The Market Today
Brexit on the Brink; ECB Eases; U.S. Jobless Claims Jump
by Craig Dismuke, Dudley Carter
CORONAVIRUS UPDATE (VS Coronavirus Chartbook – PDF)
Monitoring the Virus Headlines: On the eve of the FDA’s panel review of Pfizer and BioNTech’s vaccine, Canada became the second major country to approve the shot for emergency use. Baltimore announced it planned to close indoor and outdoor dining starting December 11 and California reported a record number of new infections and increase in the daily positivity rate. Absent that news, the focus remained on the fiery debate in Congress over how much and what kind of stimulus the U.S. economy currently needs to keep the recovery going. Bloomberg obtained more details related to the bipartisan plan proposed last week, reporting the bill includes, among other items, $160 billion for state and local governments, a $300 federal supplement for weekly state unemployment insurance through April, and money for PPP loans for small businesses with no more than 300 workers that are forgivable if certain conditions are met. Still, Senate Majority Leader McConnell kept his push for a smaller bill that excludes state and local aid and business liability protections. “Two more brush-offs in about two hours,” McConnell said, referencing Democrats dismissal of the White House’s $916 billion proposal and his preference for a skinny bill. “More deflection, more delay, and more suffering for innocent Americans,” he went on, “We can’t do a thing unless the Democrats decide they want to make law.”
Firmer-Than-Expected Inflation as Pandemic Disruptions Continue: Consumer prices rose at a firmer-than-expected 0.2% pace in November at both the headline and core levels. The monthly gains kept the year-over-year headline rate at 1.2% and the core rate at 1.6%. An unusual mix drove the changes. Many goods categories saw firmer-than-average inflation in November, including 0.9% increases in prices for household furnishings and apparel. However, November’s strength followed notably softer prices in September and October. The exception to November’s strength was found in decline in new and used autos, both of which continued to come off the boil after sharp price increases earlier this year. In the services categories, Owners’ Equivalent Rent CPI was, once again, quite soft rising just 0.02% MoM, with a 3.9% increase in lodging away from home only offsetting some of the weakness in rent equivalents. Lodging prices had declined 3.2% in the month prior, as the pandemic continued to disrupt the hotel industry. Also impacted by the pandemic, airfares recovered again for a second month to drive overall transportation prices higher. Bottom Line: November’s inflation report showed prices were firmer than expected, but many of the gains were recoveries from softer prior readings and the largest areas of strength were from categories heavily impacted by the virus. Although the YoY rates didn’t decline as expected, the overall level of inflation, particularly when put in the context of a slowing recovery and excess economic capacity, should have no impact on the Fed’s near-term policy approach.
Jobless Claims Disappoints to Start December: After some encouraging news last week, the current week’s jobless claims report was notably disappointing. Initial jobless claims jumped 137k to 853k during the week ended December 5, worse than the small expected increase to 725k and the greatest number of new claims since the week of September 18. Looking at trends in the non-seasonally adjusted data, California and Illinois accounted for 34% of the weekly increase, but the softer trend was widespread across most states. Consistent with the regular claims data, new claims under the emergency PUA program rose 139k to 428k, the highest number of new claims since late September and the biggest weekly increase since August. The disappointment carried over into the continuing claims data, where the number of unemployed workers still receiving benefits through regular state programs rose for the first time since August. Continuing regular state claims rose 230k in the final week of November to 5.76 million.
Concerning Claims Uptick Comes as Congress Struggles to Compromise for More Aid: The larger-than-expected uptick in new filings for unemployment adds to concerns the deterioration in the U.S. outbreak in recent weeks and new restrictions across several states is weighing on the recovery, and comes as Congress has failed to agree on extending emergency stimulus. It also tarnishes the drop in total unemployment claims in all programs for the week of November 21. Data showed that prior to the recent softening, claims filed under all programs fell 1.1 million to 19.0 million as regular claims, emergency claims, and extended claims all improved.
Yields Rise Even as Equities Pullback Amid Lack of Stimulus Certainty: U.S. markets sent conflicting signals on Wednesday as lawmakers released more details of a bipartisan plan for additional stimulus but showed no signs of being able to reach a compromise on the most contentious issues. In a mirror image of Tuesday’s intraday trendline, the S&P 500 opened in positive territory but reversed early and gradually declined to finish down 0.8% for the day. Treasury yields, however, rose and steepened with the 2-year yield down 0.2 bps to 0.15% while the 10-year yield added 1.8 bps to 0.94%. The paradoxical shifts occurred as investors remained conflicted about the Congressional consensus that additional emergency aid is necessary but lawmakers’ inability to quickly reconcile partisan differences over state aid and business liability protections. The House passed a one-week stopgap spending bill to extend Congress’s spending authority past Friday’s deadline, buying lawmakers more time as they wrangle over both the omnibus and virus aid bills. The Senate is also expected to pass the bill and President Trump said he will sign it to avoid a government shutdown later this week.
Brexit Talks on the Brink: Global markets struggled for direction Thursday, with investors fretting over signs Brexit negotiations may fall apart as they awaited the European Central Bank’s policy decision and latest weekly U.S. unemployment data. U.K. government yields and the pound were both down sharply from Wednesday’s level after British Prime Minister Johnson and European Commission President Von der Leyen ended dinner discussions without a way forward. Both indicated sides are “far apart” and agreed that negotiators should decide by Sunday whether a trade agreement is possible before the transition period expires at the end of the year. The pound’s weakness lifted the FTSE 100 by 0.3% but other European indices were lower heading into the ECB’s announcement of its final policy decision of 2020.
ECB Extends and Expands Emergency Asset Purchases: As expected, the European Central Bank kept its key policy rates unchanged but expanded and extended its emergency asset purchase program. The Pandemic Emergency Purchase Program was increased by 500 billion euros to 1.85 trillion, the horizon for those purchases was lengthened by nine months to March 2022, and reinvestment of maturity proceeds will occur through 2023 instead of 2022. Additionally, officials decided to “recalibrate” other monetary policy instruments. The most appealing terms under the TLTRO III program, which offers loans to banks at attractive rates, was extended by twelve months to June 2022, additional operations were added, and borrowing limits were increased slightly. Four additional operations under the pandemic emergency lending programs (PELTROs) will be held in 2021. And easier collateral requirements announced in April related to all of these lending programs were extended through June. With the biggest component of the changes, those to the emergency asset purchases, in the ballpark of expectations, the Euro and European yields both rose slightly after the announcement. Just before the latest jobless claims report, U.S. futures were mixed but little changed and the 10-year Treasury yield was flat at 0.92%.
Lagged JOLTS Date Confirm Steady, Slowing Labor Market Recovery in October: The October JOLTS report showed a second monthly recovery in job openings, continued slowing in the pace of hiring, and the first increase in layoffs since June. Total job openings rose 158k from 6.494mm to 6.652mm, the fifth increase in the last six months and the second highest level since the pandemic began to impact the data in March. The 143k increase in private health care job openings accounted for the lion’s share of the increase, while manufacturing added 33k openings, leisure and hospitality openings increased by 19k, and trade and transportation listings declined by 44k. Hiring slowed 74k to 5.8mm while separations increased, driven by a small increase in quits and a disappointing 243k jump in layoffs from a suspiciously low level to 1.68mm, a three-month high. While the data lags the more timely nonfarm report and weekly jobless claims data, report’s message is consistent with the broader message of a steady but slowing labor market recovery in October.