It’s “fingers crossed” time.
Fingers crossed that an egregious downside miss on ADP employment doesn’t presage a similarly large undershoot on Friday’s all-important July jobs report. And fingers crossed that jobless claims don’t show a third consecutive weekly rise on Thursday. And fingers crossed that stocks don’t “misinterpret” protracted Beltway wrangling as indicative of an ineffective legislature prone to dangerous brinksmanship when the livelihoods of tens of millions of Americans are on the line.
Quite a bit of whatever sanity bears have left after an inexorable rally that took the S&P to within 2% of its record high on Wednesday (bottom pane in the figure), is tied up with the notion that the structural damage to the global economy from the pandemic hasn’t yet materialized — that the worst in terms of permanent business closures, defaults, bankruptcies, and various other manifestations of “scarring” still lie ahead.
The pessimists may be proven correct. Some improvement in some states on some key metrics (there are a lot of “somes” in there) notwithstanding, the US is nowhere near getting the outbreak under control, and that means the world’s largest economy cannot stage a sustainable recovery.
There is now virtually no connection between the signal being sent by near-record-high equity prices on Wall Street and the abject despair in many (figurative and literal) corners on Main Street.
That said, there are two vexing problems for the bear case. The first is that, against the odds, it does look as though some manner of vaccine is coming sooner than the “typical” timeline for a shot. The existence of a vaccine will change the narrative, even if many paranoid, conspiracy-theory-prone Americans refuse to get it. The second is that Congress is going to deliver more stimulus barring some kind of truly epic meltdown in D.C. Nancy Pelosi has (literally) promised to come through, and she probably will.
At least $1 trillion in additional spending is baked into Treasury’s borrowing assumptions and the refunding announcement on Wednesday explicitly said that the current quarter’s needs “will ultimately depend on the final provisions of the additional legislation”. For all the fanfare around the refunding statement, Treasurys were just ~3bps cheaper at the long-end.
Pelosi and Chuck Schumer continued to squeeze Steve Mnuchin and Mark Meadows Wednesday, according to people familiar with the ongoing discussions.
The White House has reportedly floated $400/week in additional federal unemployment benefits through the beginning of December as a compromise between the $200/week GOP proposal (a non-starter) and Democrats’ demand that the existing $600 supplement remain in place. While a figure lower than $600 still appears to be the most likely outcome, Pelosi and Schumer are said to have rejected the $400 figure. Additionally, Mnuchin’s trial balloon of $200 billion for states and localities was similarly shot down by the Speaker, who wants five times that amount. The White House has agreed to extend an eviction moratorium through mid-December, apparently.
The data is playing into Democrats’ hands. There are, of course, no guarantees that July’s jobs report will be bad, let alone bad enough to cause an outright panic among Republicans, some of whom, you’re reminded, are against any further spending. But, again, the ADP report wasn’t good news, and Thursday’s jobless claims data will be key. I hesitate to even suggest this, but it’s possible that Trump no longer cares — that he’s all but given up on the election, and therefore isn’t much help at this juncture. For what it’s worth, Jeff Gundlach suggested last year that Trump would effectively lose interest if the economy fell into recession. Well, here we are — in a recession.
In any case, ING’s James Knightley is concerned. He cites data from Homebase (which I’ve used since the onset of the pandemic) noting that “employment in the small business sector has been falling since early July”.
Worse, Knightley says, “the Census Bureau has recently been publishing data from its new Household Pulse survey, which reports that after 5.5 million job gains from mid-May to mid-June there were 6.75 million jobs lost between mid-June and mid-July”.
Knightley cautions that the Census Bureau’s survey is “brand new and we simply don’t have enough history to be able to pass judgement on [its] predictive qualities”, but if one takes a simple calculation from the “employment status” table at face value, the picture isn’t pretty (figure above).
Consensus for Friday’s July jobs report calls for a gain of 1.5 million. Trump teased what he called “a big number”. As the president would put it, “we’ll see what happens”.
In the meantime, stimulus expectations and vaccine optimism are all the excuse stocks have needed to keep rising. But just in case, a little extra juice comes from the weak dollar, which was back on the… err, back foot Wednesday.
Apropos, open interest in the euro-dollar pair rose above $100 billion at the end of last month, the most ever outside a roll period, CME said. Average daily volume jumped 29% YoY in July. Readers likely already know the positioning story (figure below).
It’s not all bad news on the macro front. ISM services was a big beat Wednesday, although the employment gauge was tepid, underscoring the case that the labor market in the US is nowhere near “healed”.
Again, it’s a fingers crossed dynamic, because with stocks pressing ever higher into an extremely uncertain election and against a highly tenuous geopolitical backdrop (which got even more contentious on Wednesday afternoon when Mike Pompeo urged US app stores to ban “untrusted” Chinese apps), there’s not much room for error.
For those who may have missed it (here), the figure (below) shows just how far behind China is on implementing the “phase one” trade deal.
Given all of the above, “priced to perfection” somehow seems like an understatement for stocks.
“While the risk-on price action was evident across asset classes, July’s ADP miss gives a reason for pause” even as “the market’s willingness to look through the weak reading is natural given May’s experience when ADP printed deeply negative, and NFP very positive”, BMO’s Jon Hill, Ben Jeffery, and Ian Lyngen said, adding that “intuitively, the parallel to this episode casts substantial doubt that the official payrolls reading will be as soft [but] it does focus attention and raise the stakes for Friday’s print”.
As if the stakes weren’t high enough.
Commenting on equities, ING’s Knightley wrote that “based on [the] price action, none of this matters and you can understand why [stocks] have shrugged it off”.
After all, he went on to say, “in the market’s mindset a bad number can generate ‘good things'”, whether it’s increased urgency for a compromise on the fiscal front or more stimulus from the Fed.