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Dow soared on upbeat NFP job data and as Yellen downplayed inflation, batted for infra stimulus; may scale 41K by Mar’22

calendar 05/04/2021 - 20:24 UTC

Dow Future soared almost +500 points mid-Monday on upbeat US NFP job and PMI data as U.S. Treasury Secretary Yellen batted for infra stimulus, while downplayed inflation. On Good-Friday (market holiday), the U.S. NFP report shows that the U.S. economy added 916K jobs, the highest in the last 7-months, following an upwardly revised 468K in Feb, and much higher than the market expectations of 647K. The blockbuster March job additions were a result of the progress of herd immunity (COVID vaccinations) and easing of business restrictions, especially consumer-facing service industry (leisure & hospitality), which contributed the largest job gain in March (although slowed a bit from February) followed by public & private education, transportation, construction, warehousing as-well-as manufacturing.

The U.S. unemployment rate also drops to 6.0% in March sequentially from 6.2%, right on the expectations and lowest in a year. The labor force participation rate was ticked up to 61.5% in March from 61.4% in February, at a 3-month high. But U.S. Average Hourly Earnings (AHE) growth slips to +4.2% in March sequentially from 5.2% in February, lower than the market expectations of 4.5%. The drop in AHE was accompanied by higher AWH (Average Weekly Hours) to 34.9 from 34.6, against an estimate of 34.7 hours.

U.S. NFP report (Mar’21) at a glance:

Overall, the U.S. economy still needs to add 8M jobs to reach pre-COVID employment levels. And at present trend amid good progress of herd immunity (COVID vaccinations), reopening of the economy, especially consumer-facing service industry, the U.S. economy may achieve full employment by mid-2022 by providing jobs for that 8M people. But Fed/Powell will also look into other factors rather than just unemployment rate below 4% or around 3.5%. Powell already made it clear that by maximum employment, Fed will also consider wage growth, participation rate as well as equality besides nominal employment or unemployment ratio. The Fed will also try to bring around 4M people in the workforce, still out of the Labor force due to various reasons.

U.S. nominal employment

The U.S. unemployment rate has been falling steadily in recent months after reaching an all-time high of around 14.8% in Apr’20 (COVID lockdown). The BLS said the unemployment rate may be understated by around +0.4% as some persons misclassified as being ‘employed but absent from work’. Fed Chair Powell recently said the labor participation rate is seen expanding and holding the unemployment rate up which would be a highly desirable outcome, while there's a good reason to expect job creation to pick up in the coming months although it will take some time to get back to maximum employment.

US Unemployment rate

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On Monday, Dow was also boosted by upbeat service and composite PMI. Markit's final data shows that US Services PMI was revised higher to 60.4 in March, from a preliminary estimate of 60.0 and above the February print of 59.8, signaling the fastest output growth since Jul’14. New business expanded the most in six years, reflecting strengthening client demand amid easing of virus containment restrictions in some states. Also, the rate of job creation was the quickest for three months, while backlogs of work rose at the softest pace in the current nine-month sequence of expansion.

On the price front, input cost inflation accelerated to the fastest since the series began in October 2009, boosted by higher prices for key inputs such as PPE, paper, plastics, fuel, and transportation; while the rate of charge inflation was also the quickest on record. Finally, business confidence was robust overall and among the strongest for six years.

US Service PMI

Also, the Markit US Composite PMI was revised higher to 59.7 in March 2021, from a flash estimate of 59.1 and above February's 59.5, signaling the fastest upturn in private sector business activity since Aug’14. Service sector activity growth accelerated to an over six-and-a-half-year high, while the manufacturing production expansion slowed. Overall new business advanced the most since September 2014 and employment continued to rise at a solid pace. Price pressures remained elevated across the private sector, while business expectations regarding the outlook for output over the coming year were robust.

US Composite PMI

Markit comments:

"The recent surge in service sector growth shows no sign of abating, with another impressive performance in March rounding off a quarter in which the PMI surveys indicate that the economy grew at an annualized rate of approximately 5%. While consumer demand is rising especially strongly for goods, the surveys are now also showing rising activity in the consumer services sector, linked to the vaccine roll-out, looser virus containment measures, and the fresh injection of stimulus in March.

Financial services growth is also booming, in part reflecting buoyant housing and equity markets, and business spending on services is likewise picking up as firms look ahead to better times, resulting in a very broad-based and powerful looking upturn in the economy. High levels of new business inflows, rising business confidence, and an increasing appetite to hire new staff suggest the economy will also see a strong second quarter, especially if the vaccine roll-out continues apace. The biggest concern is inflation, with price gauges hitting new survey highs in March as demand often exceeded supply for a wide variety of goods and services.”

Markit said the US economy may have grown by around +5.00% in Q1-2021 and also set to grow robustly in Q2-2021 amid progress of COVID vaccinations, increasing reopening, and fiscal stimulus (CARES Acts). But at the same time inflation is also a concern amid supply line disruptions and higher demand than supply for products & services.

Bottom line:

As the U.S. is expected to complete its COVID mass-vaccinations by Dec’21-Mar’22 and herd immunity by June’22, the economy may attain ‘substantial progress of the Fed’s dual mandate by Dec’22 and actual achievement by Dec’23. Fed’s dual mandate is maximum employment and price stability. The Fed now changed its dual mandate goal posts- i.e. Fed’s assessment of maximum employment and core PCE inflation over +2.00% for some time to average previous undershooting. Thus, Fed may go for gradual QE tapering by Dec’22 and rate hikes by Dec’23. And Fed will communicate well in advance (at least three months) to communicate its intention and to avoid any disorderly market reactions.

Ongoing stimulus checks (CARES Acts) are also causing lower labor participation and employment as almost 60% of lower-paid Americans (bottom of the pyramid) are now getting more grants from the government than they earn by doing nothing. Such stimulus checks may be continued by Biden admin till at least Dec’21-Mar’22 until COVID mass-vaccinations get completed and the U.S. economy fully reopened.

The Fed has to keep U.S. borrowing costs at the lowest possible levels at least till 2023-25 to fund huge COVID fiscal stimulus for almost $10T (CARES Acts and infra/green stimulus/social safety net) and at the same time, keeps benchmark 10Y bond yield at an attractive level to attract angel investors (banks, DIIs, FIIs and sovereigns-China, Japan, EU, and others); otherwise who is going to fund ‘America Build Back’ story?

Thus this is a goldilocks situation, where the U.S. economy will continue to fire all the cylinders amid the deluge of fiscal stimulus, while the Fed may start QE tapering only from Dec’22 and gradual rate hikes from Dec’23. Dow may scale 41K by Mar’22 amid the deluge of fiscal stimulus, lower borrowing costs, abundant liquidity, higher consumer demand, and corporate earnings. Although Biden proposed 28% corporate tax from the existing 21%, it may be finally settled at 25% to accommodate moderate Manchin, without whose support, it’s not possible to pass Biden’s $2.25T infra stimulus.

The U.S. is employing almost $10T COVID fiscal stimulus, almost 50% of its GDP, while debt interest/revenue would be around 13-15%, which is not a big deal for a country like the U.S, although it may be historically higher than 8-10% pre-COVID levels; i.e. the U.S. has adequate fiscal space, considering the underlying debt is perpetual, only needs to service the interest cost.

On Monday, Dow jumped more after the U.S. Treasury Secretary batted out about adequate fiscal space by pointing out the debt interest cost /GDP ratio rather than the nominal debt/GDP ratio. Yellen also downplayed any spike in inflation as merely transitory and assured about adequate fiscal/monetary tools to deal with any consistent higher inflation and said the benefit of such huge fiscal stimulus to rebuild the economy is higher than the underlying cost.

Technical view: SPX-500, DJ-30, and NQ-100 Futures:


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