The return of the reverse radical recovery

Jobs day in the US in 2021 will be the same for me today for the third month running. It’s all about the start and stop nature in the leisure and hospitality sectors due to the pandemic. Underneath those shifts, the reverse radical recovery has always been happening. That’s my takeaway from the numbers today.

Contextualizing the numbers

First, let me remind you what I said two months ago when we got the poor December numbers:

The job loss in the December data was in the areas of the economy that were shut down in December like leisure and hospitality. And prior months’ data were revised up. That means, absent shutdowns the reverse radical recovery would have been intact. The shutdowns arrested the economy’s momentum and led to job losses. So, any future shutdowns will do the same going forward.

I think that’s what we’re seeing in today’s numbers. Look at the breakdown via Liz Ann Sonders of Schwab.

Some sector highlights (last month)

Leisure/Hospitality +355k (-25k)
Bus Svcs +63k (+85k)
Temp. Help +53k (+96k)
Trade/Transport +49 (+46k)
Information -3k (+10k)
Financial -5k (+1k)
Goods-producing -48k (-13k)
Construction -61k (+1k)
Gov’t -86k (+76k)

— Liz Ann Sonders (@LizAnnSonders) March 5, 2021

The big add is leisure and hospitality. They are the sectors that took it on the chin in December when we shut down and they still lost jobs in January. Now, with Covid-19 shutdowns almost gone, that’s where the big prints were.

So forget about the headline nonfarm payroll add of +379,000. Yes, that was well above consensus for +200,000. And if you add in upward revisions to +166,000 in January from +49,000, you have a month over 500,000. That’s big. But it’s all because of leisure and hospitality. Elsewhere the gains and losses were marginal by comparison.

Forward-looking view of the jobs picture

Look at the sector by sector prints and what it tells you is that, absent another wave, the return of the reverse radical recovery is intact. Most sectors of the economy are not seeing huge changes in numbers. And, depending on if you’re a glass-half full or glass half-empty guy or gal, that’s a good thing or a bad thing. What it’s telling you is the V-shaped recovery is well and truly over. Forget about GDP growth and focus on jobs. The job gains now will be step-wise and marginal. That’s what we mean when we talk of a reverse radical recovery.

What explains the record level of initial jobless claims a year into this pandemic is in part that we have had a stop-start recovery, with lockdowns causing heavy job loss and then big gains. This month is proof of that, with the leisure and hospitality sectors the big toggle. But, there is also a tectonic shift toward a stay-at-home lifestyle. And that means elevated losses for some time to come. Without government support as we make this transition, the income loss from this transition would cripple the US economy.

Finally, let me also say that we still have the next potential viral wave to think about. I haven’t forgotten about that for one second. And the reckless moves in places like Texas and Mississippi to re-open while lifting mask mandates will contribute to viral spread. As I see it, it’s only a matter of time despite the increasing vaccination. Look at Sao Paulo, Brazil, now in lockdown to understand what’s coming. The Amazonian strain of Covid-19, called P-1, has spread so much that it has overwhelmed hospitals in Brazil’s largest city and hit younger patients too. This is a variant that re-infects and could potentially evade vaccines, meaning vaccinated people might suffer fewer symptoms but they might also be carriers and spreaders. We just don’t know.

That means another stop-start. It doesn’t mean recession per se. But it could be a big hit. How long before that wave gets here? I don’t know.  And I don’t know how large a wave it will be. But I firmly believe it is coming.

The bond market

Let me end with some comments on bonds. We are now set to consolidate above the 1.50% resistance levels that represent the next move up in the stair step climb of rates for the US 10-year. If we close above that level today and next Friday, consider the next level of resistance much higher i.e. 1.75% or 2.00%. And Fed Chairman Powell confirmed what I’ve been telling you about this; the Fed is reactive, not proactive. It won’t put in a Fed Put until something breaks. So punters can forget about the Fed saving the day until we see some serious market carnage.

In my mind, the carnage that the Fed cares about is in credit markets, where spreads have yet to widen. Yields have gone up in lockstep with Treasury yields but eventually yield rises also mean spread widening. And it’s that double whammy that causes financial distress. We are not even close to being there. In 2018, this took the entire year before the Fed reversed course. So, hold onto your hats. And think about those high beta bets you’ve been making. There is about to be a lot of volatility in those names.