Stimulus Hopes and Vaccines in the Driver’s Seat

Weak jobs report increased stimulus urgency on Capitol Hill. America’s jobs engine added just 245k new jobs in November, roughly half of what markets had anticipated. The weakness was concentrated in private sector services, which are most vulnerable to lockdown measures. Private sector hiring saw a significant deceleration (344k vs. 877k), driven by slower job creation in both the goods-producing sector, which has been relatively resilient throughout the pandemic, as well as a sharp slowdown in the services sector, which has borne the brunt of lockdown-induced job losses.

Despite the gloom, the job gains were strong enough to help the unemployment rate fall further – from 0.2% to 6.7% – albeit in concert with many giving up their job search after exhausting unemployment benefits, thereby dropping off the unemployment radar altogether. The US labor force participation rate is down nearly 2% since February. Wages surprisingly increased last month, but likely reflect low-wage workers falling out of the tabulation amid a new wave of layoffs. All told, the pandemic has tremendously reduced demand for workers in certain service-related industries, weighing on any meaningful wage gains in retail and leisure and hospitality. Yet, labor shortages in construction, manufacturing and information are prompting employers to raise compensation to attract workers, equating to an obscure wage picture as we enter the holiday shopping season.

Our take: The paltry 245k increase in jobs last month puts the number of new jobs created after the initial March lockdowns at 12.3 million, 9.8 million below their pre-crisis peak, and a far cry from the 22.2 million jobs lost over the March-April period. In what is historically the most impactful piece of economic data on interest rates, the November jobs report spurred long term interest rates higher, reacting to the market’s logic that the suddenly tepid pace of job creation will nudge Congress toward a targeted stimulus deal sooner rather than later, especially as a number of CARES Act programs – which have helped the unemployed shoulder the economic blow in past months –  face a hard stop later this month.

Overall, the striking slowdown in new job creation last month serves as an ominous warning of a tough slog ahead for America’s economy amid renewed Covid-19 lockdowns, and surging case counts and the implementation of considerably more aggressive containment measures across the country means that job creation in December will likely be much worse. In the meantime, it seems we are once again dependent on Congress to steer our near-term economic fortunes, and the direction of interest rates along with it. Should a meaningful stimulus deal come to fruition pre-inauguration, long term rates should continue their drive higher, although only modestly so. Should fiscal stimulus not come to pass, or negotiations drag on for weeks through year’s end, expect long term rates to trade near the middle of their recent ranges. Early last week, a bipartisan group of lawmakers proposed a $908 billion package that has become the basis for the ongoing talks. Aid for state and local governments and liability protections for businesses remain the big stumbling blocks.