The Market Today

Labor Rebound Gains Steam, Steep Hill Ahead


by Craig Dismuke, Dudley Carter

CORONAVIRUS UPDATE

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

Monitoring the Virus Headlines: The virus headlines were by and large reflective of the concerns created by the recent resurgence of the virus in many U.S. states. New York City announced that beaches had opened as of Wednesday but said it would postpone the start of indoor dining past today’s expected start. Arizona, California, and Texas all reported a new record for daily infections, with California closing down indoor dining in 19 counties across the state. The Texas Medical Center reported another increase in ICU utilization to 102% of normal capacity. Citi said it was postponing plans to bring some workers back into the office and Apple closed more stores, taking the total tally of stores closed for a second time to 77. With the school year quickly approaching, Yale announced that it plans to hold almost all classes remotely for the fall semester. The debate on masks continued to heat up with Miami-Dade, the state of Pennsylvania, and the Dallas/Fort Worth International Airport all announcing mask mandates.

Monitoring the Stimulus Headlines: After markets closed, the House passed a bill to extend the Paycheck Protection Program, which expired at the end of June with more than $130 billion in allocated funds still unused, until August 8. With the Senate having passed the measure the day before, the bill will head to the White House for the president’s signature.

 

TODAY’S CALENDAR

Labor Market Beats Expectations Again, Gaining 4.8 Million Nonfarm Payrolls in June: The economy regained 4.8 million jobs in June besting economists’ expectations by over 1.5 million.  In addition, April’s surprising gain of 2.5 million payrolls was revised up to 2.7 million bringing the two-month rebound to +7.5 million.  There remain 14.7 million lost payrolls from the virus.  The sector data showed generally broad improvement.  The construction and manufacturing sectors both showed strong growth, up 158k and 356k, respectively.  But retail and leisure/hospitality were the big winners in June.  Retail added 740k payrolls while leisure added 2.1 million.  The leisure/hospitality sector bore the brunt of the damage of reduced mobility, losing 8.3 million of the sector’s 16.9 million payrolls.  The sector has gained back 3.5 million jobs in May and June combined.

Unemployment Rate Drops to 11.1%: In the household report, the unemployment rate fell more than economists expected, dropping from 13.3% to 11.1%. The underlying details were positive.  The number of employed persons rose 4.9 million, the unemployed dropped 3.2 million, and the number of people in the labor force jumped 1.7 million.  It appears that more of the slack from temporary closures improved, including a decline of 4.8 million to 10.6 million in people “unemployed but on temporary layoff.”  In the May report, the BLS included a note indicating that misclassification of workers likely meant the correct unemployment rate should have been 3% higher.  They issued a similar statement in April saying it should have been 5% higher.  In the June statement, the BLS indicated the unemployment rate likely should have been just 1% higher, at the most.

Bottom Line – Improvement but a Lot of Work Remains: The labor market is recovering at a slightly faster pace than expected based on the indicative data.  However, there remains a lot of work to regain the majority of the lost jobs during the virus outbreak.  The pace of recovery is expected to slow going forward, particularly with re-openings slowing – a trend which began after the reference period for the June labor reports.

Initial and Continuing Jobless Claims Disappoint: Also reported this morning, 1.43 million people filed new jobless claims during the week of June 27, a disappointing  result.  New filings were expected to decline 130k but fell just 55k.  In addition, continuing claims increased for the  week ending June 20 from 19.2 million to 19.3 million.  While the monthly labor reports are considered more authoritative, the jobless claims data are more timely.

Trade Deficit Larger-Than-Expected, Trade Volume Continues to Fall: The May trade balance jumped $4.7 billion to $54.6 billion, a $1 billion larger deficit than expected, on a sizeable decline in both imports and exports.  The larger deficit is not positive for the 2Q GDP calculation and the persistent decline in overall import and export volumes, collectively, is a negative indicator for global growth trends over the medium term.


YESTERDAY’S TRADING

Equities Rise to Start July Following Best Quarter in Over Two Decades: U.S. equities jumped to start July as economic data pointed to continued recovery in June and reports of progress on another vaccine helped offset more discouraging news about the pace of virus spread in the U.S. After ADP projected a second month of jobs recovery, separate reports showed manufacturing activity continued to pick up in June (more below). The Fed’s minutes showed officials expect to keep policy accommodative for the many years it takes the economy to recovery, a sentiment it signaled could become more explicit in updated forward guidance at future meetings (more below). The S&P 500 rose 0.5% while the Dow dropped 0.3% on a drag from shares of Boeing. The Nasdaq gained just under 1% to close at a new all-time high.

Virus Anxieties Find Daily Comfort in Progress on Another Virus: While several of the U.S. hotspots reported new records for daily infections, a pre-market report that an additional vaccine was considered safe and saw some positive results in early tests helped market sentiment. Shares of Pfizer rose 3.2% after announcing the progress in a joint effort with a German biotech company. Firmer equities kept Treasury yields under pressure for the duration Wednesday, with the 10-year yield closing up 2.0 bps at 0.68%. The 2-year yield added 1.2 bps to 0.16% and the 5-year yield added 2.4 bp to 0.31%.


OVERNIGHT TRADING

Vaccine Hopes Give Markets Shot in the Arm Despite Rising Infections: Equity investors were clearly in a risk-on mood overnight despite an accelerating U.S. outbreak and impending U.S. labor market updates. The consensus continued to credit yesterday’s reports of positive early-trial results from another possible vaccine for lifting spirits. Asia stocks earlier closed up 1.4% and Europe’s Stoxx 600 was 1.3% higher just before 7 a.m. CT. Treasury yields, however, were little changed as U.S. cases continue to climb and yesterday’s Minutes supported beliefs the Fed will keep rates low for a long time. Lower yields in Europe also kept a cap on Treasury yields after several strong French debt auctions.

Jobs Beat Gives Markets Another Boost: Heading into this morning’s jobs report and jobless claims data, the Treasury curve was essentially flat on the day while U.S. equity futures had joined the global rally and were up just under 1%. Following the big beat in the jobs rebound, yields rose and stock futures hit new highs. At 7:50 a.m., S&P 500 contracts had gained 1.3% and the 10-year yield was 2.5 bps higher on the day.


NOTEWORTHY NEWS

Manufacturing Picked up in June: A couple of PMIs pointed to further recovery for manufacturing activity in June. Markit revised its PMI up 0.2 points from initial estimates to 49.8, an improved reading that lagged an even larger gain for the ISM index. Easily exceeding expectations of a contractionary 49.8, the headline ISM manufacturing index jumped nearly 10 points, from 43.1 in May to 52.6 in June. The first expansionary reading since February was built on a surge in new orders and production and a slower pace of job loss. The new orders index rocketed 24.6 points higher to 56.4 while production gained 24.1 points to 57.3, both registering their best levels since early in 2019. Less encouraging, the employment index rose 10 points but signaled continued contraction. Consistent with a host of regional Fed reports, the data reflect continued improvement for the sector.

Construction Spending Missed in May: Construction spending missed the mark in May and there were negative revisions to previous estimates for both March and April. The 2.1% decline in May followed a 3.5% drop in April (previously estimated at -2.9%) and disappointed expectations for a 1.0% gain. The private sector saw declines in both residential and non-residential activity while increased spending at the state and local level offset a decline in federal outlays. Despite strength in several separate housing reports, construction of single family homes fell at the fastest rate since February 2009 and home improvement spending leveled off after three months of decline.

Dovish Minutes Show Concern about the Outlook and Plans for Prolonged Accommodation: The FOMC’s June 10 Meeting Minutes reflect uncertainty, heightened downside risks, a preference for forward guidance and asset purchases over yield curve control, and a willingness to use these tools in the near future.  The Fed noted the virus will “weigh heavily…in the near term” and poses “considerable risks…over the medium term.” Among the risks to the rebound, “the recovery in consumer spending was not expected to be particularly rapid beyond this year,” and business investment is likely to be “constrained.” In the discussion of their toolkit, officials clearly favor forward guidance and asset purchases over yield curve control (YCT as they reference it).  The minutes showed “nearly all participants…had many questions regarding the costs and benefits of such an approach.” Related to forward guidance, more participants appeared to favor outcome-based guidance tied to inflation followed by guidance tied to an unemployment rate outcome, a decision which could be announced at an upcoming meeting.


ICYMI – June 2020 Monthly Review: Click here to view the full monthly review.


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