The Market Today

Economic Data Give Reason for Optimism


by Craig Dismuke, Dudley Carter

CORONAVIRUS UPDATE (Chartbooks: Vining Sparks Coronavirus Chartbook and Vining Sparks Coronavirus State Charts)

Global cases of the coronavirus crossed over 200 million on Wednesday as the WHO called for a moratorium on booster shots until the end of September to allow for more doses to be made available for poorer countries. The U.K. lifted quarantine restrictions for travelers from some countries and approved vaccines for anyone 16 years old and above. Reports indicated the U.S. may require travelers from other countries to be vaccinated and Illinois’s Governor announced masks will be required in schools.

 

ECONOMIC DATA

Jobless Claims Data Continue to Grind Lower: Initial jobless claims for the week ending July 31 fell 13k to 479k as traditional state-level claims dropped 14k to 385k and pandemic-program claims rose 1k to 94k.  State-level continuing jobless claims for the week ending July 24 fell 366k to 2.93mm.  However, California continues to report large week-over-week changes, accounting for 256k of the weekly decline.  Nonetheless, there were 40 states reporting fewer continuing claims indicating broad-based improvement. Continuing pandemic-program claims for the week ending July 17 dropped 77k to 9.4mm (both programs combined). The 25 states ending the pandemic benefits early now account for 1.6mm continuing jobless claims, or 1.1% of their total populations, which includes 794k pandemic-program claims.  The 25 states not ending the programs early account for 10.4mm continuing claims, or 5.6% of their total populations, which includes 8.4mm pandemic-program claims.

Trade Deficit Continues to Grow: The monthly trade deficit jumped from in June $71.2b to $75.7b, the largest on record, as imports rose 2.1% and exports gained just 0.6%.  This marked the largest monthly deficit on record and brought the trailing 12-month trade deficit from $573b prior to the pandemic to $812b, also a new record.  The ballooning deficit has led trade to drag from the final GDP total for four consecutive quarters as imports have been turbocharged by the U.S. recovery and unprecedented stimulus.  Imports have now surpassed their pre-pandemic level by 13.1% while exports, reflective of the slower global recovery, are up just 1.3%.

Fedspeak: Speaking from the Fed today are Governor Waller (9:00 a.m. CT) and Minneapolis Bank President Kashkari (3:00 p.m.).

ISM Services Index Beats Expectations, Tempers Growing Concerns of Slowing Economy: The ISM services index shocked expectations, jumping 4.0 pts to 64.1 and hitting a new record-high.  The supplier deliveries index jumped again, a reflection of slower delivery times, artificially inflating the monthly gain in the headline index by 0.9 points.  Nonetheless, the details of the report remained positive. Business activity increased sharply, new orders remained high, and the employment index moved back above 50 rising from 49.3 to 53.8.  Also positive, new export orders jumped 15.1 points to 65.8, the highest level since 2007 and the first indication that the trade balance could turn accretive to the GDP tally.  On the inflation front, the prices paid index increased again, now at its highest level since 2005.


TRADING ACTIVITY

Treasury Yields Dropped Sharply after ADP’s Payroll Estimate Missed Expectations by Wide Margin, Reversed Higher on ISM’s Surprise Record High: ADP’s projection that just 330k private jobs were added in July, less than half of the 690k gain that was expected, sparked worries that a resurgent virus may already be impacting the U.S. economy. The 10-year Treasury yield slumped to down 4.6 bps on the day to 1.1258%, a new intraday low back to February 11. However, the benchmark U.S. yield reversed sharply after the ISM’s Services Index rose substantially more than expected in July on strong fundamentals, including a strong rebound in its employment index, indicating demand remained strong and countering the messaging from ADP. After a wild intraday ride, the 10-year yield ended the day up 1.0 bp to 1.177%. The 5-year yield rose 2.9 bps to 0.673% after having dropped to as low as 0.604% following the ADP disappointment. The underperformance of the belly of the curve may have been related to Fed Vice Chair Clarida’s comments about a possible rate hike late next year (more below). Stock futures stumbled in pre-market trading following the weaker payroll reading and the major indexes never regained their footing. Although the Nasdaq added 0.1%, the S&P 500 slipped 0.5% and the Dow fell 0.9%.

Amid a mixed global session on Thursday, U.S. equity futures had risen 0.2% ahead of the weekly jobless claims figures and Treasury yields had risen by less than 1.5 bp. U.K. yields were also higher, yielding from the broader declining trend across Europe. The Bank of England (BoE) kept policy unchanged and said it expects most of the stronger inflation it expects will be transitory. However, it also nearly doubled its forecast for year-end inflation to 4% and said some modest tightening of policy will likely be required over the forecast horizon. Markets generally held their levels after the jobless claims data improved as expected.


NOTEWORTHY NEWS

Support Continues for Tapering to Begin Soon: A couple of Fed officials offered somewhat different takes on plans for tapering asset purchases in public comments Wednesday. Both President Bullard from St. Louis and President Kaplan from Dallas suggested they would like to see tapering begin soon. However, Bullard would like the process completed by the end of the first quarter next year while Kaplan would prefer a bit more gradual of a pace. Kaplan added, “I think it’s very important to divorce discussion of the Fed funds rate from discussion of our purchases, …My comments on purchases are not intended to suggest I want to take more aggressive action on the Fed funds rate.”

Clarida Still Expects Inflation Will Moderate, Sees Risk to Expansion from Delta Variant; But, Possible Case for Hike Next Year: Fed Vice Chair Clarida said in a speech yesterday that he continues to believe that strong inflation will prove transitory as substantial economic balances fade over time, but admitted that risks to his inflation outlook are to the upside. The ongoing spread of the Delta variant poses a downside risk to the expansion and has likely been a key driver of the sizeable drop in Treasury yields, a move which has surprised the Vice Chair. His personal forecast is for unemployment to decline to 3.8% by the end of next year, meaning that conditions for raising rates could be met in 2022. The Fed will continue to discuss tapering plans at upcoming meetings and will make policy decisions based on actual outcomes, not forecasted outlooks.


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