The Market Today

Eurozone Yields Rise on ECB Talk; U.S. Jobs Data Hot, Social Security Outlook Not

by Craig Dismuke, Dudley Carter


Mortgage Applications Rebound on Drop in Rates: Mortgage applications for the week ending June 1 rebounded 4.1% as 30-year mortgage rates fell 9 bps to 4.75% (according to the MBA).  Purchase apps jumped 4.2% WoW while refi apps had a rare increase, up 3.8%.  On a YoY basis, purchase applications are now flat while existing home sales are down 1.6% and new home sales are up 11.6%.


Productivity Continues to Disappoint: Nonfarm productivity for 1Q was revised down from 0.7% to 0.4%, continuing productivity’s weak 1.1% run rate dating back to the end of the recession.  Weak productivity continues to be a driving force for weak wage and economic growth.  It is one of the several structural headwinds facing long-term growth.  Unit labor costs, however, were revised up from 2.7% to 2.9% as more hours worked offset a slight negative revision to compensation per hour.


Smaller April Trade Deficit than Expected:  The April Trade Balance tally came in $2.8 billion better-than-expected while the March tally was revised to show a $1.8 billion smaller deficit.  Both months’ data should provide a small boost to the GDP figures.



Yesterday – Stocks Buoyed By Tech and Economic Data, Treasury Yields Moved Lower on Italian PM Comments: Despite separate reports covering two major components of the U.S. economy reinforcing the story of solid domestic growth (more below), stocks mostly treaded water and Treasury yields moved lower. The Dow (down) and S&P 500 (up) changed by less than 0.1% while another day of strength for technology companies secured a second-straight record close for the Nasdaq. The S&P 500’s tech sector also improved, rising for a fifth consecutive session. Gains for materials and consumer discretionary stocks led the S&P but were offset by similar sized losses in utilities and consumer staples. Treasury yields had moved lower during European trading as investors opted to replace Italian assets with safer sovereigns following comments from Italy’s new PM rehashing the key points of their agenda. After mild fluctuations during U.S. trading, the 2-year yield ended down 2.4 bps at 2.49% while the 10-year yield lost a smaller 1.5 bps to finish at 2.93%.


Overnight – ECB Chatter Pushed Yields and the Euro Higher: Global equities were supported overnight but the more notable changes were seen on the sovereign bond screens. Italian bonds remained under pressure for a second day following Tuesday remarks from the country’s new PM restating plans for fiscal expansion paired with tax cuts. But yesterday’s bid for German bonds dissipated after ECB officials reminded investors of their plans to take steps towards less monetary accommodation. The ECB’s chief economist said it was clear that at next week’s meeting they “will have to assess whether progress so far has been sufficient to warrant a gradual unwinding of our net purchases.” Germany’s central bank president called the market expectations for a 2018 end to QE “plausible.” Knot, from the Netherlands agreed a 2018 announcement would be reasonable because the Eurozone’s inflation outlook is “less dependent” on stimulus. The German 10-year yield was up 8.7 bps and the Euro was stronger. Treasury yields rose less, with the 2-year yield 2.4 bps higher and the 10-year yield up by 3.3 bps.



JOLTS Data Showed Non-Wage Labor Metrics Remained Hot in April: The April JOLTS data showed an unexpected increase in the number of open positions to a new high for the series that stretches back to 2000. Instead of pulling back to 6.350MM as expected, openings rose to 6.698MM from a revised higher 6.633MM in March (previously 6.55MM). Private postings grew by 91k while opportunities in the public sector contracted by 26k. Manufacturing openings rose 30k to their highest level since 2001 but the biggest bright spot was a 95k increase in professional and business services. The obvious blemish was the 74k fewer open positions in financial activities which put the absolute level at its lowest since June 2015. Still, the overall openings rate held at 4.3%, the highest of the series, and the ratio of unemployed persons per each open position dropped to 0.95x, the lowest on record. Other metrics in the report also showed just how strong the labor market is as the hires and quits rates rebounded to their cycle-bests and layoffs held at a healthy level.


Social Security and Medicare Reports: Either Benefits Will Be Cut or Taxes Will Increase:  The Board of Trustees overseeing Social Security released its 2018 Annual Report yesterday highlighting that the Social Security Trust Funds for old-aged and disability benefits (OASDI) will now go bankrupt in 2034, the same horizon as projected in the 2017 report.  Social Security ran its 8th consecutive annual deficit in 2017, $41 billion, bringing the cumulative deficit since 2010 to $457.2 billion.  According to the data within the report, Social Security would either need to reduce benefits by 21% or increase payroll taxes from 12.5% to 16.3% in 2034 to maintain solvency.  Also released this week, the 2018 Medicare Trustees Report showed even more reason for concern.  The report estimated that the Medicare Hospital Insurance Trust Fund would be bankrupt in 8 years, 3 years earlier than projected in last year’s report.  Medicare lost $352 billion in 2017 alone, making up 49% of the total federal deficit.  For context, the TARP program disbursed $426 billion at its peak to rescue the financial system and auto sector during the Great Recession (TARP also recovered $442 billion, making almost a $16 billion profit).  The program has run a deficit every year since it was founded in 1965, save 1966 and 1974, bringing its cumulative deficit to $4.7 trillion, 24% of the outstanding Federal debt.


Activity in the Services Sector Picked Up in May: A better-than-expected services PMI from the less-popular Markit survey was corroborated by the ISM’s May Non-manufacturing report. The ISM’s services PMI rose from 56.8 to 58.6, doubling the expected gain to 57.7. All four components that drive the headline PMI improved but the biggest moves were in the supplier deliveries (+4.0 pts to match its cycle high) and business activity/production (+2.2 pts) indexes. The rise in the supplier deliveries index signaled slower delivery times, considered a byproduct of bustling economic activity creating bottlenecks in the supply chain, and was consistent with numerous anecdotal reports of a scarcity of truck drivers. That fact pattern received a mention in the comments section from a leader in the wholesale trade sector who said, “The supply chain is shuttering because of a lack of drivers and equipment causing delays in multiple modes of transportation.” Tariffs were also mentioned as causing supply disruptions. The new orders and employment indexes made marginal improvements. The implied supply disruptions may have also been a catalyst for both the 8.5-pt increase in the backlog of orders index, the biggest monthly move to a series-high level, and the prices paid index rising to its second highest level since 2012.

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