September payrolls will get top billing in the US this week, while equities look to recover after logging a third weekly loss in four.
Consensus is looking for 500,000 on the headline nonfarm payrolls print (figure below). This will be the final jobs report the Fed sees prior to making a decision about a taper unveil at next month’s policy meeting.
August’s disappointing read on the labor market was a rather stark reminder that well-documented frictions remain, but it was also influenced by the spread of the Delta variant. Daily cases peaked during the first week of September. For the purposes of the jobs report, that may have been too late to remove the Delta variable from would-be workers’ calculus.
“Any bounce back following August’s disappointing print will be of particular relevance” given the read-through for the taper announcement, BMO’s Ian Lyngen and Ben Jeffery said, adding that “the drift higher in jobless claims throughout September and the fact the seven-day average of COVID cases peaked during NFP-survey week serve to moderate more ambitious expectations.”
Pandemic unemployment benefits began rolling off last month and jobless claims rose a third week for the first time since April of 2020. The labor market was still defined by a record disparity between vacancies and hires as of late July (figure below).
There’s scant evidence to suggest the situation looks materially different today. (August JOLTs are due October 12.)
The defining feature of August’s underwhelming report was the “unchanged” read on leisure and hospitality hiring (figure below) and, drilling down a bit, the 42,000 jobs lost in food services. To say market participants will be keen on signs of improvement would be an understatement.
Recall that retail sales at restaurants and bars flatlined in August alongside the slump in hiring.
September payrolls comes at a critical juncture for rates. There’s the proximity of the taper, yes, but note that bonds are coming off a rough stretch. Although 10-year US yields ended last week near the weekly lows, they’re still around 1.50% (figure below).
Remember: Parsing the post-FOMC reaction in rates isn’t straightforward. If rates are trading an accelerated liftoff timeline, it’s far from obvious that bear steepening is the “correct” expression. Fed officials are split on a 2022 rate hike. If the economy slows and the Fed brings forward the first hike, they could end up exacerbating things. Tighter financial conditions could ensue and everything that goes along with that. That’s not exactly a reflationary outcome. Surging crude prices ostensibly argue for higher long-end yields, but the burgeoning energy crisis is a stagflationary threat, not a reflationary boon.
All of that to say that rates should continue to focus on liftoff timing, not the taper, which at this point could be described as a “well-known unknown.”
“It’s challenging to conceive of a payrolls report (shy of a negative print) that will derail the Fed’s well-telegraphed intentions to begin winding down QE with a goal to end balance sheet expanding bond buying by mid-2022,” BMO’s Lyngen and Jeffery remarked. “It’s with this backdrop that we continue to expect the more sustainable price action will occur in the five-year sector as the 1.00% level looms,” they went on to say, in the same note. “Progress toward the first rate hike will be sufficient to put a floor in for five-year yields and, for better or worse, the market currently views the beginning of the tapering process as bringing the liftoff hike that much closer.”
Jerome Powell’s efforts to “delink” liftoff from the taper haven’t resonated. The Fed needs to complete the taper before hiking rates, so there is a link. You could argue that the Fed may be forced into an extremely accelerated timeline on both in the presence of persistently large inflation overshoots, but the pseudo-guidance (i.e., that the taper will be completed by late summer 2022), makes it difficult to imagine how the policy calendar could be compressed any further without chancing a highly destabilizing outcome for markets.
When you consider what kind of macro conditions would compel a policy panic, you’re left to ponder a kind of worst-case scenario characterized by ongoing inflation overshoots and a Fed that races to wind down bond-buying so they can “get to” a hike, so to speak. Data out last week showed prices pressures are still the most acute in three decades (figure below).
Outside of labor market figures and ISM services, the data docket is relatively sparse in the new week, leaving markets to parse headlines out of Washington in the four-day lead-up to payrolls.
Over the weekend, Nancy Pelosi pushed back the deadline for passing the bipartisan infrastructure bill to October 31, leaving four weeks for Democrats to agree on a top line figure for the broader social spending package.
Having won a game of legislative chicken with Pelosi (no small feat), Pramila Jayapal will likely agree to a lower top line figure. As for Joe Manchin and Kyrsten Sinema, they’d probably do well to give a little ground. They’ve established (definitively) their willingness to stymie the Progressive agenda. Further grandstanding for the sake of it is tantamount to brinksmanship. We get it, senators. You’re moderates. Can we move on now?
Moderate: If sea levels rise 5 ft as opposed to 10, that’s fine.