The last week’s market highlights:
Each week, we present our featured topics in the context of the major themes listed below from Nuveen’s 2021 Outlook:
- U.S. economy: Getting worse before it improves.
- Global economy: Ready to get back to normal—with the help of vaccines.
- Policy watch: No Federal Reserve interest-rate hikes until at least 2023.
- Fixed income: A modest-risk overweight with a focus on credit sectors.
- Equities: Lean toward small caps, emerging market shares and dividend payers.
- Asset allocation: Consider benefits of active management amid idiosyncratic opportunities.
Quote of the week:
"Nothing matters as much as the ability to give every effort you have to the work you’re doing.” — Doris Kearns Goodwin
U.S. labor market is improving but still has a long way to go
Last Friday, the Bureau of Labor Statistics delivered a positive surprise in the form of a far-better-than-anticipated monthly jobs report. The timing of the good news was probably less than ideal, however, as markets have been spooked of late by rising interest rates driven by stronger growth and heightened inflation outlooks.
Payroll growth (+379,000) in February nearly doubled expectations (+210,000), and job creation for December and January were revised upward by a combined 38,000.3 Leisure and hospitality sectors added 355,000 positions, a sign that the decline in COVID-19 cases and the accompanying restrictions on businesses are having a positive economic effect.4 Also on the plus side of the ledger: the unemployment rate dipped from 6.3% to 6.2% in the context of a steady labor force participation rate and slightly higher employment-population ratio.5 All these data points made this report exceptionally positive.
There were a few sour notes, though. Public-sector employment is still nearly 1.4 million lower than its peak a year ago.6 States and localities have had to lay off workers due to falling tax revenues and uncertainty about future federal aid. Fortunately, help appears to be on its way as part of the $1.9 trillion American Rescue Plan stimulus bill, which continues to wind its way through Congress.
Another part of the jobs report that will trouble policymakers, including those at the Fed, is the rise in unemployment among African Americans, in contrast to the progress seen the month before. Sampling can be tricky in these data releases, and it’s important not to extrapolate too much from just one month. Still, this is one more sign that the U.S. labor market is nowhere near as tight as it was a year ago.
There’s further evidence of slack in the labor market. Average hourly earnings growth was subdued, increasing just 0.2% in February, and January’s gain was revised down to 0.1%.7 And the average work week dipped unexpectedly, from 34.9 hours to 34.6 hours.7 Taken together, these data points don’t reflect the labor market tightness that normally accompanies an economy on the verge of overheating. As Fed Chair Jay Powell stated last week, the labor market remains far from the Fed’s goal of full employment.
Powell also emphasized that he believes the Fed’s current policy stance, which includes $120 billion of asset purchases each month, is appropriate. Some investors have been disappointed that the Fed has not responded more aggressively to the recent rise in long-term Treasury yields, for instance, by increasing its monthly purchase amounts.
The bellwether 10-year U.S. Treasury, a key gauge of market expectations for long-term growth and inflation, rose 13 basis points last week to close at 1.57%. (It was 1.04% in late January.)8 Bond yields and bond prices move in opposite directions, so investors holding these notes have seen them decline in value. Those who’ve purchased longer-dated U.S. debt have fared worse.
In our view, February’s labor-market report was very positive overall, and probably just the beginning of a robust and inclusive jobs recovery after a few difficult winter months.
We’re not seeing a synchronous global growth boom yet
While the overarching economic narrative of 2021 is likely to be significantly positive, broad acceleration in global growth wasn’t uniformly apparent in February’s Purchasing Managers’ Index (PMI) data.
In the eurozone, Markit’s Composite PMI registered 48.8, remaining below the 50 mark separating contraction from expansion.9 The region’s economy continues to operate at two speeds. Manufacturing activity registered its highest level of output in four months, bolstered by strengthening demand from both domestic and international customers.9 Hopes for a successful vaccine rollout and a reduction of COVID-19 restrictions helped drive business confidence to a three-year high.9
In contrast, the eurozone’s services sector contracted for the sixth straight month.10 Many hospitality-based companies continued to struggle due to COVID-19 related mandates.
While the eurozone has yet to achieve liftoff, China’s economy remained in expansion territory even as its composite PMI (51.7) dipped to its lowest level since last April.11 China enjoyed the world’s most convincing economic recovery in 2020, but credit growth has eased this year due to a broad-based slowdown in bank and non-bank lending. Additionally, China may be suffering from soft global growth conditions over the winter, which arose as a result of spiking COVID-19 cases in the eurozone and U.S.
Here at home, there’s plenty of cause for optimism, with more vaccinations per capita than all other developed countries except the U.K. and more fiscal stimulus than almost any other large economy.12 Moreover, the Federal Reserve has committed to keeping rates low and allowing inflation to run above its 2% threshold to compensate for periods of low inflation (such as that seen during the pandemic).
But it’s not all sunshine and roses in the U.S. Yes, service-sector PMI (55.3) marked nine consecutive months of expansion in February, and manufacturing activity increased to 60.8, matching a three-year high.13 But a look below the headline numbers shows that businesses of all types are facing some significant price pressures, especially for so early in a recovery.
Also of concern to businesses, as reflected in the PMIs: delivery times have slowed due to bottlenecks in supply chains amid a much-quicker-than-expected rebound in demand. The lessons learned from the pandemic might prompt companies to reroute supply chains or hold more inventory.
Overall, the unique nature of last year’s recession and the record-setting amount of fiscal stimulus enacted to counteract it make this cycle difficult to compare to others. But what we’re witnessing is an economy experiencing growing pains. And as the economy reopens — potentially faster than anticipated, if vaccinations continue apace — companies operating at greatly reduced capacity have to turn the switches back on and get the gears turning again, which never goes perfectly smoothly.
At the margins, we wouldn’t be surprised if the economy operates with reduced efficiency out of the gate, making diminished supply and sporadic bouts of inflation in leisure and travel industries likely in 2021. The Fed has, in fact, already noted the possibility of such inflation, and last week Chair Jerome Powell pointed out that these episodes of rising prices would likely be transitory and not significant. Against that backdrop, the Fed is unlikely to change its ultradovish policy.
Keep in mind that the short-term supply chain bottlenecks and higher input costs currently facing U.S. companies are “good” problems to the extent they reflect healthy demand in a recovering economy. Businesses would rather sell to U.S. customers now than to anyone else in the world.