NFP React: Soft Jobs Report greenlights case for more stimulus, Dollar drops, Treasury yields pop

US stocks are shrugging off a disappointing nonfarm payroll report that showed December was much worse and that January only saw a modest rebound in hiring.  Stimulus prospects are unchanged as Democratic lawmakers appear poised to move President Biden’s $1.9 trillion stimulus bill forward without Republican support.  Stocks are trying to hold onto modest gains and any profit-taking should be limited as the US is nearing major stimulus.

NFP 

The US economy added only 49,000 jobs in January, lower than the consensus estimate of 105,000, but somewhat disappointing given the recent bump the forecast had over the last few trading days.  January was always going to be a tricky month for the US economy given the presidential transition, the December $900 billion stimulus package, and as the country hits the peak of the virus.

The labor participation dipped to 61.4%, helping send the unemployment rate lower to 6.3%.  Wage growth is nothing to get excited about

The nonfarm payroll report completely supports the need for more fiscal and monetary stimulus in the short-term and that should be positive for the reflation trade.

The biggest risk with the nonfarm payroll report was a strong rebound in hiring that could diminish the prospects of future fiscal stimulus.

The problem with the labor market recovery is that the economy still needs to make up for around 10 million jobs lost in the pandemic.  Economic scarring is happening as the number of long-term unemployed continues to stay at around the 4 million level.  Education jobs came back, while leisure and hospitality jobs continue to show the most pain with another 61,000 jobs lost with a massive downward revision in December to -536,000 jobs.  Until large parts of the country are reopened, the prospects of more stimulus remain elevated.

FX/Treasuries
The dollar rebound might be over following the large downside surprise with nonfarm payrolls.  Yesterday’s short squeeze on the euro cleared out many bullish bets on the tentative break of the 1.20 level.

The reflation trade looks like it could send Treasuries towards 1.20 a lot sooner as hedging activity in the swap market picks up.  The prospects of more stimulus are high as the labor market stagnates and so is the economic recovery in the second half.  More support and high hopes for a strong recovery could send the 10-year Treasury yield towards 1.30% by the end of the second quarter.  The 10-year Treasury yield popped above 1.18% shortly after the employment report but has settled slightly below 1.15%.

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