The pretended rebound in the US jobs market seems to have run its course. As we learned last week, jobless claims hit a 5-week high as America is plagued by resurgent Covid infection numbers and on the eve of another lockdown, partial as it may end up being. Initial jobless claims in the 7 days through November 21 rose by a seasonally adjusted 30,000 to 778,000, markedly worse than most of the pundits’ forecasts.
Ever since weekly claims spiked from an average level of low 200k at the beginning of the year to the still incredible 6.65 million in early April, the weekly number has gradually fallen to a low of 709k on November 12. The economy was meant to have left the historic valley of tears and to gradually and sustainably recover. Amid this perceived scenario the labour market admittedly had a decent run… until it apparently didn’t.
The new Covid wave will in all likelihood push America back into recession, and unemployment is likely to worsen, at least in the short run. The data series of weekly claims has evidently been forming a bottom around the 700-800k range. Restaurants and other businesses have been forced to close again, and, vaccine or not, we might only be at the start of further restrictions to be imposed. It should not come as a surprise if we hit the 1m mark again in coming weeks, a level we haven’t seen since August.
The recent slump in retail has already given us a cue, with October sales being flat and November and December to likely look horrible in comparison. Just think about Black Friday only 3 days ago and its numbers for a moment. Only half of the usual foot traffic shoppers visited American retail shops. Rising infection numbers ravaged what should have been one of the busiest days in consumption. Despite the jump in e-commerce total Black Friday spending was significantly lower than originally forecast.
This trend, if you want to call it that, coincides with the pending expiration of extended federal jobless benefits at the end of the year. Millions of Americans could be cut off unless Congress gets its act together, a scenario that seems to not be in the least likely from today’s point of view. A continued stalemate across the aisles has the potential of not only throwing into doubt the concept of an economic recovery, it could also do irrecoverable damage to the system as such.
It is no wonder that the Treasury market is starting to price in a less-than-desired outcome. Instead of 10-year rates pushing through the 1% threshold and impressively confirming the continued economic improvement, as the majority of the pundits were betting on, yields have turned down again, now hovering around the low to mid-80bp level. Once the last shred of fiscal hope is lost, the 10-year will probably move back to the August lows of 50bp, if not lower.
Much depends on what the Fed will do on December 15/16. The board of governors must be fuming over Steven Mnuchin’s removal of emergency lending programs that were pre-approved by Congress, in an apparent stunt to deprive the incoming administration of a readily available tool to counter any such economic setbacks. As the only game in town remaining to mitigate the hardship, an increase of monthly bond purchases seems to have been discussed inside the ivory towers.
According to a
WSJ article, the minutes of the November 4/5 meeting released on Wednesday showed that officials were prepared to roll out revised guidance on the Fed’s QE operation at the coming December get-together. Since June, the Fed has been buying 120 billion of bonds net of redemptions per month, 80 billion of Treasuries and 40 billion of mortgages. From here, it will be a walk on eggshells whether, in what fashion, and by how much to boost QE in the face of imminent Covid pain.
It is understandable that positive vaccine news will have an effect on Fed decision making. No one would want to overwind the wheel if there was the real prospect of the economy bouncing back hard in the wake of a much more managed health crisis to be expected by summer. At the same time, this is no moment to skimp. If Congress remains defiant and millions fall into a hole come January, who will take responsibility for it?
