The Market Today
Jobless Claims Show Labor Market Continuing to Improve
by Craig Dismuke, Dudley Carter
Initial and Continuing Jobless Claims Improve: Initial and continuing jobless claims data both beat expectations in this week’s reports. For the week ending October 16, initial jobless claims were expected to increase but fell 6k to 290k. On a non-seasonally adjusted basis, 38 states reported decreases in new claims. Continuing jobless claims for the week ending October 9 fell 122k to 2.48mm, the lowest level since the pandemic’s onset. Moreover, the improvement was broad-based with 41 states showing improvement. While there continue to be pandemic-program claims filed, those continue to decline through the October 2 data.
Philly Fed Index Remains Positive but Shows Continued Evidence of Supply Chain Problems: The Philadelphia Fed’s October report on business conditions in its region declined from 30.7 to 23.8. The index remained elevated from an historical perspective. The new orders index jumped from 15.9 to 30.8. After recent reports showed some easing in the supply chain disruptions via a reduction in the delivery time index, the index jumped from 20.4 to 32.2 in October.
Existing Home Sales and Leading Index: At 9:00 a.m. CT, September’s existing home sales report is expected to show a 3.6% MoM gain to an annual rate of 6.09mm. If correct, this would mark the best rate of sales since February. Also at 9:00 a.m., the September Leading Index is expected to increase 0.4% MoM.
Fedspeak: Fed Governor Waller is scheduled to speak at 8:00 a.m. CT. New York Bank President Williams is scheduled to speak at 8:00 p.m.
YESTERDAY’S ECONOMIC NEWS
Fed’s Beige Book Shows Persistent Inflation Pressures Amid Incessant Supply Strains That Are Holding Back Growth: The Fed’s Beige Book, covering activity from early September through the first week of October, described growth as “modest to moderate.” However, several regions across the country cited slower activity, blaming “supply chain disruptions, labor shortages, and [Delta] uncertainty.” Manufacturing grew “moderately to robustly” while nonmanufacturing growth was seen as “slight to moderate.” While the overall outlook remained positive, there were reports of “increased uncertainty and more cautious optimism than in previous months.” The discussion of employment trends reiterated that labor supply was hampering hiring as demand remained strong. Worker shortages were most severe in transportation and technology while a lack of workers led some businesses in the retail, hospitality, and manufacturing industries to reduce production. Retirements, exits for other opportunities, child-care challenges, and vaccine mandates were cited as headwinds to hiring. A “majority of Districts” described wage growth as “robust” and many businesses reported raising starting and existing pay to attract and keep employees. Importantly, inflation pressures remained strong. “Significantly elevated prices” were attributed to strong demand colliding with the tight labor market as well product shortages and supply chain issues. There was evidence of these costs being successfully passed along to consumers.
Mester Supports Tapering But Believes Rate Hikes A Ways Away: Cleveland Fed President Mester, who will begin voting on policy decisions in January, said she supports the Fed beginning to taper asset purchases but isn’t expecting to vote to raise rates “any time soon.” Mester said much of the recent increase in inflation is tied to categories significantly disrupted by the pandemic and should abate as the economy moves throughout 2022. Therefore, Mester said, “I don’t think that interest rate hikes are coming any time soon because I don’t think we’ll reach our goals which are maximum employment and inflation at and above 2% for some time.”
Quarles Sees Inflation Pressures Broadening Out: Fed Governor Quarles supports plans to begin tapering asset purchases next month and wrap up the process by the middle of 2022. He expects inflation will decline “considerably” next year and noted that longer-term inflation expectations remain relatively well anchored “for now.” However, he also admitted there are “significant upside risks” for inflation and said, “there is evidence in the past couple of months that a broader range of prices are beginning to increase at moderate rates.” Therefore, Quarles went on, “if we are still seeing 4% inflation or in that area next spring, then I think we might have to reassess the speed with which we would be thinking about raising interest rates.”
Stocks Flirted with Records While Longer Treasury Yields Rose after a Weak 20-Year Auction: Despite a drag from tech shares and stocks of hotels, restaurants, leisure businesses, and other services companies, the S&P 500 and Dow both rose 0.4% on Wednesday as Treasury yields fluctuated. The S&P 500 and Dow surpassed their respective all-time highs during Wednesday’s session but had fallen back out of record territory by the close. More conservative sectors such as real estate and utilities joined health care names and cyclicals such as energy and financials to post positive finishes. Despite continued concerns about economic imbalances and inflationary pressures, both of which remained plentiful in the Fed’s latest Beige Book (more above), better-than-expected corporate earnings so far have lifted investor spirits in recent weeks. After flattening lower during European trading and early in the U.S. session, the Treasury curve shifted and steepened as domestic trading progressed. The 2-year yield remained 1.0 bp lower by the close at 0.39% while the 5-year yield finished up 0.3 bps to 1.16%. The 10-year yield, however, rose 2.0 bps to end at 1.66%, a new high since May 13. Upward momentum for longer yields gained steam following an ugly auction of 20-year Treasury notes that tailed by 2.5 bps on a weaker bid-to-cover and with an increased amount tendered to primary dealers.
Stock futures pulled back overnight alongside losses across Asia and Europe as yields on U.S. Treasurys and other sovereign bonds pressed higher. After threatening record territory on Wednesday, futures on the Dow and S&P 500 were 0.3% lower before 7 a.m. Contracts on the Nasdaq had declined by a similar amount. Strong corporate earnings have helped insulate stocks from inflation concerns that are driving interest rates higher, although that may become a tougher task if current trends continue. The 5-year Treasury yield had added 1.3 bps to 1.18%, a high since February 2020, as 5-year inflation expectations jumped to 2.85%, their highest reading since March 2005. The 10-year Treasury yield was 1.1 bps higher to 1.67%, its high-mark since May, as 10-year inflation expectations rose to 2.63%, the highest level since September 2012.