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Equity market ‘stutters’ over rise in yields: expert

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Michelle Girard, NatWest Co-Head Global Economics, joins Yahoo Finance’s Alexis Christoforous to discuss the recent jobs report and rise in bond yields.

Video Transcript

ALEXIS CHRISTOFOROUS: Now economists are warning not to get too excited about that strong February jobs report that we saw, given the fact that the economy still has a lot of ground to make up to get to those pre-pandemic levels. I'm joined now by Michelle Girard. She is co-head of global economics at NatWest. Always good to see you, Michelle.

MICHELLE GIRARD: Nice to see you, Alexis.

ALEXIS CHRISTOFOROUS: Would you be in that camp? Would you say, look, yes, good report, but don't get too excited?

MICHELLE GIRARD: No, I think I have to go the other way. I have to tell you, I actually, with respect to this February report, would say, it looks good. It was well above expectations. And that is even with the negative impact of poor weather. The weather, certainly there were a lot of storms, winter storms that hit different parts of the country in the week that they take this snapshot of employment conditions.

And if it weren't for that, I think the report would have been significantly-- significantly-- but would have been even stronger. I mean, construction employment, for example, was down over 60,000. We know that sector is really benefiting from low mortgage rates, and the housing sector is very strong.

So I think that would have been a much better performance. So the truth is, the February numbers looked good even with that headwind, if you will, which really sets us up for an even stronger performance in March, when not only will the weather not be an issue. We'll get a rebound.

But you will expect that more of the opening and reopening and easing of restrictions that we've seen kind of through the winter are eased. So I think we've got a great-- we have more to go. Let's-- I'm not trying to suggest that we aren't suffering from economic scarring. But we've got a good base to build on. And I think the outlook with vaccine distribution is only going to continue to improve.

ALEXIS CHRISTOFOROUS: You know, Michelle, when you look at that unemployment rate of 6.2%, how much of that, do you think, understates the actual situation on the ground, if you will? Because you had millions of Americans not counted in that, especially a large number of women, who basically just gave up and left the workforce.

MICHELLE GIRARD: Well, you know, there has been a lot of focus on the fact that that headline unemployment rate that we all looked so closely at, may not be the marker or the metric that we want to rely most closely on when we are assessing the health of the labor market. There is a lot of work that's done that looks at the people who have left the labor force or people who are more marginally attached, if you will, to the labor force.

And if you take those workers into account, you know, there are estimates that the true or underlying unemployment rate could be up closer to 9% or 10%. I think the other point, you mentioned women in terms of the unemployment rate for women-- also minorities. I mean, this is something that the Fed is going to be very mindful of as we move forward, and they assess the health of the economy and the labor market.

It's not going to be that they're going to focus just on the overall unemployment rate looking low. They want to see that across the spectrum, everybody is seeing benefit. And they've made that very clear that this needs to be-- you know, this economic recovery needs to lift all boats, if you will. And if you look at the unemployment rate for women or Blacks or across the educational attainment spectrum, it isn't necessarily as low as that 6.2% number would suggest.

ALEXIS CHRISTOFOROUS: You know, at this pace-- and this is quite a pace to keep up. I mean, we saw the 379,000 jobs added. But if we were to be close to this pace going forward, how long do you think it's going to take before we have the labor market come back to its pre-pandemic levels? How many years?

MICHELLE GIRARD: Well, I mean, I actually think that by the end of this year, or certainly, as we look into the middle part of-- early to middle part of 2022, you can get the economy back to not where it was before COVID hit. Because remember, the unemployment rate was down around 3 and 1/2% when we were running in an economy that was growing faster than potential.

So, the first point is what we talk about closing that output gap, getting the economy back to its underlying potential growth rate. And I think by our numbers, we can get there perhaps even by the end of 2021. There is a lot more, I think, ability for the economy to accelerate over the second half of this year and to see even faster job growth, as we see the service sector to really rebound as people get their vaccinations, and they feel more comfortable to get out. That's the one segment.

And when you noted that employment at restaurants and in the hospitality sector had improved so much in February, there's a lot of ground to make up there. And as people get vaccinated and are willing to get out, they're going to concerts, they have the ability to go to restaurants, you're going to see hiring in that area pick up even more. And so, I do think we can see an accelerated pace of hiring. And as I said, that's what we're anticipating so that we could at least get back to full employment in that overall unemployment metric, if you will, as I said, by perhaps, by our forecast, very close to the end of '21.

ALEXIS CHRISTOFOROUS: That is definitely optimistic and encouraging forecast, Michelle. But as we get back to normal, we're going to start seeing pricing pressures. And Fed Powell, Fed Chair Powell, said as much yesterday, saying that we are going to see inflationary pressures, but he said, again, the Fed is going to be patient-- that was his word-- and not rush to raise interest rates in response. And we're also seeing yields in the bond market spike up because of fears about higher inflation. What could or should the Fed be doing now to get ahead of the curve?

MICHELLE GIRARD: Well, there's a couple of things. It certainly is true that you're seeing bond yields rise. And they've been rising, really, since January. They've almost-- they've moved-- coming into the year, we were just under 1%. And today, we've touched over 1.6%. So we've seen a very sharp movement. Initially, a lot of that move earlier in the year was, as you said, inflation expectations. People were shifting their view about inflation staying so weak to thinking maybe prices are going to start to rise.

More recently, and what's been driving Treasury yields higher, is what we call the real yield. It's actually not the inflation expectations part. It's the part that reflects kind of the return on investment. It's the part that really reflects how people feel about economic growth. And so, that's different in the sense that for stocks, it's that rise in real yields that people focus on. And so that's why you've actually seen real yields-- I'm sorry-- you've seen the equity market sort of stuttering here as Treasury yields have risen, because they're watching those real yields rise.

And so when we come back to the Fed, this is why people are looking to see if the Fed will perhaps do something to slow that rise down. But, you know, again, from the Fed standpoint, they almost welcome the market embracing a better economic outlook. And I think the Fed chair made it very clear this week, at this time, unless we see a disorderly rise in yields, they're very comfortable, I think, in letting this all play out and the market adjust to a different set of both growth and inflation expectations.

ALEXIS CHRISTOFOROUS: Yeah, I guess we'll all be looking ahead now to the Fed's next meeting, coming up fast here-- March 16th and 17th. Michelle Girard of NatWest, thanks so much for being with us.