Exposure rates of the Dorval Asset Management Range – 6th August 2021

Strong labor market figures out of the US in July point to a continued normalization – and even acceleration – in the country’s economy. This could help put an end to the dip in long-term yields, the extent of which had surprised and sometimes worried investors.

It is perfectly reasonable that labor market momentum would follow the same trend as the economic recovery with a lag under normal conditions, yet we may well have assumed that the situation would be somewhat different given the very particular set of circumstances during the emergence from the Covid crisis. Some countries have already actually recovered a very strong pace of employment as economies have reopened – such as Australia, as well as France according to national statistics agency INSEE’s 2Q figures (cf. chart 1). However, the pace of the upturn on the US job market had been disappointing, perhaps partly as a result of temporarily generous unemployment benefits, although other factors no doubt come into play. In this respect, July’s figures are more encouraging with a sharp drop in the jobless rate to 5.4% vs. 5.9% in June, while 903,000 jobs were created.


US labor market finally seems to be catching up its lag

Australia / France / Canada / USA


While jobless numbers still stay stuck well above the pre-Covid 3.5% mark, the US Federal Reserve should feel heartened by these stats and continue paving the way for tapering its asset purchases, perhaps at the end of the year. However, all investors will be keeping a particularly close eye on the US bond market: the over-50bp drop in the 10-year yield since March 2021 (cf. chart 2) seemed to challenge the scenario of a robust and sustainable recovery. An upturn in long-term rates would be more reassuring than worrying in this respect.


End to drop in long-term yields in the US?

10-year Treasuries


However, a number of issues will keep on testing this scenario of a robust and sustainable economic recovery out to the end of the year. Firstly looking to the Delta variant, news from certain European countries is reassuring (UK, Spain, Netherlands), but concerns persist in some US states where the vaccination rate is weaker. Secondly on the job market, we will need to monitor whether the sound US figures in July endure, which we feel is fairly likely. Lastly looking to budget questions, it will be crucial to weigh up the Biden administration’s scope for action and its determination to finalize the $550bn infrastructure plan negotiated with Republicans. The Democrats’ plan includes a very wide range of $3 trillion in additional spending to be voted out to the end of the year.


In our portfolios, we maintain moderate equity exposure and diversified allocation, with no very major change versus the previous week. 


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