While today’s US jobs report was better than expected, it also reminds us that there is still a long runway for the economic recovery to take-off in the coming quarters. While 12.9m of the 22.4m jobs lost from the pandemic have been recovered, that still leaves employment 6% below its pre-pandemic peak. With employment in the hospitality and leisure industry still 3.5m lower than a year ago, the jobs recovery may be quicker than in the past, once the vaccines allow for a strong rebound in that sector.
It’s no wonder that the Treasury market’s confidence in the recovery has been growing, leading to yields moving sharply higher: the vaccine rollout is proceeding well, the US consumer has accumulated excess savings of 8% of GDP in 2020 and there is a proposed stimulus of $1.9tn (9% of GDP) in the pipeline. This can fuel the economic recovery for many quarters to come and rapidly accelerate job gains.
But you can have too much of a good thing and the sharp move higher in Treasury yields has recently caused some indigestion in the equity markets that had previously been buoyed by low interest rates. However, investors should take comfort from Chair Powell’s hints yesterday – should markets become disorderly, then action would be taken to maintain favourable financial conditions and keep the economy on the path to full employment.