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July Jobs Report Satisfies Everyone & No One

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Investors who expected that the July jobs report would compel congressional officials to avoid a collapse in negotiations on a new coronavirus relief bill were met instead with data that seems likely to entrench Democrats and Republicans in their positions.

Just consider the headline number: U.S. payrolls increased by 1.76 million in July. On the one hand, that beat estimates for a 1.48 million gain, but it’s also down from a 4.79 million pickup in June and 2.72 million advance in May.

Is this a sign that the economic recovery is better than expectations or an indication that progress is sputtering?

Either way, the jobless rate remains in the double digits, which would seemingly bolster the argument of Democrats that Congress needs to extend the $600-a-week supplemental unemployment insurance payment from the last stimulus.

But then there are the details of the report.

Aid for state and local governments is reportedly a chief source of antagonism among House Speaker Nancy Pelosi, Senate Democratic leader Chuck Schumer, White House Chief of Staff Mark Meadows and Treasury Secretary Steven Mnuchin, with Democrats warning of huge public sector layoffs without an infusion of funds.

There was an encouraging upswing in the number of employees on state and local payrolls in July, and even if that’s mostly just noise from seasonal adjustments, it could very well embolden Republicans to stand firm against open-ended grants to states and municipalities.

Bloomberg chart of jobs and markets in July 2020
Lyngen, head of U.S. rates strategy at BMO Capital Markets, captured the market mood before the jobs data: “Given stocks are near the highs and Treasury yields near the lows, it follows intuitively that ‘something’s got to give.’”

Or, perhaps not. The benchmark 10-year Treasury yield was little changed Friday, hovering around 0.53%, and the rest of the yield curve barely budged. The S&P 500 Index fluctuated.

Few traders, if any, are betting that Congress will fail entirely to come up with any sort of relief deal — the stakes are simply too high to let that happen.

But it’s probably not going to match the size of the last package. “The easiest progress is behind us,” Chris Low at FHN Financial wrote before the jobs data.

If July’s jobs report leads to a more subdued fiscal package, it stands to reason that the Federal Reserve will be more likely to dig deeper into its own monetary policy toolkit to ignite the U.S. economy.

For instance, 30-year yields are settling in at less than 1.2%, perhaps on wagers that the central bank will skew its bond purchases to the longest-dated debt.

It’s also worth noting that the yield spread between two-year and three-year Treasuries briefly inverted this week for the first time since March.

There’s not really any good reason for that to happen if you believe Chicago Fed President Charles Evans, Cleveland Fed President Loretta Mester and Dallas Fed President Robert Kaplan, each of whom dismissed negative interest rates just this week.

But if the economy is still struggling in 2022, might they change their tune?

Chart of bone yields in early August from Bloomberg

One ominous long-term figure from July’s jobs report: the labor force participation rate. Even during the longest U.S. expansion on record, it never came close to reaching its pre-financial crisis levels.

After suffering a record decline in April, it looked as if it was on the rebound in May and June. But it dipped last month, in contrast to estimates for another increase, and if that continues it could be a significant drag on growth.

Expectations are a tricky thing, especially with so little precedent for how an economy claws out from a pandemic. Investors and lawmakers alike are learning more with each significant data release.

In many ways, there was something for everyone in July’s jobs report. Unfortunately, that means no one is likely to emerge as a winner.

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