Markets Stick to the Bright Side Despite Jobs Data

(Bloomberg Opinion) -- December’s U.S. jobs report was widely expected to be the worst since April. When it turned out to be even more dire than forecast, markets barely flinched.

U.S. nonfarm payrolls fell in December by 140,000 from the previous month, Labor Department data showed Friday, a much steeper drop than the median estimate in a Bloomberg survey, which called for a gain of 50,000 jobs. The unemployment rate remained unchanged at 6.7%, as did the labor force participation rate at 61.5%. 

All of this is an unambiguously rough read on the state of the U.S. economy heading into 2021. And yet, as markets have done throughout much of the Covid-19 pandemic, the narrative quickly flipped to an iteration of “bad news is good news.” The knee-jerk reaction was to sell Treasuries, with the benchmark 10-year yield topping 1.1% for the first time since March, and buy the dip in S&P 500 futures on bets that persistently elevated unemployment will push lawmakers to provide ample fiscal stimulus.

The rationalization of weak numbers had already begun in advance of the Labor Department’s report, given that ADP Research Institute data released Wednesday showed company payrolls decreased by 123,000 during December, compared with estimates for a 75,000 increase. Economists pointed out that essential workers and the elderly would be the first to get vaccinated, which doesn’t help the labor market because they’re either already employed or retired; that the job losses would naturally be concentrated in leisure and hospitality and retail given the resurgent virus; and that colder weather in certain areas of the country probably curbed willingness to dine out.

Certainly, many of those points were valid and showed up in Friday’s jobs report. Leisure and hospitality jobs fell by almost 500,000, playing a huge role in the negative overall figure. Meanwhile, as my Bloomberg Opinion colleague Conor Sen pointed out, the number of Americans unemployed for more than 27 weeks didn’t move much higher in December, suggesting the sharp increase in those facing long-term joblessness may be slowing. And the Labor Department revised October and November payrolls higher by 135,000, almost entirely negating the December decline.

Regardless of the nuances, Wall Street tends to have a singular focus at any given time. Right now, as it has been for months, it’s the prospect of additional fiscal aid.

“As confirmation additional bailout funding is needed, a negative NFP print could easily shift the tone back to ‘bad news is good’ insofar as it reinforces political urgency for the storied $2,000 checks,” Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets, wrote before the report. “The prospects of addition support from Washington will serve to limit any bond rally and curtail any aggressive selling in domestic equities.”

At least for the first full week of 2021, the investing strategy has been the same: No matter how grim things might look today, they’ll be better someday soon. A mob storms into the U.S. Capitol on Wednesday, forcing a lockdown that interrupted certification of the presidential election? Stocks rise, Treasury yields climb. The U.S. exceeding  4,000 daily fatalities from Covid-19 for the first time on Thursday, breaking a record for deaths for the second consecutive day, and hospitalizations reaching a new high of 132,370? Again, stocks were up along with Treasury yields. So why shouldn’t it be the same with bad jobs data?

Jim Vogel at FHN Financial called it a “Pavlovian expectation of greater fiscal stimulus but no change in monetary policy.” Far be it for me to argue that’s the wrong bet. A unified Democratic government is a big deal for what investors can expect in terms of fiscal policy coming out Washington this year, and it has probably received less attention that it would ordinarily after the Georgia Senate runoffs given what has since transpired in the U.S. capital.

At a certain point, however, endless hope for additional fiscal aid isn’t a substitute for a strong and healthy labor market in the world’s largest economy. President-elect Joe Biden will come into office with the jobless rate at the highest in seven years and the labor-force participation rate, which measures the percentage of the population that is either working or actively looking for a job, near the lowest since the 1970s. Much will depend on how quickly hiring rebounds once a large swath of the general population is vaccinated and whether early vaccine distribution snags are fixed.

Given that much of the U.S. looks to remain in a state of lockdown for at least the next few months, it’s hard to blame traders for choosing to look on the bright side to when life returns to normal. But the December jobs report was a painful reminder of the damage that the American economy is taking in the meantime.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Brian Chappatta is a Bloomberg Opinion columnist covering debt markets. He previously covered bonds for Bloomberg News. He is also a CFA charterholder.