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Soft Jobs Rreport Greenlights Case for More Stimulus

US stocks are shrugging off a disappointing nonfarm payroll report that showed December was much worse and that January only saw a modest rebound in hiring. Stimulus prospects are unchanged as Democratic lawmakers appear poised to move President Biden’s $1.9 trillion stimulus bill forward without Republican support. Stocks are trying to hold onto modest gains and any profit-taking should be limited as the US is nearing major stimulus.

NFP

The US economy added only 49,000 jobs in January, lower than the consensus estimate of 105,000, but somewhat disappointing given the recent bump the forecast had over the last few trading days. January was always going to be a tricky month for the US economy given the presidential transition, the December $900 billion stimulus package, and as the country hits the peak of the virus.

The labor participation dipped to 61.4%, helping send the unemployment rate lower to 6.3%. Wage growth is nothing to get excited about.

The nonfarm payroll report completely supports the need for more fiscal and monetary stimulus in the short-term and that should be positive for the reflation trade.

The biggest risk with the nonfarm payroll report was a strong rebound in hiring that could diminish the prospects of future fiscal stimulus.

The problem with the labor market recovery is that the economy still needs to make up for around 10 million jobs lost in the pandemic. Economic scarring is happening as the number of long-term unemployed continues to stay at around the 4 million level. Education jobs came back, while leisure and hospitality jobs continue to show the most pain with another 61,000 jobs lost with a massive downward revision in December to -536,000 jobs. Until large parts of the country are reopened, the prospects of more stimulus remain elevated.

FX/Treasuries

The dollar rebound might be over following the large downside surprise with nonfarm payrolls. Yesterday’s short squeeze on the euro cleared out many bullish bets on the tentative break of the 1.20 level.

The reflation trade looks like it could send Treasuries towards 1.20 a lot sooner as hedging activity in the swap market picks up. The prospects of more stimulus are high as the labor market stagnates and so is the economic recovery in the second half. More support and high hopes for a strong recovery could send the 10-year Treasury yield towards 1.30% by the end of the second quarter. The 10-year Treasury yield popped above 1.18% shortly after the employment report but has settled slightly below 1.15%.

Oil

Crude prices are rallying as the reflation trade continues and as the COVID situation improves in Europe. Brent is eyeing the $60 level now that OPEC+ has successfully eased most supply side concerns and optimism on the COVID front improves globally.

Oil was unfazed by the disappointing employment report but did catch a bid once the dollar dropped. The fundamentals remain solid for crude, but a consolidation seems likely given the recent runup.

Gold

Gold prices got a much-needed boost following a disappointing nonfarm payroll report that cemented the need for more fiscal and monetary stimulus. Gold is trying to hold the $1,800 line and that could be the case if the dollar rebound is over. The technical selling that is building for gold is significant and could trigger a drop towards the $1,750 level. Gold is nearing a death-cross but strong longer-term stimulus fundamentals should alleviate concerns that a complete abandonment of safe-havens is upon us.

Bitcoin

Bitcoin is rallying after a disappointing jobs report signals more stimulus is likely. A thorn in Bitcoin’s bullish outlook this year was a rebounding dollar, but that could be over. Bitcoin is eyeing another run towards $39,000 and if it is successful, momentum trading could easily have prices settle above the $40,000 level. If retail and institutional interest continues to grow over the next month, Bitcoin could target the $45,000 level.