June’s US employment report on Friday spurred the S&P 500 to a new all-time high at 4,352 while 10Y Treasury yields edged down again to 1.42%.
Last month, payrolls jumped by 850,000 as America continues to reopen from the pandemic. The large job gains - coupled with June’s manufacturing ISM survey remaining at very high levels of 60.6 - show the US economy is recovering strongly to the benefit of risk assets.
Source: Bank of Singapore, Bloomberg
At the same time, the employment report eased fears the Federal Reserve will start tapering its quantitative easing this year rather than waiting until early next year. Despite June’s payroll gains, the US economy is still 6.8 million jobs short from the start of the pandemic (see chart above).
Source: Bank of Singapore, Bloomberg.
Similarly, other indicators show the Fed remains far from its goal of securing maximum employment. In June the unemployment rate ticked up from 5.8% to 5.9%. Before the virus emerged, the US jobless rate was 3.5%. In addition, June’s participation rate remained unchanged at 61.6% of the labour force and therefore well short of its pre-pandemic level of 63.4%. The employment-to-population ratio was also unchanged last month at 58.0% compared to 61.1% at the start of 2020 (see chart above).
The Fed will thus want to see ‘substantial further progress’ over the next few months in reducing slack in the labour market before deciding when to start tapering its quantitative easing.
We expect the Fed will remain slow to reduce its pace of bond buying. Officials are set to discuss quantitative easing at July’s meeting but may only say in September the economy is making enough progress to firm up plans for tapering.
Having given financial markets ample warning, the Fed is still likely to wait until December before announcing it will reduce its bond buying from USD120 billion a month at the start of 2022. Moreover, the Fed may only cut asset purchases by USD10 billion each month so tapering will be gradual and take all of 2022 to finish.
Thus, we expect the strong US recovery and the Fed’s deliberately slow exit from its dovish policies to keep supporting risk assets throughout 2021.
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