Following last week’s massive non-farm payrolls (NFP) miss, we think it’s safe to say a September tapering announcement by the Fed is probably dead and buried. The jobs number came in about 490k below consensus. Our view over the last few weeks has been that consensus market expectations might be underestimating the severity of a potential resurgence of the virus and its impact on the global economy. This was possibly the result of increased optimism arising from the rapid growth in vaccination rates. That seems to be changing now as growth forecasts are starting to be adjusted lower. It is quite clear that the Delta variant had a significant impact on the jobs numbers we had in August. The NFP survey is taken on the week of the 12th and when the survey was taken in July, there were about 15k covid cases a day in the US. The revised NFP number for that period has now been upped to just over 1m jobs. During the week of the August survey, the US had about 140k cases a day and jobs dropped to 235k with no growth in leisure & hospitality.
A peculiar feature of recent market behaviour has been the idea of “bad news means good news.” A bad jobs report in this environment would typically imply the Fed kicking tapering further down the road, which means continued stimulus and more fuel for risk assets. However, following the weak jobs report, we saw a recovery in the dollar index, a drop in equities and some commodity weakness. This shift in sentiment was probably sparked by the sell-off we witnessed in US rates, led by the back end of the curve. We think this move in rates was a response to inflation concerns resulting from an expectation of continued stimulus and wage pressures. But a strong US 10-year auction on Wednesday brought the rise in yields to a halt and it now appears that growth concerns have taken over as the main culprit keeping risk assets down.
The chart below shows the US 10-year yield rising and testing a key resistance above 1.380 but failing to break through. We will be watching this closely as a move above this level would likely see a squeeze in positioning and bring further weakness to risk assets.
Despite the significant lag in the data, the results from the recent US JOLTs survey (which measures job positions that are open and not filled on the last business day of the month) also feeds into the inflation narrative. The report showed that job openings in the US rose to 10.9 million in July – a fifth consecutive record high versus an expectation they would drop slightly. This highlights that employers will need to raise wages to attract workers. Given that wages tend to be sticky, this points towards higher inflation and higher yields. However, due to the huge lag, the market reaction
to this tends to be muted. Nonetheless, next month’s JOLTs data release will be one to watch as it will reflect job openings for August where we had the big NFP miss. With emergency unemployment benefits having come to an end, we also expect this to start being reflected in the jobs numbers.
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