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For the second straight month, US jobs data has beaten estimates and helps affirm the equity market recovery trade up to a point. The recent rise in Covid-19 infections across the country’s south and west, delaying the restoration of economic activity, suggests that the recovery in jobs activity in the past two months may well fade.

Brian Coulton, chief economist at Fitch Ratings, noted:

“The fact that unemployment fell far more than expected despite a rising participation rate underlines the rebound in employment, most strikingly in leisure and hospitality. But slightly more sobering is the upward creep up in permanent job losers which, along with the recent rise in virus cases, emphasise the recovery challenges ahead.” 

Indeed, the latest figures from just the state of Florida show a near-record jump in new coronavirus cases, marking the second time in less than a week that the state’s daily case count has risen by more than 9,000.

Market sentiment was far more focused on another set of figures.

A gain of 4.8m jobs blew past the forecast 3.2m, while the May data was upwardly revised by 190,000 to 2.7m. This still leaves a large unemployment hole to fill, but the direction of travel was enough to spur a bounce for Wall Street in a shortened trading session ahead of a July 4 long weekend.

Economically sensitive sectors, energy, materials and industrials followed by tech outperformed the S&P 500 on Thursday, while small and mid-cap company benchmarks also rose sharply with gains in the region of 2 per cent.

Another encouraging sign for risk appetite is the fall in equity volatility, with the Vix near its lowest level in a month, while the S&P 500 is stretching further beyond the 200-day moving average that was tested a week ago. As for the Nasdaq, the benchmark is extending its record run and is up more than 14 per cent on the year, a performance that certainly stands apart among developed world global benchmarks.

Less impressed are bond investors. The 10-year Treasury yield briefly rose above 0.7 per cent, leaving the benchmark stuck in the middle of its recent range between 0.6 to 0.8 per cent. Such a reaction highlights misgivings over the jobs data in general.

Steven Blitz at TS Lombard says the number of permanent unemployed workers “has risen into recession territory and will continue to rise as summer moves on” as shown here:

The Conference Board noted “lay-off rates remain historically high”, with 1.4m new applications for unemployment benefits last week.

Steven adds:

“For policymakers, the question confronting them as they work through the next stimulus package is whether to believe the headline employment data or the underlying fragility of the increase.”

There also remains an issue over classifying unemployed workers at the moment, and that lowered the unemployment rate by one percentage point to 11.2 per cent. Adjusting for that leaves the rate below a forecast 12.5 per cent and the Bureau of Labor Statistics said “the degree of misclassification declined considerably in June”. 

Gregory Daco at Oxford Economics highlighted that the US labour data show just “three out of every 10 jobs lost” have been recouped in the past two months.

“Policymakers should not read the back-to-back record payroll reports as ‘mission accomplished’. In fact, rising Covid infections in many states and a looming July 31 income cliff for 30m unemployment benefits claimants should motivate policymakers to press firmly on the fiscal accelerator in order to ensure a strong recovery.”

Neil Williams at Federated Hermes also cautions that a long path to full employment beckons:

“Sadly, in terms of employment, it may still be the ‘elevator down, but only steps back up’. And it remains to be seen how spendthrift consumers can be, given low earners have understandably been using Federal support for paying bills, rather than discretionary spending.”

Quick Hits — What’s on the markets radar?

Much of the decline in leading sovereign bond yields from the first half of the year is over, argues BCA Research. But they think “it is far too soon to expect a big bond sell-off, with nominal government bond yields now pulled in opposing directions by their real yield and inflation expectations components”.

BCA believe investors should be mindful that “rising inflation expectations do not necessarily have to translate into higher nominal bond yields if the markets do not expect central banks to signal a need to tighten monetary policy in the near future, which would push real bond yields higher”.

Programming note

Market Forces will return next week. A good weekend to all readers.

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