The Market Today

Base Effects and Supply Chain Challenges Exacerbate Concerning Inflation Headlines


by Craig Dismuke, Dudley Carter

TODAY’S CALENDAR

Initial Claims Show Broad Improvement: Total initial jobless claims for the week ending May 8 fell to a new pandemic-low 577k, down 32k from the previous week.  Driving the decline was a 34k drop in traditional state-level claims to 473k, the lowest of the pandemic for the series.  On a non-seasonally adjusted basis, 29 states reported improvement.  Initial PUA claims remained relatively low at 104k, but did inch up 2k for the week.

Volatility in California Masks Improving Trend for Continuing Claims: Traditional state-level continuing claims fell 45k to 3.655 million for the week ending May 1, near the low end of the recent range. On a non-seasonally adjusted basis, traditional claims dropped to their lowest level of the pandemic as 38 states reported improvement.  As for the various extension and pandemic-related programs, the picture was less encouraging as for the week ending April 24.  Continuing PUA claims rose 420k to 7.284 million.  While most states reported improvement, California reports a 436k increase and Michigan reported a jump of 185k. Similarly, continuing PEUC extension claims rose 291k for the reference week as most states reported improvement but California reported an increase of 351k.  The traditional continuing extension program saw a decline of 20k continuing claims.  All told, total continuing unemployment claims rose 696k for the week ending April 24 to 16.75 million.

PPI Inflation Firmer than Expected on the Heels of the Hot CPI Report: On the heels of the hotter-than-expected CPI report, producer price inflation (PPI) rose more than expected in April. Headline prices rose 0.6% MoM while prices excluding food and energy increased 0.7%, both exceeding respective expectations for smaller 0.3% and 0.4% gains. Baking in the firmer monthly gains, annual headline inflation moved up from 4.2% to 6.2% (5.8% expected) while inflation excluding the effects of food and energy increased from 3.1% to 4.1% (expected 3.8%). Similar to Wednesday’s CPI report, base effects boosted the annual rates, energy was a drag on the headline, and supply chain issues and economic reopening led to firmness across several categories. Producer prices for autos jumped 5.2%. Airfare prices were up more than 7%. Car rental costs surged 17%. And traveler accommodation costs jumped 2.4%. Tracking a key input into the Fed’s preferred PCE inflation measure, price increases in the medical-related categories were firm. The firmer report will, like the CPI report, complicate the Fed’s messaging around inflation and officials’ belief that these levels of price increases will prove transitory.

Fedspeak: The wave of Fed communications continues today with comments from Richmond’s Barkin (9:00 a.m. CT), newer Governor Waller (12:00 noon), and St. Louis’s Bullard (3:00 p.m.).


24 HOURS OF MARKET ACTIVITY

A Hot Inflation Report Sends the Price of Stocks and Bonds Lower as Investors Contemplate What’s to Come

Wednesday’s CPI report was highly anticipated and expected to show strong year-over-year rates of price increases, but no one (at least among Bloomberg economists) envisaged its actual intensity. Small overnight declines for U.S. futures grew and a moribund Treasury curve moved quickly higher after the April report showed headline prices up 0.8% and core prices up 0.9%. Annual gains for the headline (4.2%) and core (3.0%) indices were the firmest since 2008 and 1996, respectively. Known base effects were exacerbated by some broad firming and evidence of supply disruptions (record month for used auto prices) and effects from economic re-opening (record increases for lodging and airfare; second largest increase for car rentals). Equities’ downturn worsened throughout the U.S. session and Treasury yields continued to climb as investors displayed increased concern about the pace of inflation. Fed officials have incessantly repeated that they believe coming increases will be transitory, although one key official was caught off guard by the April data (more below). The Nasdaq declined 2.7% and was followed lower by the Dow and S&P 500, both of which dropped around 2%; all three indices closed near session lows. The 10-year Treasury yield rose 7.0 bps to 1.69%, its highest level since April 5, and the 5-year yield jumped 6.3 bps to 0.86% as inflation expectations repriced higher. Five-year inflation expectations rose 3.5 bps to 2.75%, the highest level in 15 years. Despite fed funds and Eurodollar futures rising, the 2-year yield only added 0.4 bps to 0.16%.

Global equities were tripped up Thursday by yesterday’s walloping on Wall Street, sending stocks across Asia and Europe down more than 1%. Tracking the sharp jump in Treasury yields after the inflation scare, sovereign yields were also climbing. Germany’s 10-year yield was up 1.8 bps to -0.11%, the closest it’s been to positive territory since sliding back into negative territory in May 2019. Ten-year yields in France and the U.K. were up by more than 2 bps, also perched at or near their highest levels in nearly two years. U.S. futures, however, had stabilized and Treasury yields had leaked lower ahead of this morning’s jobless claims and producer price inflation data. Contracts on the S&P 500 were up 0.2% and the 10-year yield had inched down 0.5 bps.


NOTEWORTHY NEWS

CPI Report Surprises Fed Vice Chair, Although Still “Not Yet” Time to Talk Tapering: Less than an hour after the boomy CPI report, Fed Vice Chair Clarida said he was surprised by the strength of April’s price gains. While the monthly gains were “well above” what he expected, however, he continues to believe firmer readings as the economy reopens will be transitory. Nevertheless, if they are not and faster increases persist, the Fed will “not hesitate to act” to ensure inflation expectations remain at levels consistent with the Fed’s target. Addressing the April jobs report, Clarida noted, “The near-term outlook for the labor market appears to be more uncertain than the outlook for activity,” adding that it could take some time for supply to catch up with demand. “The economy remains a long way from our goals,” and it is “not yet” time to talk about tapering asset purchases.

Atlanta Fed President Bostic said after the CPI data shocked markets that he expects a “lot of noise” in the inflation data “at least through September,” adding that it’s too soon to form an opinion on whether the uptick in April is an indication of a concerning underlying trend. After “the next four to five months,” he said, “we will have to see what is happening with the supply chain disruptions and the commodities prices and those sorts of issues.”


CORONAVIRUS UPDATE  (VS Coronavirus Chartbook – PDF)

Buried Beneath the Inflation Headlines: A CDC advisory panel approved the Pfizer vaccine for use in adolescents from 12 to 15 years of age and President Biden said he was encouraged about prospects for a bipartisan infrastructure bill after meeting with leaders from Congress.


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