By Justin Pawl, CFA, CAIA, CFP®
Last Week Today.
- The European Central Bank took the first step towards tapering its Quantitative Easing program, announcing it will reduce bond purchases in the fourth quarter. Unlike the Fed, which will deliver a plan with a timeframe to reach $0 of net bond purchases, the ECB’s plan is more flexible, and the ECB could even reverse course to increase bond purchases should economic growth slow.
- President Biden requested a call with Chinese President Xi Jinping as talks between lower-level representatives have been unproductive. Biden advanced the idea of separating climate change discussions from defense and trade negotiations, but apparently, Jinping was uncooperative.
- The Atlanta Fed’s GDPNow third-quarter growth estimate plunged from 6% to 3.7% in recent weeks, mainly due to a steep decline in auto sales. Demand for new cars is not down, but the semiconductor chip shortage is preventing production, and if dealers don’t have cars, they can’t sell them.
- Inflation-adjusted yields on European junk bonds turned negative for the first time in history last week. Investors paying for the “privilege” of holding low credit quality corporate debt indicate how governments’ efforts to stimulate pandemic-shocked economies are distorting prices.
- In a holiday-shortened week, the S&P 500 and Dow Jones Industrial indexes declined for four straight days. The Nasdaq managed one positive day in the mix, but overall investor sentiment soured after the long weekend. However, losses were contained as the indices declined less than 2% for the week. International developed equity markets were relative outperformers as the MXEA Index fell 0.3% and the emerging markets index was down 0.5%. Japan and China’s equity markets stood out in a rather soggy week for stocks, rising 3.7% and 1.1%, respectively. Click on the table below for detailed market performance.
Labor Market Conundrum. Last weekend the extraordinary expansion of the nation’s unemployment benefits system expired, removing pandemic-related assistance that began 18 months prior. As of the end of July, there were more than 13 million laborers on some form of unemployment benefits, and all but 4 million just reached the end of the line.
Source: FHN Financial
Fortunately, the labor market is red-hot for those seeking work, with approximately five job openings for every four unemployed workers. Small businesses, the backbone of employment in the United States, are clamoring to hire workers with indicators like “Job Openings Hard to Fill”, “Hiring Plans”, and “Compensation” hitting record levels in data series that extend back for 30 years or more. It’s worth noting that the NFIB Small Business Surveys are diffusion indexes, meaning that the index level is equivalent to the percentage of survey respondents that provided an affirmative response. In other words, 50% of those surveyed responded that open job postings are difficult to fill, greater than 40% of companies are increasing pay, and more than 30% are planning to hire additional workers.
Sources: NFIB and Covenant Investment Research
With high demand for workers and some 9 million would-be laborers no longer receiving government assistance, will hiring pick-up substantially in the coming months? The answer is maybe. After the initial hiring rebound from the pandemic lockdown, monthly job gains have been inconsistent. The bumpiness reflects both the waxing and waning of various Covid infection waves and the uneven nature of the economic recovery that first centered on goods producers. More recently, hiring picked up in the services industries as the recovery broadened, and in July, more than 1 million jobs were added.
Sources: Bloomberg LP and Covenant Investment Research.
With building economic momentum and a recent acceleration in hiring, economists forecast job gains of 733,000 in August. What they got were a disappointing 235,000 new hires. The wide miss in the forecast vs. actual hiring is informative in so much as it should temper our expectations about the path forward to a full labor market recovery, even as pandemic assistance ends. Earning money to pay bills is the primary reason people work, but there are multiple non-economic reasons people choose not to work, including:
- 5.5 million unemployed workers are not working because they care for children who are not in school or daycare (Census Bureau). This number should go down as the school year ramps up.
- 3.2 million unemployed workers are concerned about contracting or spreading the coronavirus (Census Bureau).
- Employees are not fungible. Jobs available in some locations may not fit the skillsets of the local labor pool, requiring hiring from other markets, which takes time.
- A large cohort of Baby Boomers accelerated retirement during the lockdown and will not return to the labor market.
- According to a BCA Research survey, respondents cited a “financial cushion” as the top reason for not searching urgently for a job.
Bottom Line: Nothing moves in a straight line, and the labor market recovery is not immune from this immutable law of economics (and financial markets). The easy job gains are likely behind us and, thus, the path to a full labor market recovery will be a long one. Hopefully, the end of pandemic benefits will encourage workers to find jobs and alleviate some labor supply issues. But economics is not the sole motivating factor when a virus is running rampant through society. Regardless, the Fed is on a path to taper their bond purchases this year, even if the labor market has not reached the Fed’s definition of “maximum employment.” The political winds have shifted against quantitative easing and while the Fed is not a political body, even their independence is subject to influence, and a tapering announcement will come in the fourth quarter. Rate hikes will be the next lever for the Fed to pull in normalizing monetary policy, but that’s unlikely to happen until late 2022 at the earliest.