Jobs, Jobs, Jobs (And The Rent’s Due)

“Jobs, jobs, jobs!” Or whatever.

It’s NFP week in the US, but virus headlines will likely dominate the news cycle for obvious reasons — cases are rising, officials are alarmed and half of Americans aren’t fully vaccinated.

While everyone wants to be optimistic when it comes to the outlook for hospitalizations and deaths associated with the new wave, the inescapable reality is that if everyone were vaccinated, the rate of severe illness caused by the Delta variant in the US would be dramatically diminished. But that’s not where we are. Instead, the world’s largest economy is attempting to preserve a rebound fueled by an unsustainable level of consumer spending amid rampant misinformation which is directly responsible for endemic vaccine hesitancy.

Meanwhile, market participants are more worried about inflation than they are public health. That inclination is understandable if hospitalizations and fatalities don’t accelerate to levels that overburden the country’s healthcare system. That assumption (which may well hold) is generally based on the idea that the vaccines will suppress severe illness in breakthrough cases. But what’s missing (or at least as it relates to traders and investors) is any serious consideration of the fact that tens of millions of Americans are running around unvaccinated. It’s not just a handful of people. Around half the population is unprotected.

Read more: Maybe We’re Worried About The Wrong Tail Risk

Mask mandates are coming back, as are various containment protocols. And, crucially, if the half of the country which is vaccinated gets too worried about contracting Delta, that may well affect their propensity to consume, as could dwindling savings buffers.

To be fair, market participants have every reason to believe that irrespective of public health outcomes, equity “outcomes” will be favorable. And when it comes to the data, it’s always possible to put a bullish spin on things. For example, if the July jobs report is robust, we can say the labor market is “normalizing” and “frictions” are abating which should lessen wage pressures. If, on the other hand, we get a miss, traders can simply refer to Jerome Powell’s remarks at the July FOMC presser, where he reiterated that more progress needs to be made on the jobs front before the Fed’s dovish contingent will be wholly comfortable with starting to pare stimulus.

But spin aside, it’s not terribly difficult to posit an unfavorable conjuncture where, for instance, a string of scary-sounding Delta headlines collide with some ostensibly foreboding morsel from July payrolls and, say, a disconcerting read on this or that ISM subindex, to deliver a “shock-down” event for markets. That’s especially true considering seasonal liquidity concerns.

For what it’s worth, consensus is looking for ~900,000 on the NFP headline (figure below). Revisions will be watched closely.

Powell’s emphasis on the labor market means anything “too hot” will be interpreted as another step towards meeting the “substantial further progress” threshold which some officials insist was met months ago. That, in turn, means you’d probably rather have ~800,000 than 1.1 million on the headline.

The timing of the survey period compared to the onset of the latest COVID wave means interpreting the numbers will be challenging. “The July BLS employment report will be particularly useful in evaluating the risk the realized inflation begins to build on itself,” BMO’s Ian Lyngen and Ben Jeffery said. “The ideal outcome for the Fed would be a decline in the unemployment rate that’s combined with an increase in overall participation,” they added, before noting that “rising COVID case counts complicate the matter insofar as any positive momentum revealed via July’s data would presumably be based on hiring processes started prior to the recent focus on the Delta variant.”

As for ISM, some indicators suggest activity is likely to moderate meaningfully. “Our Risk Appetite Indicator has declined sharply since Q2 and seems to imply a material growth slowdown in H2 – the current RAI level is consistent with an ISM manufacturing index in the low 50s,” Goldman’s Christian Mueller-Glissmann wrote Friday.

“At the center of the reflation reversal have been bonds, which have rallied strongly since June with yield curves flattening, pointing not just to concerns of a near-term growth slowdown but the risk of continued secular stagnation in the new cycle as monetary and fiscal support fades,” the same Goldman note read.

Speaking of bonds, the quarterly refunding announcement is this week. At this point, I doubt anyone can honestly claim to have a “game plan” when it comes to assessing all of the factors playing into rates. Getting a look at the supply side is helpful, but because the taper discussion is so fluid, it’s impossible to know what the demand side will look like. And because the taper timeline is contingent on data which is itself impossible to parse due to pandemic distortions, you’re left to simply throw up your hands.

“The US rates market will be faced with a series of traditionally tradable developments; between the ISMs, ADP, and the BLS employment report investors will be offered a better understanding of the current state of the domestic employment market,” BMO’s  Lyngen and Jeffery said, on the way to offering a lamentation: “Alas, the extent to which Treasurys will be driven by the fundamentals is as much of an unknown as the actual data itself at this stage.” I could scarcely put it better myself.

The composition of rates is a bit disconcerting (figure below). “Most of the decline in long-dated bond yields has been driven by real yields, with breakeven inflation sticky – that points to growing stagflation concerns,” Goldman’s Mueller-Glissmann remarked.

In a separate note, Mueller-Glissmann’s colleague Praveen Korapaty painted a somewhat gloomy picture. “New outbreaks are weighing on growth,” Goldman’s rates team wrote, discussing the implications for yields of more muted growth forecasts.

“Recent revisions to the economic outlook suggest… the upward repricing in yields may not be quite as front-loaded in 2021, presenting downside risks to our year-end forecasts,” Korapaty said, adding that “bull flattening over the past two months, after controlling for other factors, appears to imply a lower r*.”

Meanwhile, the eviction moratorium expired over the weekend. Although multiple government agencies announced they’d extend their own moratoriums for two months, millions of Americans (families included) are at risk.

Diane Yentel, president of the National Low Income Housing Coalition, called it “a devastating failure to act in a moment of crisis.” “As the Delta variant surges and our understanding of its dangers grow, the White House punts to Congress in the final 48 hours and the House leaves for summer break,” Yentel chided, after Nancy Pelosi failed to rally holdouts.

“Democrats remained short by at least a dozen votes as of Friday afternoon, and patience was running thin, with lawmakers increasingly incensed about sticking around Washington with no timeline to vote,” Politico wrote. “Some Democrats had begun leaving for the airports, and others were waiting in their offices with their cars packed.”

Once again, Americans are left to ponder an uncomfortable reality: Neither party cares about them. Not even enough to delay a vacation.

Alexandria Ocasio-Cortez, never one to shy away from assigning blame where it belongs rather than where it’s convenient, didn’t mince words. “The House and House leadership had the opportunity to vote to extend the moratorium, and there were, frankly, a handful of conservative Democrats in the House that threatened to get on planes rather than hold this vote,” she told CNN on Sunday.

“And we have to really just call a spade a spade. We cannot in good faith blame the Republican Party when House Democrats have a majority,” Ocasio-Cortez continued. “This court order came down on the White House a month ago. And the White House waited until the day before the House adjourned to release a statement calling on Congress to extend the moratorium.”

“Congress has approved $47 billion in rent relief funding since December, but state programs to distribute that money have been mired in bureaucracy and miscommunication, a growing frustration for tenants and landlords alike,” Bloomberg noted, in their coverage. “The vast majority of the $47 billion total allocation remains unspent, so, millions of Americans could find themselves in eviction proceedings as soon as Monday.”

In separate remarks Friday, Ocasio-Cortez called the debacle “reckless and irresponsible.” “Everybody knew this was coming,” she said. “No matter whose fault it is, what was promised to people has not been given.”

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