Upbeat July Jobs Report. The US economy added 1.8 million jobs in the month of July, bringing the unemployment rate down to 10.2%. Mohamed El-Erian, Chief Economic Advisor for Allianz noted, “The internals are, relative to expectations, as positive as the headline numbers. The qualifications are first, levels remain worrisome, and second, a positive report does not help resolve differences in the fiscal relief bill.”
CARES2 Update: Lawmakers were unable to come to an agreement this week and President Trump is expected to use executive power as soon as this weekend to restore several provisions of the CARES Act that have expired. According to Bloomberg, “Two people familiar with matter said Trump would extend the supplemental unemployment insurance at a $400-per-week level, a reduction from the $600 in the last stimulus bill.” The article continued, “It wasn’t clear what mechanism he would use to fund the extension or how long it would be in place.” The Washington Post pointed out Friday afternoon, “The Constitution gives Congress the authority on spending. Because this would require additional spending, it’s difficult to see how an executive order would be legal. If Trump tried it, it probably would lead to legal challenges, which could further delay payments to the unemployed.”
The 2020 Presidential Election is now less than 3 months away. FiveThirtyEight and PredictIt both continue to show Biden as the likely winner. The S&P 500 also offers a prediction on the election worth tracking. Historically, if the three-month period prior to the election is positive for stocks, the incumbent party has won 87% of the time since 1928 (20/23 times). The S&P closed at 3271 on Friday, July 31st.
Back to School. Goldman Sachs estimates that 1/3 of the pre-pandemic work force have school-age kids at home. With many public-school systems across the US moving to partial or full remote learning, many parents will be forced to make tough decisions this school year. Single parents, parents who can’t work from home and parents with young children will be at particular high risk of being forced from their jobs. Looking at the basic composition of GDP as the US labor force (# of people working) plus productivity (how much they produce), the move to homeschool will certainly weigh on the recovery over the coming quarters.
Who’s Right- Bankers or Investors? Credit spreads, the excess yield over Treasuries paid by corporations to borrow money, continue to fall (easing lending conditions) while banks continue to tighten lending standards. These two indicators, which historically move together, have diverged during the Covid pandemic (see chart below, source: FRED). Companies that access financial markets for capital have been buffeted by a recovery in risk appetite, while companies dependent on bank borrowing face rising thresholds for capital- as banks see deteriorating business conditions and rising defaults ahead. Yields on corporate bonds are so low, they reached parity with the yield on the S&P 500 this week, something that has never happened as long as Bloomberg has tracked the data.
Not Even Thinking About It. During last week’s press conference following the FOMC meeting, Chair Powell reiterated that the committee is “not even thinking about raising interest rates,” given their priority to provide ultra-supportive monetary policy during the Covid pandemic. NatWest pointed out this “ultra-dovish” view is held collectively by the entire FOMC committee (Hawk-Dove Map below). Rick Rieder of BlackRock said via Twitter, “the key to near-term monetary policy will be all about the Fed’s dual mandate, but with one side of the mandate being the primary target (employment) and the other governing how far the central bank is willing to go (inflation). The fact is that the Fed likely has an impressively long runway.” Markets currently believe what they are being told, with consensus estimates for no rate hikes over the next two years.
I will close here for the week. Have a great weekend.
-Steve