Morning Notes — Changes at the Margin

Jobs: The labor market is always the last piece of the economy to recover following a recession. The Q2’20 recession and recovery has been unique in many ways, but the feedback loop from weaker labor markets to weaker output and weaker corporate profits seems inescapable. Fiscal stimulus has helped cushion the impact, but the current pace of job growth and elevated weekly jobless claims point to an incomplete recovery through next year.  This will all change upon vaccine approval, but until that happens, the weekly claims numbers (tomorrow) and monthly Jobs Report (Friday) will be closely followed by markets.  Today’s release of August ADP payrolls showed an increase of +428,000, which is up from +212,000 in July, but below consensus for +1M.  The correlation between the ADP number and official BLS report has always been questionable, but recent discrepancies make today’s number less meaningful.  Consider the +212,000 July ADP gain vs the July BLS payroll gain of +1.763M.  Consensus for Friday’s payroll number is currently +1.4M.  And consensus for tomorrow’s weekly jobless claims is +972,500 vs +1.006M last week. 

Nuanced: The CDC eviction ban may actually add pressure on lawmakers to find agreement for a fifth coronavirus relief bill.  Housing experts warn that barring landlords from evicting non-paying tenants without compensation could lead to landlord mortgage defaults, which has the potential to destabilize credit markets.  In this way, the sense of urgency to get a bill signed before month-end has just increased. And maybe expectations for the eventual size of the relief package will start to drift higher as well.  Consensus was looking for $1T-1.5T back in July, but don’t be surprised if this floats higher despite resilient US economic data.    

Prepared: US infection rates are well off the July peak and rising expectations for year-end vaccine Emergency Use Authorization (EUA) are beginning to challenge COVID’s influence in the market narrative.  Over the next several weeks, we’ll likely hear early Phase 3 trial commentary and learn what constitutes ‘emergency use.’  We won’t have actual Phase 3 data or FDA approval, but from a market perspective, the horse will be out of the barn.  Actual Phase 3 trial data will certainly influence consumer acceptance of any vaccine, but interim information will drive markets.  We should expect the COVID theme, including its perceived winners and losers to evaporate well-before the FDA issues its EUA.