The Market Today
Claims Continue to Improve but Show Significant Geographic Disparity
by Craig Dismuke, Dudley Carter
TODAY’S ECONOMIC DATA
ECB Cites Strengthening Economy in Slowing PEPP Purchases “Moderately”: The ECB decided to reduce its monthly asset purchases in its overnight policy decision. The bank will continue to run the program through its original March 2022 (or later) date but will slow purchases from $95 billion by a “moderate” amount. ECB officials cited a strengthening recovery in making the decision. Like the Fed, the ECB noted that they expect inflation may moderately exceed their goal, but that they expect it will be transitory.
Initial Claims Continue to Grind Lower, Assuaging Concerns of Slowing Labor Recovery: Initial state-level jobless claims for the week ending September 4 fell 35k to 310k, the lowest level of the pandemic. Initial PUA claims also declined, down 6k to 96k. Combined, total initial claims fell 41k to 406k, another low for the pandemic.
Continuing Claims Show Significant Geographic Disparity: Continuing state-level jobless claims for the week ending August 28 fell 22k to 2.78mm, a new low for the pandemic but still 1mm above the pre-virus baseline. Between the two pandemic programs, continuing claims fell 315k to 8.9mm. This improvement came primarily from Michigan and California, which collectively reported declines of 335k pandemic-program continuing claims. These two states continue to report volatile figures on a week-over-week basis. Additionally, there continues to be a chasm between the 26 states which ended the federal pandemic boost early and those which did not. The states which ended the programs early reported just 0.99% of their populations receiving some form of continuing unemployment assistance. The states which did not end the programs reported an average of 5.41% of their populations receiving assistance.
Fedspeak: We will hear from a flurry of Fed officials today including San Francisco’s Daly (10:05 a.m. CT), Chicago’s Evans (10:05 a.m.), Governor Bowman (12:00 noon), and New York’s Williams (1:00 p.m.).
YESTERDAY’S ECONOMIC NEWS
Job Openings Soar to a Record Showing Labor Strains Intensified in July: Job openings surged unexpectedly to a new record high in July, showing businesses’ demand for workers wasn’t infected by the Delta variant in the early weeks of the summer wave. Job openings rose from 10.19mm in June to 10.93mm as of the end of July, a second monthly increase of more than 700k and an easy beat of the 10.05mm figure economists expected. For context, there were 8.70mm individuals that reported as unemployed in July. The ratio of less than 0.8 unemployed workers for every job opening marked a new record, surpassing the pre-pandemic low when unemployment was at a more-than 50-year nadir. The 294k increase in health care and social work positions led all sector gains. Finance-related openings rose 202k while leisure and hospitality posted a 134k increase. Retail reported 95k fewer positions, July’s biggest decline. While layoffs rose modestly, they remain historically low and job quits, an indicator of employee optimism, rose back near a record. Usually overlooked because of the one-month reporting lag, the JOLTS report has become a popular place to find clear signs of the acute strains on labor market supply.
Fed’s Beige Book Shows Delta’s Impact to Growth, Product Shortages’ Impact to Prices, Labor Shortage’s Impact on Wages: The August Beige Book, released two weeks ahead of the September 22 meeting, said growth had “downshifted slightly to a moderate pace in early July through August,” despite indications demand was holding up. The largest deceleration was seen in “dining out, travel, and tourism in most Districts” and blamed on the Delta variant. The discussion faulted “supply disruptions and labor shortages” for slowing in other sectors. Businesses remained optimistic but “there continued to be widespread concern” about supply-side issues. The discussion said labor demand “continued to strengthen” while “extensive labor shortages” limited hiring and some activity. As a result of the tight labor supply, “a number of Districts reported an acceleration in wages” with “several” seeing “particularly brisk wage gains among lower-wage workers.” Inflation was “steady at an elevated level” with input costs still being pressured higher. Businesses in “some” Districts were able to pass along more of the increases to customers and “several” said businesses “anticipate significant hikes in their selling prices in the months ahead.”
Williams Wants “More Improvement” Toward Full Employment before Tapering: New York Fed President Williams said tapering asset purchases “could be appropriate” this year, but added “I will want to see more improvement [toward maximum employment] before I am ready to declare the test of substantial further progress being met.” His comments were consistent with the belief that a surprisingly weak August jobs report last week essentially took a possible tapering announcement at this month’s meeting off the table. Activity has slowed from a stronger pace earlier in the year and the Delta virus wave has increased the level of uncertainty, Williams said. He still expects inflation will fall back closer to the Fed’s 2% target as pandemic-related issues subside, adding that longer-term inflation expectations haven’t moved above levels consistent with that target.
Kaplan Keeps His Call for September Taper Announcement, October Start: Dallas Fed President Kaplan expects growth will slow in the third quarter and noted that he would not be surprised if hiring was soft again in September. However, he said mobility metrics his bank tracks have not weakened significantly amid Delta’s spread and he believes that the recovery will pick back up in the fourth quarter of this year. He continued to signal support for tapering asset purchases, reiterating that they are futile as a fix for the supply issues currently hampering activity. “If I get to the [September] meeting, and continue to feel that [there has been no fundamental change in the outlook], I’d be advocating that we should announce a plan for adjusting these purchases in the September meeting and begin shortly thereafter, maybe in October.”
Consumer Credit Growth Stepped Down in July: Consumer credit not related to mortgages grew by $17.0b in July, the slowest pace since a $1.7b decline in January and short of economists’ expectations for a $25.0b expansion. Revolving credit grew $5.6b while non-revolving balances rose $11.4b.
Treasury Yields Dipped on Strong 10-Year Auction, Cautious Tone in Beige Book: Stocks never recovered from early declines Wednesday, with the persistent weakness helping to push Treasury yields lower after a Tuesday rise. The S&P 500 briefly broke into positive territory after opening lower but quickly reversed into negative territory, never able to find a footing. The broader index dropped 0.1% as losses in cyclical sectors offset gains for utilities, consumer staples, and real estate. The Nasdaq dropped 0.6%, just its second non-record close over the last six sessions. Concerns that Delta’s spread since early July has impacted the economic recovery, including slowing hiring in August, were reinforced by the cautious tone in the Fed’s August Beige Book (more above). The release of the Fed’s anecdotal economic analysis nudged yields to new lows for the day. An overnight decline for the 10-year Treasury yield had already picked up steam after a $38b auction of 10-year notes stopped through by more than 1 bp with an above-average bid-to-cover. For the day, the 10-year dropped 3.6 bps to 1.34% after falling as low as 1.3258% in early afternoon trading.