For the second time in as many months, US jobs disappointed. Things aren’t looking good in Laborland. January payrolls saw a modest increase of only 49,000 jobs and December’s figures were revised even lower to reflect a total of 227,000 jobs lost. January’s private sector hiring was particularly weak, adding a mere 6,000 jobs. Meanwhile, it may seem counter- intuitive but the official unemployment rate actually declined 0.4% to 6.3%; similarly, U6 clocked in 0.6% lower at 11.1%. Given that labor force participation declined to 61.4%, these are not what we would call “healthy declines” or “improvements” in US unemployment. Hourly earnings ticked up 0.2%. If there is something good in today’s nonfarm report, it is an uptick in hiring for public and private educators. This is encouraging as it signals American schools are embarking on the long road back to “normal.” In other economic news, January’s jobless claims averaged ~868,000. US PMI’s continue to suggest that the economic recovery is intact, but pricing at the producer level remains relatively soft. Moreover, long-term inflation expectations are anchored at 2.70%. On the consumer front, personal spending declined 0.2% in January and retail sales fell 0.7%. It’s not too surprising that January’s MoM CPI was all but flat. All in all, are things looking bad enough economically for more stimulus? You bet (and that yet again is the real news).
Another giant fiscal package appears to be en route to aid the flagging US economy. Congress hashed out the $1.9T plan for the better part of this past week, and Kamala Harris cast the tiebreaking vote last night in the Senate. Where will the trillions come from? This is a huge deficit spending package; additional taxes at the individual and corporate level are not a part of this deal… modern monetary theory at its best. Not surprisingly, the US dollar weakened overnight and this morning’s weak labor report added fuel to the fire. Let’s pivot from the halls of Congress to the Fed.
The Fed has no interest in changing its accommodative stance at this time and maintains that it can still do more. Truly amazing. How is Jay Powell doing? Money is cheap! Corporate spreads remain quite tight- Aaa and Baa debt range from 1.49% to 2.17% over US 10-yr treasuries. Speaking of… the US 10-year is hovering around 1.15% and that’s after a substantial steepening in recent weeks. How did we get here? Look no further than the balance sheet of the Federal Reserve itself (KPMG must have its hands full!) The Powell Fed’s balance sheet currently stands at a stunning $7.4T. To give some context, it was only $4.2T this time last year! At the end of 2007, the balance sheet was valued at less than $1T. Meanwhile, the velocity of MZM (the broadest measure of liquid assets in the US financial system) is at the lowest level on record. One word: unprecedented.
Earnings have been coming in and we’re about halfway through the season. So far so good! Reported earnings and revenues from the final quarter of 2020 have been impressive. Furthermore, American corporates are guiding for quite a strong earnings recovery in 2021, but it will still take a couple more quarters to eclipse 2019 earnings levels. Inflation has been a hot topic in recent weeks, but a structural shift higher seems unlikely especially given what appears to be a new normal burgeoning in the US workforce. With the coordination of fiscal and monetary policy and leaner corporate structures, earnings growth of >25% looks likely in 2021 and that is supportive of S&P 4450.
Market Outlook: Bearish USD, Neutral Duration, Neutral Equities