Longer Treasury yields moved notably higher Thursday despite the recent rally in global equities running out of steam. The S&P 500 had improved for four consecutive days before Thursday’s 0.3% decline and in eight of the last 10 trading sessions. Optimism about economies reopening and early signs of recovery in global economic data for May had lifted global stocks to their highest levels since mid-March Wednesday. Treasury yields, however, had been constrained to narrow trading ranges by significant outlook uncertainty and low-rate pledges from central banks. Prior to this week’s rise, the 10-year yield traded within its tightest monthly range in May since February 2019.

Yields Broke Higher: But upside momentum for yields has gathered steam this week as recovery hopes lifted investors’ spirits. Longer yields tested the top end of current ranges on Wednesday before breaking out on Thursday. After Wednesday’s 6.1-bp rise, the 10-year Treasury yields jumped 7.8 bps to 0.82%, its highest level since March 26. Germany yields also rose earlier in the day after the ECB expanded its emergency asset purchase program by 600 billion euros, adding to hopes for a European recovery while reiterating a willingness to support even greater amounts of debt-backed stimulus. With the 2-year yield up just 0.4 bps to 0.19%, the spread between the two widened out to 62.5 bps, which, except for two days during the week after the Fed cut rates to zero in March, was the widest since March 2018.


Rise in Yields Rolls on Ahead of Payroll Report: This week’s long-end-led move up in Treasury yields that has added notable steepness to the curve continued Friday ahead of May’s nonfarm payroll report. Optimism that has boosted equities since March finally led to a breakout in longer yields on Thursday. Just before the payroll data was released, the 10-year yield had added 4.5 bps to 0.87% as the 30-year yield moved up 5.7 bps to 1.69%. The 10-year yield has added 21.8 bps this week while the 30-year yield has risen nearly 28 bps. With shorter yields still locked in by lower-for-longer expectations regarding Fed policy, the spread between the 2-year note and 30-year bond has widened to roughly 150 bps, the steepest curve since August 2017.

Yields Surge Higher after Payrolls Post Surprise Increase: Despite overnight reminders of the historic depth of recession which will make recovery a lengthy and taxing event, global equities had recovered after yesterday’s pause and prior to the update on the U.S. labor market. Retail sales in Singapore sank by a worse-than-expected record 33% in April from a year ago. Consumer confidence in the U.K. fell in May to its lowest level since 2009. German factory orders and industrial production in Spain both dropped by record amounts in April. However, hopes that the worst is in the past lifted stocks across both Asia and Europe and had pushed U.S. futures higher by 0.8%. After the shockingly strong payroll report, yields rocketed higher to push the 2-year yield up 3.2 bps to 0.23% (high since April 13) and the 10-year yield to up 11.0 bps to 0.93% (highest since mid-March). Equity futures doubled their gains to push Dow contracts up 2.5% with those tracking the S&P 500 up 1.7%.

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