Friday's Market Minute: Delta Variant, Bonds, And The Labor Market

The ADP jobs report earlier in the week was a bit of a shocker, falling well short of expectations. Given how the ADP report has not been a consistent indicator of how well the private sector performs in the official BLS nonfarm payroll report, it set the tone for lower expectations for today’s monthly payroll print. It also raised concerns that the Delta variant is having a bigger impact on the economy, reduced the odds of a sooner rather than later Fed balance sheet taper, instigated economic growth concerns, and tentatively sent the 10-year Treasury yields this week to the lowest level since February.

The labor market recovery is extremely uneven and suggests the economy struggles to match individuals up with the current job vacancies. A strong jobs print would intensify speculation about when the U.S. Federal Reserve might begin to cut back its $120 billion in monthly asset purchases, which has essentially been a key financial lifeline supporting the economy during the pandemic and recovery. In the upcoming weeks, expect that taper talk could lead to stock market volatility given how stretched equity market technical indicators appear as new market milestones are made. The S&P 500 has not seen a meaningful correction of nearly 10% since October of last year, and the 200-day moving average was last touched over 400 days ago.

Tumbling bonds yields consistently defy theoretical gravity when it comes to a measure of inflation expectations. It is possible that that the demand for Treasuries simply communicates that the highly transmissible variant of coronavirus could once again derail the global economy and alter the Fed’s plan to reduce its asset-purchase program if it risks slowing the labor market recovery. Under normal circumstances, a drop in long-duration yields is generally a reliable market indicator of economic slowness or even a recession. However, one could also conclude that the demand for bonds is being further pushed by central banks around the world with nearly record levels of negative-yielding global debt. If coordinated central bank efforts continue to crowd out inflation-adjusted returns for fixed-income investors, the path of least resistance will clearly be seen in equities.

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