December’s drop in payrolls widened the employment deficit in the labor market from before the pandemic, bringing the economy still more than 9.8 million payrolls short of its February levels. This came even as the payroll gains for each of October and November were upwardly revised by a combined 135,000. Michael Darda, MKM Partners Chief Economist & Macro Strategist joins Yahoo Finance Live to break down Friday’s job report.

Video Transcript

JULIE HYMAN: Let's talk more about the market reaction here and how it's interpreting these numbers. Michael Darda is with us now. He's MKM Partners chief economist and macro strategist. Mike, good morning. It's good to see you.

You know, we've been going back and forth on this number and what it tells us about the labor market. It doesn't seem like it's much positive. Futures are higher, as I pointed out. Is this sort of the extrapolation that stimulus is coming? It's not-- it's more likely, if anything, to be coming after this report and that that is going to help?

MICHAEL DARDA: Yeah, I think that's exactly right. So this was not a good number. We lost jobs in December, but not a complete surprise, since we know that the virus was surging going into the fall and winter holidays, and that that prompted government closures and restrictions on economic activity. And so we have a bit of a pause.

But the good news here, and there is some good news, there were some upward revisions the last two months. So it turns out that the economy actually had quite a bit of momentum coming into December. In some sectors, that momentum continued. Manufacturing's been a real bright spot.

And, as you mentioned, I think equity markets are simply looking over the horizon. We know these case counts are probably peaking now, if they haven't already peaked. It looks like some of the hot spots in the Midwest in particular, the surge in case count is already well beyond the peak. And in other areas, we're sort of right in the eye of the storm now.

So as the vaccine rollout, hopefully, improves in weeks and months ahead, the re-opening effort should-- should get back underway and we should start to see pretty strong job growth again in the next few months. And that's what I think risk markets are focused on-- looking ahead, looking a bit over the horizon here.

BRIAN SOZZI: And Michael, that's what I'm seeing from just getting some notes from my friends on the Street, too. You had the private sector payrolls in December fall by 95,000, but November was revised up by 70,000. So there the Street's rationalizing it. Maybe it's just a wash.

But to your point on starting to see strong jobs gains, when does that happen? And how strong are those gains in the spring, assuming jobs gains do come back by the spring?

MICHAEL DARDA: Right. I think it's going to happen soon. We could even see positive job growth in January. But really, spring into this summer and then once we get into the fall, I think this economy is going to have quite a bit of momentum. We already recovered just over half of what we lost in terms of jobs coming into December. And so that's-- that's pretty good, considering that not only was the virus still with us, but actually getting worse from the fall into the winter.

So now, as the vaccine rollout hopefully improves and the reopening effort can get underway in a much more broad-based fashion, a V-shaped recovery should ensue. And I think by the end of this year, going into 2022, we're going to essentially be fully recovered. And the discussion at that point is probably going to be overshooting and the potential for some inflation.

So the consensus is really, I think, been too pessimistic. Certainly today's report was disappointing. But the consensus has been more or less keying off this super slow recovery from the '07, '09 downturn. But that was a different shock, a different policy response. And certainly, it's been a different recovery and not a good base of comparison for this one.

MYLES UDLAND: Mike, I'd love to talk a bit about what's happening in the treasury markets, specifically in the 10-year yield, where everyone has all their attention. You know, 1.07% I think last I saw. So, again, crazy that we're talking about 107 basis points as a big increase in treasuries. But certainly that is where a lot of attention is being focused.

And I think you make a good point that it doesn't necessarily portend tighter financial conditions, which would mean higher rates. And it doesn't necessarily say that things are going to change for the Fed. But what are the conversations that you're having now about the 10-year? Is it an inflationary fear? Or is it really a reflationary type of trade?

MICHAEL DARDA: Right, good question. So I think much more on the reflationary side. If we look at weekly or monthly averages, the 10-year yield's actually been rising since last summer. So there tends to be sort of a focus on recent election results of recent stimulus measures that were passed.

But yields actually bottomed out around 50 basis points or so this summer on a weekly and monthly moving average basis and have essentially doubled. What's driving that is actually inflation expectations, which is not a bad thing. If inflation expectations are too low, that's a concern that demand is too weak. So those higher inflation expectations, which have been driving the entire rise in yields over the last few months, also tend to be correlated to liquidity conditions and macroeconomic momentum, leading economic indicators, including leading indicators for the labor market.

So that's a very good sign that risk markets, that credit markets are looking ahead, looking over the horizon, and that job growth hopefully will resume sooner than anticipated. I don't think it's going to be two, three, four months down the road. Hopefully within a month or so, we'll start to see positive jobs momentum taking root again.

JULIE HYMAN: Hopefully indeed. Michael Darda is MKM Partners chief economist and macro strategist. Mike, thanks for being here and giving us your perspective. Appreciate it.

MICHAEL DARDA: My pleasure.