Why you should care: November’s personal income and spending data illustrate the overarching factors driving America’s economy in the near-to-medium term. The lack of personal-income growth will constrain overall demand, shackling the prices of goods and services to earth. While the Fed is doing all it can to stimulate economic activity, overall demand will be subdued until the slack in the jobs market has been more fully absorbed, a catalyst that looks to be a long way off. With the current level of jobs remaining 9.8 million below their pre-pandemic peak, consumer incomes on their back foot and a subdued inflation outlook, the Fed’s primary focus for the foreseeable future is job creation. Layer on raging virus infection rates, hospitalizations, deaths, and a stalling vaccination rate and what have you got? An economy that will struggle to create any meaningful number of new jobs in the near-term and an ultra-low interest rate environment that will struggle to post any meaningful, sustained rise.

What to Watch This Week: It’s all about the January 5^th Georgia Senate race and the January 8^th jobs report for December.

As the latest data on personal income and spending revealed, household incomes decelerated sharply as various government support programs wound down in recent months. While the income hole was partially plugged by Congress’s recent passage of a fiscal aid bill, the fall in consumer incomes, and the expected weak pace of new job creation, could still lead to a deeper contraction in Q1 and flatten the slope of economic recovery in 2021.

The outlook will become clearer after this Friday’s release of the jobs report for December. Our gut tells us that the dramatic surge in job creation, after the initial Covid-19 lockdown ended, has likely come to a crashing end. For some perspective, the large downside miss in new jobs created in November relative to what was expected – a time when lockdown measures were considerably less restrictive than they were in December – is a troubling indication of a lack of resilience in the roaring jobs recovery of recent months. As such, we expect that a disappointing number of jobs were created last month, joined by a rising unemployment rate.

For the Georgia Senate race, the impact it will have on determining which political party controls Congress, President-elect Biden’s agenda and the scope for further fiscal stimulus, keep in mind that the results likely won’t be known for days, and vote counts will almost certainly face legal challenges. Once the election results do finally come through, Democratic victories could push yields higher given the inclination for more spending coming from the Biden administration.

Big Picture: The health of the economy is regressing as the pandemic intensifies. Unemployment filings have erased the last two months of improvement and consumer confidence has retraced back to August levels, dragging down household spending – which drives about 70% of America’s economic activity – along the way. The economy has rebounded impressively from the record steep declines earlier this year, but significant impairment remains; a little over 50% of jobs lost have been recovered, leaving nearly 10 million workers still displaced. While talk of the Fed’s eye-popping, $7.5 TRILLION balance sheet and calls for higher inflation are entertaining, they are mostly a distraction. What we need now are jobs, jobs, and more jobs. The Fed knows it and will act as such by keeping short-term rates anchored near zero and long-term rates on a leash near their current levels.

Current Select Interest Rates:

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Source: Bloomberg Professional

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Source: Bloomberg Professional