The Process

The Process

Bad news was good news Friday. Or at least that’s one interpretation of the price action.

A lackluster November jobs report helped cement market expectations for fresh fiscal stimulus, pushing equities and bond yields higher into the weekend.

Speaking just before the closing bell on Wall Street, Joe Biden implored the federal government to step up. Congress, he said, needs to act immediately to sustain the recovery and should help states that need funding in the fight against COVID-19. The virus, you’re reminded, is claiming more than 1,500 American lives per day. Nearly 101,000 people are hospitalized with COVID nationwide. During the last two spikes (in April and July), hospitalizations peaked at roughly 60,000.

Read more: Labor Market Momentum Decelerates Sharply As November Jobs Report Misses

Biden called the November NFP report “grim.” To be sure, 245,000 on the headline wouldn’t count as “grim” under normal circumstances, but these circumstances are anything but normal. Consensus was, of course, looking for a far higher number (475,000).

A cursory look under the hood revealed plenty to be concerned about, although there were no obvious “land mines,” so to speak. The reality is quite simple: Labor market momentum is deteriorating. And the US economy is at risk of falling into a double-dip downturn. In a statement, Chuck Schumer called November payrolls “a blaring warning that a double-dip recession is looming.”

The GOP continued to voice skepticism about relief for states on Friday. The $908 billion bipartisan stimulus proposal supported by Biden, Nancy Pelosi, Schumer and a number of Republicans, some of whom are high-profile, contains state aid provisions that Larry Kudlow suggested aren’t acceptable to Mitch McConnell. The bill sets aside $160 billion for state and local governments. For his part, Chuck Grassley has a line in the sand at $150 billion. McConnell isn’t budging on liability protection, a key Republican demand.

Still, for all the GOP pushback, it sounds like the bipartisan deal has a solid chance of surviving after running the Beltway gauntlet. Apparently, the likelihood of stimulus getting Scotch-taped to the omnibus bill is growing.

The perception that stimulus by year-end is a foregone conclusion propelled equities Friday. Every major benchmark hit record highs. Small-caps are riding a five-week win streak coming off a blockbuster November.

The dollar slumped the most in five weeks (figure below), as the prospect of more fiscal spending, “lower forever” rates, higher inflation, bigger deficits, and generalized debasement concerns weighed.

Remember: The world is a much friendlier, more forgiving place when the dollar is on the back foot, especially at a time when the globe is attempting to dodge a deflationary black hole (i.e., the pandemic).

Treasurys bear steepened Friday as stimulus expectations were priced in. Yields were cheaper by 7bps out the curve, steepening the 2s10s by more than 6bps. It was already the steepest in three years.

10-year US yields hit the highest since March, touching 0.984%, before pulling back a bit. As Bloomberg’s Edward Bolingbroke recounted, “two large block trades in Bond futures for [a] combined $1.45m/DV01 added impetus to the bear steepening move” over the US morning.

It was the second straight week of declines for bonds. TLT had its worst week since early August. Breakevens are a hot topic, sitting as they are at the highest since May 2019.

Ideally, if this all comes together “right,” the lackluster jobs report will cement the case for WAM extension from the Fed this month, while simultaneously prodding Congress into passing the bipartisan $908 billion relief bill. That’s your “best” case. It bolsters the reflation narrative and presumably risk assets while reinforcing the pro-cyclical nature of the rally. At the same time, WAM extension and a good post-FOMC press conference performance from Jerome Powell can help insure against a disorderly rise in yields.

Pulling that off could green light a year-end melt-up on top of what already counts as one of the most spectacular rallies in history.

At the same time, the OPEC+ compromise looks set to pacify the oil market, which is also good for the reflation narrative. And don’t forget about the ECB, which has all the cover it needs to ramp up asset purchases this month, with headline inflation in Europe still negative.

If you’re getting the sense that these really are engineered outcomes, you’re not wrong.

Remember “administered markets?” Well, they’re basically here…

Imagine the dystopian metropolis of the future. There’s a break in the rain. The sidewalks and streets are red-tinged glass as puddles reflect the city lights. You’re looking out from an alley. A girl walks by holding her umbrella. Above, today’s administered prices scroll across a ticker tape.

Videos of the daily price-setting press conferences play in a loop, as they do every night from 8 PM to 9 PM on every electronic billboard from New York to London to Tokyo.

They say it promotes “transparency.” It’s important, they say, for the public to understand “the process.”


7 thoughts on “The Process

  1. Looking at the last photo – very Blade Runneresque.

    Recently Yoshinoya managed to stay in business by further automating their outlets. We’re getting there here as well. And then there are/were those clerk-less convenience stores being tried out in China.

    But those jobs are just entry level, right? The displaced workers should simply pick up and become app writers or, better yet, designers of robotics & automation equipment. Everyone is better off!

  2. You know who’s not getting enough credit for this post-election run? Joe Biden. After four years of Trump’s narcissistic demagoguery, I think Biden’s empathetic, yes-daddy-will-make-it-better approach is reassuring many people that, yes, things can and will get better.

    1. Indeed – for me, it’s the repelling broken future, for which we harbor a secret bit of potential envy.

      The girl with the umbrella has Universal ESOP. She doesn’t need UBI. She doesn’t worry about robots. She knows she’ll never be rich.

  3. At this point any more help for the states means some democrat voters might somehow end up better off and that is totally verboten in DC these days. As to Grassley. I’ve known him personally since he was my congressman and he was a fair and honest man for decades but in his later years not so much. Now just a curmudgeon. Too bad. A waste of a solid senator.

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