Nonfarm Payrolls June 2021

That’s more like it! Sort of… June jobs gained by 850,000! Hiring in leisure and hospitality lead the way followed by payroll expansion among public and private educators. This is largely consistent with the simple fact that the reopening process in US economy is well underway. However, there was little improvement in the overall health of the labor market as a whole.  The official unemployment rate ticked marginally higher to 5.9% from 5.8% in May and labor force participation stalled at 61.1%. In addition, the average American workweek declined to 34.7 hours with manufacturers adding only 15,000 jobs last month (more on that below). Moreover, construction jobs actually fell by 7,000 jobs. It might not be the autobahn, but we are still on the road to recovery. And on that note…   

June figures suggest it’s déjà vu all over again in the domestic economy. PMI’s in both US services and manufacturing continue to indicate expansion within the American economy. However, according to the Institute of Supply Management (ISM), employment gauges are flashing caution signs on both fronts. The latest reading on non-manufacturing employment came in at 55.3, which is not great but roughly inline with pre-pandemic levels. Meanwhile, ISM’s manufacturing employment index clocked in at a mere 50.9. It is important to remember that readings over 50 indicate expansion, but employment metrics fell meaningfully in both manufacturing and services relative to the previous month.

Data on new home sales and retail sales also disappointed, falling 5.9% and 1.3% MoM respectively. Not surprisingly, personal spending in aggregate actually flatlined last month—that’s 0.0% growth MoM and it was the worst showing since March. All the while, inflation is creeping steadily higher. Core CPI and PPI are running at 3.8% and 4.8% respectively YoY. The difference between core and “non-core” price indexes is that core excludes “volatile” food and energy prices from the basket of goods. Importantly, the gap between core CPI and PPI has been narrowing since April even as inflation readings continue to tick higher MoM. We have noted before that some producers are having more success passing costs through to end users and that trend appears to be well intact. Meanwhile, JOLT’s continue to impress with last month’s figures rising to nearly 9.3MM, suggesting the appetite for labor remains high among US employers. In fact, there have never been more job openings among America’s businesses than there are today, based on BLS data going back to the turn of the millennium!          

In the near term, inflation expectations are certainly on the rise, but things get murkier the further out we look. According to a survey conducted by the University of Michigan, 5-yr inflation expectations actually ticked down to 2.8% from the prior month’s reading of 3%. However, June saw the first “significant” rise in the effective funds rate (EFFR) thus far in 2021; EFFR ended May at 5 bps and jumped at 10 bps on June 17th— that means Fed funds doubled in a matter of weeks (#humor)! The Fed surely must be changing its stance on inflation (#sarcasm). Speaking of the Federal Reserve, its balance sheet quietly breached the $8T mark on June 16… that “T” stands for TRILLION, folks, and the 10-yr UST ended June at 1.45%. So, what’s going on out there? Well, there are many factors to consider, of course, but the velocity of money in the US economy certainly hasn’t picked up steam in 2021. In other words, money supply continues to dwarf economic activity (#goldilocks).        

Market Outlook: Bearish USD, Neutral Duration, Neutral Equities

News Release: Bureau of Labor Statistics (The Employment Situation- June 2021)