The June Employment Report, Fed and Q221 Corporate Earnings

The markets will likely focus on this week's release of the June FOMC Minutes for clues on when the Fed will begin discussing the start of tapering.  They may not get much hint.  It is more likely that any discussion of the issue will be general in nature.  The Fed leadership appears committed to eliminating the pandemic-induced labor market slack and a significant move in that direction may be necessary to spur a change in policy.  The June Employment Report did not show this to be the case as yet.  Meanwhile, the corporate earnings season is beginning and expectations are strong.

The June Employment Report should keep the Fed on hold.  The Unemployment Rate edged up to 5.9% from 5.8%, with small increases in most sub-groups.  There was a dip in Civilian Employment, while the Labor Force rose slightly.  The minor changes in both could reflect the small sample bias in the Household Survey, but the bias drops out in the calculation of the Unemployment Rate.  So, it is fair to say the Rate was up slightly, counter to the Fed's goal of driving the Rate down to pre-pandemic levels.  Currently, the Unemployment Rate is 2+ percentage points above the pre-pandemic low.

While Payrolls surged +850k, 230k came from State & Local Government Education jobs.  It looks like seasonals were behind their jump.   Seasonals expected to offset a drop in these jobs as the school year ended.  But, since schools were mostly closed for in-class teaching, many of these jobs were not there to begin with -- and therefore did not drop out (nsa) in June as seasonals expected.  Most of the remainder of the Payroll increase came from re-openings of restaurants and hotels and retail jobs.

Labor cost inflation appears to be contained.  Average Hourly Earnings slowed on a m/m basis for the 2nd month in a row.  The 0.3% m/m increase is just slightly above the 0.1-0.2% pace seen before the pandemic.

The decline in the Nonfarm Workweek to 34.7 Hours from 34.8 Hours in May -- the second m/m decline in a row -- held down the increase in Total Hours Worked to 0.2% m/m.   The latter raises the possibility of slower GPD Growth in Q321.  The June level of THW is 0.7% (annualized) above the Q221 average.  If THW climbs 0.2% m/m in each of the past 3 months, then THW will have risen 2.4% (q/q, saar) in Q221, versus +4.5% in Q221.

Consensus looks for a huge 60+% y/y increase in Q220 S&P 500 corporate earnings.  Base effects account for most of the gain, as the bounce represents a recovery from the economic shutdown to a large extent -- as was the case with GDP.   The level of earnings per share would be about 6% above the pre-pandemic peak.  Besides the re-opening bounce in GDP, other macro factors helped the earnings recovery, as well.  Oil prices rebounded, pointing to large gains for this sector's profits.  The dollar weakened as the "flight to safety" unwound.  This lifted the dollar value of earnings abroad, which also should have been helped by economic recoveries in other countries.  And, while compositional shifts have distorted Average Hourly Earnings and CPI, profit margins may have improved. 

                                                                                                                                          Markit
                                                                                                                                          Eurozone                        Real GDP     Oil Prices        Trade-Weighted Dollar    AHE     Core CPI    PMI  
                [                                y/y percent change                                                   ]    (level)
Q119            3.2                -12.8                 +7.9                             3.2           2.1               51.9 
Q219            2.7                -12.2                 +5.9                             3.1           2.1               47.8    
Q319            2.1                -19.2                 +3.6                             3.2           2.3               46.4
Q419            2.4                  -3.6                 +1.7                             3.2           2.3               46.2

Q120           -5.0                -16.5                 +2.9                             3.1           2.3               47.2

Q220         -10.6                -53.5                 +5.9                             6.5           1.4               40.1

Q320           -2.8                -27.8                 +1.0                             4.8           1.7               52.4

Q420           -2.4                -25.5                  -1.9                             4.8           1.6               54.6

 

Q121            0.4                  26.3                 -4.4                              4.9           1.4               58.3   

Q221          12.4 *               32.1                 -8.3                              1.2           3.4               63.1                                                                     

         

* Based on the Atlanta Fed Model's latest projection of +7.8% (q/q, saar).