The Market Today
Claims Data Remain Strong as Markets Remain Focused on Washington Chaos
by Craig Dismuke, Dudley Carter
Today’s Calendar – Claims Data Continues to Point to Tightening Labor Market: Initial jobless claims unexpectedly declined last week, falling 4k to a 232k which sets the low mark since the final week of February. Analysts continue to predict an uptick in initial claims and they continue to be incorrect. Last week was the third consecutive week of actual claims falling below estimates. The weekly result knocked 3k off the 4-week average which fell to 240.8k, just 1k above its lowest level since 1973. Continuing claims data for two weeks ago fell 20k to 1.898MM compared with expectations for 32k increase. The weekly level of continuing claims also matched its best since 1973. The hiring and firing data continues to signal a strong labor market that continues to tighten.
Also released this morning was the Philadelphia Fed’s latest Business Conditions Outlook index. The May index unexpectedly increased from 22.0 to 38.8 compared with expectations for a decline to 18.5. The strength in the current conditions index was driven exclusively by a big improvement in the level of shipments and a slight gain in the length of the workweek. Both the new orders and employment indices were a bit softer than in the April report. The May index was the second best since 1993 and helps balance out the weaker NY Fed survey from earlier this week.
At 9 a.m. CT, Treasury Secretary Mnuchin will give a congressional testimony and the Conference Board will release its leading index for the month of April. The index, which tracks 10 diverse economic metrics, is expected to show another 0.4% monthly improvement.
Overnight Activity – No Letup in the Letdown: Investor sentiment deteriorated further as the dark clouds that hung over yesterday’s U.S. session spread across Asia and Europe. Global equities tumbled as indices tracking aggregate performance in Asia and Europe dropped to their lowest marks in two weeks. Japan’s Nikkei fell 1.3% as the yen remained strong and investors were seemingly unfazed by the preliminary 1Q GDP results. Based on the initial release, Japan’s economy grew 0.5% QoQ and 2.2% from a year ago; both were the best in four quarters. Shares across Europe are down more than 1% and sovereign yield curves there are flattening on lower yields. The German 10-year note was 5.0 bps lower early this morning and at its lowest level in two weeks. The energy sector is leading losses on European bourses as the commodities complex was broadly weaker despite the Dollar hovering at more than six month lows. In currencies, the British pound is actually outperforming the yen after the U.K.’s April retail sales report proved much stronger than expected. In the U.S., Treasury yields continued to move lower with the 2-year yield down 1.2 bps (1.23%) and the 10-year yield 3.1 bps lower (2.19%). The 10-year yield fell to as low at 2.179% overnight, just 1 bp shy of its April low. The Dollar has stabilized and U.S. equity futures point to more selling at the open; Dow futures are down by more than 100 points.
Yesterday’s Trading – Full-Fledged Flight to Quality as Washington’s Woes Weigh: Tuesday’s early morning negativity tightened its grip on U.S. markets as stocks dropped the most since September, Treasurys rallied sharply, and the Dollar sank. Reports of an alleged dossier of conversations between Former FBI Director Comey and President Trump seemed to be the breaking point for markets. The alleged memos are the latest in a string of distractions for the administration that have raised concerns the pro-growth, economic portions of the administration’s mandate may be delayed indefinitely. House Oversight Committee Chairman Chaffetz has invited the former FBI director to a hearing next Wednesday. Politico reports Comey wants to testify as soon as possible. Investors responded by flooding out of riskier assets and into safe havens such as gold, the yen, and Treasurys. Financials bore the brunt of the equity selling while defensive sectors buoyed the major indices. The Dow shed 373 points with the S&P off 44; both representing 1.8% declines. The Dollar closed at its lowest level since November 4th. On a percentage basis, the 2- and 5-year Treasury yields fell the most since the Fed’s March hike while the 10-year yield dropped the most since last July. With the 2-year yield 5.3 bps lower at 1.246% and the 10-year yield 10.1 bps lower at 2.224%, the extra post-election premium for holding 10-year debt in lieu of 2-year debt has completely evaporated. The 97 basis points spread between 2s and 10s is the lowest since October.