Fresh records for US stocks after a soft NFP report increases odds of more stimulus, Dollar mixed, Treasuries slide

The last nonfarm payroll report of the year was quickly shrugged off as softness in hiring should keep pressure on Congress to deliver another stimulus package before the holidays.  The knee-jerk reaction for US stocks was an initial drop following the disappointing employment report. 

State and local aid for governments remains the key hurdle and at some point, over the next week, Senate Majority McConnell will need to make a concession or he could risk providing added motivation for Democratic voters for the two Georgia senate runoff races on January 5^th.  White House adviser Kudlow did not provide any hints Republicans are closer to budging, keeping the uncertainty in place over the timeframe on when a deal will happen.      

The S&P 500 index hit a fresh record high as a soft employment report increased the likelihood Congress will deliver stimulus and for vaccine distribution.  In Europe, financials pared some of their gains after ECB supervisory board member Sibley recommended banks to extend the dividend ban by six months. 

NFP

The headline nonfarm payroll reading of 245,000 was a big miss to the consensus estimate of 460,000, and a significant decline than the prior reading that was revised lower to 610,000.  The coronavirus spread is hitting the labor market hard and will likely get worse next month.  The December nonfarm payroll report, the last of President Trump’s administration, will likely see job growth turn negative.  COVID lockdowns and restrictive measures are risking permanent scarring to the labor market and that will keep the Fed remaining ultra-accommodative. 

The unemployment rate declined as expected to 6.7%, but that was partially because the participation rate fell from 61.7% to 61.5%.  The unemployment rate has steadily improved since the 14.7% seen for the April report, but that will not likely remain the case for next month’s report. 

Factory Orders/Durable Goods Orders

US factory and durable goods orders for October was old data but cemented the strength of the economy before the third coronavirus wave hit. Factory orders remained healthy with a 1.0% increase, a six-consecutive increase.  Durable goods orders were unrevised at 1.3%. 

FX/Treasuries

The nonfarm payroll report allowed Treasuries to fall, with the 10-year yield rising 6.3 points to 0.969%.  The dollar pared losses as euro and sterling might have reached a tentative pause in their rallies until next week’s big European risk events have passed.  The focus will heavily be on Europe as the Brexit trade deal remains in limbo, whether Poland and Hungary will maintain their veto on the EU budget and recovery package, and an ECB rate decision that should unveil more policy stimulus.

The dollar could see further momentum in the short-term if the 10-year Treasury yield reaches 1.00%.  The Fed can stomach a gradual rise with yields, but if this bond breakout continues, bond traders will certainly expect them to increase purchases and adopt yield curve control at the December 16^th policy meeting.

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