The payroll report for July was mixed. The recovery to full employment will be long, slow and arduous. The July Challenger layoff survey showed a rise in job cuts. Nevertheless, new cases of infections for August 7th (63,246) were down 19.8% from the July 24th peak. The daily death toll remains well below the highs reached in the Spring.
For the stock market, the relationship between infections and deaths is critical. If the recovery rate is higher, the rally can be rationalised. Fed policy ‘helps.’ The 10-year real yield dropped four basis points last week to -1.04%. The 10-year break-even inflation rate climbed another six basis points (to 1.61%).
There is a sting in the tail: tech companies are benefitting from a rush to automate that has been condensed in weeks and months. The net result is record IT valuations but rising structural unemployment.
The Fed is set to unveil new policy targets in September, that will undoubtedly take into account the realities of a Covid-19 economy: the focus will be on how to push inflation above 2%, to offset the years of entrenched disinflation stretching back to the financial crisis of 2008. Real yields may fall further, towards -1.5%, as break-even rates climb towards 2.0% and above.
Summary
• Rotation into cyclicals drives S&P 500 higher
• But IT and communication services march higher too
• Market not worried by Covid-19, as infections ease back
