Jobs rebound in February! At least, that is what you are bound to hear in certain economic circles. Nonfarm payrolls in the US increased by 379,000 in the month of February. The final figures for December are in and they are UGLY. After being revised lower in last month’s labor report and again today, job losses in December totaled 306,000. This seems consistent with the weakness we were seeing in other areas of the economy during the 4th quarter. Nonetheless, January’s anemic job growth was revised higher to reflect an expansion 166,000 jobs. If today’s number holds, the trailing 3-month average for America’s jobs machine is running at ~80,000 jobs per month-- NOT great (particularly at this stage of the recovery). Wages increased 0.2% MoM, bringing the YoY increase to 5.3%. Meanwhile, unemployment was “little changed” in February according to the Bureau of Labor Statistics. In fact, the official unemployment rate clocked in at 6.2% (down 0.1% from January’s reading); U6 was unchanged at 11.1%. Forgive us if we don’t hear much cheering in Laborland.
Speaking of… labor and wages are central themes in the great inflation debate. In fact, Jay Powell noted (yesterday) the historically tight relationship between inflation and employment. Of course, the shape of the post-GFC (Great Financial Crisis) economic recovery stands in stark contrast to this economic maxim. We would note the slack in today’s labor market (double digit U6!) and the velocity of money in the US economy. By any measure, velocity was anchored at all-time lows at the end of 2020. There is simply too much money supply in the US relative to the level of economic activity. Will this change? We certainly hope so.
With a labor market growing at a pace of ~80k per month and in the context of a relatively soft economic recovery it does not appear any structural inflationary change is imminent. So, we have news for the inflation hawks: Nothing to see here… stay in your roost! Meaningful ramifications? This kind of backdrop gives the Fed ample flexibility to maintain its accommodative stance and expand its balance sheet. Please keep in mind the FOMC is inclined to look past “aberrations” in the commodity complex. As an aside, let’s cheer on those in the agriculture and energy sectors (it’s been a tough few years). We would also note here that the size and scope of the Fed’s balance sheet continues to reach new heights (despite rising rates) and investment grade corporate spreads are still tight, averaging about 180 bps. Meanwhile, option- adjusted spreads in corporate America are also running sub- 1%. This is great… especially for those with access to it.
Around the horn to corporate earnings... Earnings season was much stronger than expected in terms of both reported results and guidance. We are tracking for a very quick recovery in profitability. Of course, this bodes quite well for equities as whole, and we will likely increase our expectations for yearend. However, we would be remiss if we did not mention a couple of proverbial flies in the economic ointment (primarily relating to the US consumer); we will be keeping a close eye on cyclical data in the coming weeks. There is also good news on the virus front as vaccinations are on the rise and “reopenings” (however cautious or aggressive) are in the offing. Let’s hope for something closer to “normal” in 2021.
Market Outlook: Bearish USD, Neutral Duration, Neutral Equities