- U.S. unemployment report is expected to show continued improvement in U.S. labor market but with a long way to goÂ
- Market focus next week is mainly on a pandemic bill and politics
U.S. unemployment report is expected to show continued improvement in U.S. labor market but with a long way to go — The consensus is for today’s Aug payroll report to show an increase of +1.39 million jobs, adding to July’s increase of +1.763 million jobs.
Wednesday’s Aug ADP employment report of +428,000 was substantially weaker than expectations of +1.000 million and did not bode well for today’s payroll report.
Payrolls in May-July rose by a total of +9.3 million jobs, but recovered only 42% of the -22.2 million job plunge seen in March-April. Payrolls would need to rise by another 12.9 million jobs in order to get back to the record-high job level of 152.5 million jobs seen in February before the pandemic hit.
It will likely take at least several years for the U.S. to get back to that job peak. After the Great Recession, it took six years for the job level to recover to its previous peak. This time, the recovery should be much quicker if there is an effective and widely-available vaccine that becomes available next year that helps the economy return to normal.
The consensus is for today’s Aug unemployment rate to fall by -0.4 points to 9.8%, adding to July’s -0.9 decline to 10.2%. However, even if today’s unemployment rate falls to 9.8% as expected, the rate will remain near the peak of +10.0% seen during the Great Recession. The current unemployment rate is nearly three-times the full-employment rate of 3.5% seen in February before the pandemic battered the U.S. economy.
The Fed last week said that it has adopted a new policy where it will no longer assume that low unemployment levels will push inflation higher, thus doing away with the discredited Phillips curve concept of a direct relationship between inflation and the unemployment rate. The Fed will now allow unemployment rates to fall to levels that might be below what is thought to be the natural rate of unemployment. The markets can now be assured that the Fed will not raise interest rates preemptively just because the unemployment rate is low.
The consensus is for today’s Aug average hourly earnings report to eased further to +4.5% y/y from July’s +4.8% and April’s peak of +8.0%. The upward spike in earnings in April was due to the fact that mainly lower-paid workers were laid off during the pandemic shutdowns, leaving higher-paid workers in the pool to push the hourly earnings rate higher. It is actually a positive sign that average earnings are declining since that means that lower-paid workers are being hired back into the workforce.
Market focus next week is mainly on a pandemic bill and politics — The markets next week will focus mainly on the fate of the pandemic bill as the Senate returns to Washington. The full House isn’t scheduled to return to Washington until Sep 14.
Senate Majority Leader McConnell has indicated that he may try to have the Senate vote on a “skinny” pandemic bill next week totaling only about $500 billion. However, it isn’t clear that such a bill could get past a 60-vote filibuster and see a vote in the full Senate since Democrats oppose that concept and Mr. McConnell has said that a group of his Republican Senators will not vote for any additional pandemic aid. Meanwhile, House Speaker Pelosi continues to hold out for a full $2.2 trillion bill.
Next week’s U.S. economic calendar is relatively light. The JOLTS job openings report, and the PPI and CPI reports, are the only key economic reports on the agenda. The Treasury will also return to the markets for another big dose of financing with the sale of 3-year, 10-year, and 30-year securities.
The markets will also be looking ahead to the FOMC meeting on Sep 15-16. The FOMC is not expected to shift its key policy variables of the 0.00%/0.25% funds rate target and the $120 billion per month QE program. However, the FOMC is expected to discuss providing more specific interest rate guidance now that it decided to adopt average inflation targeting. It remains unclear whether the FOMC will announce that more specific guidance at the Sep 15-16 meeting, or wait until it has more data about how the U.S. economic recovery is faring and the prospects for a vaccine.
The FOMC at its Sep 15-16 meeting will release an updated set of macroeconomic forecasts and is due to provide a new Fed-dot forecast for the funds rate. In the last Fed-dot forecast released in June, all FOMC members predicted an unchanged funds rate through 2021 and only two members predicted a hike in 2022.
The markets next week will also start paying closer attention to politics in the 8-week stretch leading up to the November 3 election. The markets are waiting to see if Democrats will sweep Washington by taking the House, Senate, and Presidency, which would give them full rein to pass legislation if the Senate also decides to do away with the 60-vote filibuster.
Since the Democrats are widely expected to keep the House, the other main scenario is for the status quo of divided government where the Republicans retain control of the Senate and/or the presidency.
The betting odds at Predict.org, for whatever they are worth, are currently at 59% for a win by former VP Biden versus 44% for a win by President Trump. The odds for control of the Senate are at 53% for the Democrats versus 46% for the Republicans. The odds for the Democrats to retain control of the House are at 83%.
