The Market Today
Virus Causes December Job Loss Despite Otherwise-Solid Growth
by Craig Dismuke, Dudley Carter
2021 ECONOMIC OUTLOOK WEBINAR
Vining Sparks will host our 2021 Economic Outlook Webinar next Tuesday, January 12. During the presentation, we will discuss the forecast tension between the continued headwinds of the virus and the upside risk from the growing pent-up consumer demand.
CORONAVIRUS UPDATE (VS Coronavirus Chartbook – PDF)
Monitoring the Virus Headlines: Markets remained focused on the outlook for more stimulus after Democrats took back control of Congress on Wednesday and certified the electoral college votes to officially name Joe Biden as the 46th President of the United States. The discussion of more stimulus will be key to for the growth outlook this year as the virus continues to spread rapidly around the globe. In the U.S., Texas and Connecticut identified their first cases of the U.K. coronavirus variant and New York reported a record daily increase of more than 17,000 cases. In Europe, France’s Prime Minister announced that the 8 p.m. curfew will be extended until January 20 and could be pulled forward to 6 p.m. for 10 hot spots. Gyms and ski lifts in France will remain shut until the end of the month and bars and restaurants could be closed until at least mid-February. After announcing record infections and new mobility restrictions on Wednesday, Ireland’s deputy prime minister said businesses should plan on being closed for the entirety of the first quarter. Portugal’s prime minister said current restrictions will be extended and tighter measures could be announced next week. The CEO of England’s hospital system said pressures on health services were “real and growing.” Brazil, one of the worst-hit countries early on, reported a new record for infections of more than 87,000. On a more positive note, the U.K. approved the Moderna vaccine for emergency use and preliminary results from a lab study in Texas indicate the Pfizer-BioNTech vaccine provides some protections from the mutated virus strains.
Virus Causes December Job Loss Despite Otherwise-Solid Growth: The economy lost jobs in December for the first month since April as the recent increase in coronavirus cases decimated the leisure sector. Total nonfarm payrolls contracted 140k for the month with private payrolls declining 95k and government jobs declining 45k. Jobs susceptible to the restrictions of the pandemic were hit hardest. According to the BLS, “In December, 15.8 million persons reported that they had been unable to work because their employer closed or lost business due to the pandemic–that is, they did not work at all or worked fewer hours at some point in the last 4 weeks due to the pandemic. This measure is 1.0 million higher than in November.” The leisure sector illustrated the situation best, losing 498k payrolls. Particularly hard hit were restaurant and bar workers, down 372k. As schools were shuttered, education lost 83k jobs, 63k from the private sector and 20k from the public sector.
On a positive note, goods producing sectors did quite well. Construction jobs increased 51k while manufacturing jobs rose 38k, both well above their typical growth rates. The retail sector, surprisingly, added 121k jobs. Transportation jobs rose 47k and business services added 161k. Despite the disappointment in the areas most acutely affected by the virus, the underlying economy appears to be continuing to recover.
The household report showed very little movement despite expectations that it might show volatility, particularly with the incorporation of the annual seasonal adjustments. The headline unemployment rate held at 6.7% as 21k more people reported as employed and 8k fewer people reported as unemployed. The number of persons not in the labor force did increase 114k, but not enough to push the participation rate down from 61.5%. There was a migration out of part-time jobs (-456k) into full-time jobs (+397k). Additionally, 348k fewer people reported as having permanently lost jobs. On a negative note, the number of persons temporarily unemployed increased 237k, likely the same workers affected by the pandemic as seen in the establishment report.
Stocks Set New Records and Treasury Yields Rose and Steepened as Stimulus Bets Remained Front and Center: Investors in the U.S. remained focused on the possibility that a Democratic President and Congress could pass additional stimulus measures early in the new administration to hasten the recovery from the pandemic. With such a scenario possibly leading to a quicker pick-up in activity and increased Treasury issuance to fund the outlays, the major equity indices climbed back to new all-time highs and the Treasury curve continued to move higher and steeper. Reversing roles from Wednesday’s trading, the Nasdaq led with a 2.6% gain while the Dow trailed with a smaller 0.7% improvement. The S&P 500 climbed 1.5% with support from nine of its eleven underlying sectors. Tech companies led the way, energy names rose as U.S. crude crossed $50 per barrel to the highest level since February, and financials remained near the front of the pack as yields rose and the curve steepened. With the Fed expected to keep rates near zero for the next several years as the economy recovers, the 2-year Treasury yield remained unchanged at 0.137%, roughly holding its flatline average level since July. As the 10-year yield added 4.4 bps to 1.079%, a new high back to March, the spread between the 2-year and 10-year notes expanded for a fourth consecutive session to 0.94%, the widest since July 2017.
Investors Remain Upbeat Despite Expectations for Weak Payroll Report: Global risk markets’ generally strong start to the year has continued on Friday despite expectations for this morning’s official payroll data to show the labor market weakened in December amid rapid virus spread. The weakness has been anticipated for weeks and the sticker shock of a potentially negative print was absorbed earlier on Wednesday after ADP reported the first contraction of private payrolls since April. While the data provides a concerning indication for the pace of the recovery, it has also made investors increasingly confident that the new Biden administration will seek additional stimulus early in his administration, and potentially large stimulus with Democrats taking back control of the Senate after victories in run-off elections in Georgia on Tuesday. Ahead of the labor data, the 10-year Treasury yield inched up 0.5 bps to 1.08%, a new pandemic high, and stock index futures were positive by at least 0.3%, signaling new record highs at the open. Similarly, foreign sovereign yields were little changed but reflected a risk-on bias and global equities had notched solid gains. The MSCI Asia Pacific Index gained 1.6% to close the week and European equities were higher, giving a 0.6% lift to Europe’s Stoxx 600. Treasury yields and stock futures both largely brushed off the payroll decline, holding to their overnight increases.
Virus Disruptions Drive Services ISM Higher as Employment Contracts: A surprisingly strong ISM Services index for December owed more of its unexpected strength to virus disruptions than to a resurgence of hiring or broader economic activity. The headline index rose 1.3 points to close out the year at 57.2, notably higher than the 54.5 consensus expectation and the best level since September. But while indices tracking production and new orders rose by 1.4 points and 1.3 points, respectively, the employment index dropped 3.3 points into contraction. Combined, those three indices, which track trends in actual economic activity, were a net negative for the headline index. As a result, most of the increase in the headline resulted from a 5.8-point increase in the supplier deliveries index, likely signaling disruptions and delays caused by the virus and new lockdowns. That indication, which was consistent with the manufacturing report from earlier in the week, was also reflected by comments from leaders across many industries
Harker Sees 2H21 Pick-Up without Inflation Pressures Building; Barkin Concurs: Philadelphia Fed President Harker signaled support for the path of the fed funds rate reflected in the December dot plot, noting, “We are looking at a long period where the fed funds rate will stay at essentially zero.” In addition to the obvious labor market slack that remains as a result of the pandemic, Harker said, “There’s no signs, in my mind, right now, that inflation is going to go out of control.” He expects weak growth in the first half of the year to give way to more positive trends in the final six months. On the balance sheet, he stated, “I don’t see us paring that back right now, or in the near future. I could see, potentially, that occurring at the very end of 2021 or early 2022.” Richmond Fed President Barkin provided a similar paradigm in separate remarks, saying he expects a robust rebound in the second half of the year but added “It’s hard to find inflation in the numbers.”
Bullard Bets Inflation Will Surprise Many: St. Louis Fed President Bullard took somewhat of a contrarian approach on the outlook in a for inflation, saying he believes that pricing pressures will firm up more quickly than most others think. And while he considers the recent rise of inflation expectations to be a start in the right direction, he also said there is still a ways to go until they are at a sufficient level. Nonetheless, he said the pieces are in place for inflation to pick-up. He expects positive growth in the first quarter despite the current virus-induces slowdown and highlighted that the labor market recovery is well ahead of the pace from the Great Recession. On the policy front, he addressed the vague forward guidance on asset purchases as a nod to the level of uncertainty that exists and noted it’s too soon to say when tapering of the current level of purchases could occur.
Daly Sees a “Deep Hole” in the Economy, Low Probability of Unwanted Pick-up in Inflation: San Francisco Fed President Daly, who will vote on policy decisions in 2021, said that the economy has recovered more quickly than most had expected and remained resilient even amid the latest outbreak. However, she cautioned that overall activity has a “deep hole” to dig out of before it fully recovers. With inflation the key to discerning future fed policy decisions, Daly said she sees significant increase in inflation pressures as a low-probability event, placing herself in the camp of those comfortable with keeping rates near zero for some time.