The Market Today
Headline Jobless Claims Skewed by Anomalies
by Craig Dismuke, Dudley Carter
CORONAVIRUS UPDATE (VS Coronavirus Chartbook – PDF)
Monitoring the Virus Headlines: U.S. cases rose 0.5% on Wednesday, below the 0.7% past week average, while the rise of infections in Europe continued to be a concern. France reported 7,017 new positives and said its weekly pace of new cases is the worst since the beginning of the pandemic. The country’s ICU patient load was the highest since July 21. Spain reported 3,663 new cases, above the 2,731 tallied on Tuesday and near its highest level in four months. Shortly after lunch, a report indicated that the CDC was requesting that states prepare for a potential vaccine as early as November. On the stimulus front, White House adviser Kudlow said negotiations are ongoing on a daily basis and noted he believes there are some areas where targeted aid would be “quite useful.”
Headline Jobless Claims Skewed by Anomalies: The BLS changed its seasonal adjustment methodology in the claims data released this morning. Rather than applying a multiplicative factor to the weekly data, they are now applying an add factor. The multiplicative factor has been distorting the adjustment excessively since March. Given the new methodology this week, the week over week comparisons lack precision. Just looking at the non-seasonally adjusted figures, initial jobless claims for the week ending August 29 rose from 825k to 833k, remaining in the 800k range for a fourth consecutive week. The pace of improvement in new jobless claims has slowed significantly. Initial PUA claims, a CARES Act emergency program to broaden assistance to the self-employed and gig workers, rose 152k, a third consecutive increase to the highest level since late July.
On a positive note, continuing jobless claims (non-seasonally adjusted) fell from 13.87 to 13.10 million for the week ending August 22. Those coming off the rolls of continuing claims and presumably back into the labor market remains a positive indicator for the labor market. Continuing claims under the PUA program, reported with a lag for the week of August 15, rose an unusually large 2.6 million, although most of the increase resulted from a 2.4 million jump in claims in California. The large increase in California likely reflects a catch-up in reporting.
Trade Deficit Jumps to Largest Since 2008: The July Trade Balance report showed an even larger increase in the monthly trade deficit than indicated by last week’s goods trade balance data (which showed a shockingly large trade deficit). This morning’s total trade report shows a $10.1 billion increase in the monthly deficit, from $53.5 to $63.6 billion, the largest monthly trade deficit since 2008. As the first trade balance report for the third quarter, this portends a meaningful drag on the rate of recovery. On a positive note, the increased deficit was the result of increases in both imports and exports, up 8.1% and 10.9%, respectively.
August Service-Sector Indices: At 8:45 a.m. CT, the final revision to August’s Markit Services PMI will be released followed by the August ISM Services Index at 9:00 a.m. The service sector has been hardest hit by the pandemic and its recovery has shown signs of slowing.
Fedspeak: At 11:30 a.m. CT, Chicago Fed Bank President Evans is scheduled to discussed the economy and monetary policy.
Equities Extended Record Streak: U.S. equities rallied sharply Tuesday to push the S&P 500 up for a ninth time in the last ten sessions. Global equities had rallied overnight, extending upward momentum that has pushed global stocks back to record levels. The Fed shifted its policy approach last week to allow for moderately-above-target inflation as it seeks to find full employment and boost the economy in a low-rate environment. Overnight, the ECB’s chief economist commented that the euro’s strength could affect the outlook, sending the common currency sliding alongside sovereign yields in the region. Early in U.S. trading, U.K. yields tumbled after dovish remarks from a couple of officials from the Bank of England, including a comment from the deputy governor for markets and banking that QE could be increased significantly if needed.
Treasury Yields Continued to Drift Lower: Support from central banks has played a pivotal role in equity markets’ historic recovery from the pandemic lows in March. Expectations that they will continue to accommodate have held global yields at low levels and been strengthened by signs of the recovery slowing. Just before U.S. markets opened Wednesday, ADP reported a smaller-than-expected gain for private payrolls in August ahead of Friday’s BLS nonfarm payroll report. In the afternoon, the Fed’s Beige Book flagged a slowing recovery and persistently uncertain outlook (more below). The Dow and S&P 500 both rose around 1.6% while the Nasdaq trailed with a 1.0% gain, the latter two notching another round of record closes. Lagging larger declines in Europe, the 10-year Treasury yield slid 2.1 bps to 0.65%, an eight-day low.
Global Equity Rally Becomes Uneven: The synchronized climb higher for global equities has taken a breather Thursday as European indices powered ahead while U.S. futures turned lower ahead of this morning’s jobless claims data and ISM services PMIs. The global session started unevenly in Asia as Chinese shares fell during a mixed session despite the country’s services sector expanding for a fourth month in August. The Caixin Services PMI showed little change from July, slipping from 54.1 to 54.0. In Europe, services PMIs were weaker than expected, excluding a positive upward revision in Germany that kept the Eurozone-wide index steady. Spain and Italy’s services sectors saw activity contract unexpectedly as the region continues to struggle with a new wave of infections.
Treasurys Hold Steady: European stocks rose, nonetheless, as the developments reinforced expectations that the recovery leveling off amid a new wave of infections could force policymakers to provide more economic stimulus. France unveiled on Thursday the details of its previously-announced 100 billion-euro plan to boost the economy out of recession. More broadly, the Financial Times reported that the stronger euro is worrying some ECB officials. Comments on Wednesday from the bank’s chief economist that the euro’s rise “matters” for policy decisions sparked a sell-off in the currency and created some chatter that officials might be forced to ease policy. The euro is down nearly 1% over the last two days from multi-year highs against the dollar. Before the jobless claims data, S&P 500 futures were 0.4% lower and the Treasury curve was little changed with a downward tilt. Treasury yields inched higher after the drop in initial claims.
Fed’s Beige Book Discusses Slowing Recovery and Uncertain Outlook: The Fed’s Beige Book was consistent with most broader economic data and assessments that the recovery continues but has slowed in recent weeks. The discussion started with a note that, “Economic activity increased among most Districts, but gains were generally modest and activity remained well below” pre-pandemic levels. Consumer spending slowed across many of the districts and commercial real estate remained a concern. No surprise, housing was painted in a positive light. Employment growth continued but some slowing was noted. Addressing a key area of risk, there were “rising instances of furloughed workers being laid off permanently as demand remained soft.” The overall outlook was “modestly optimistic” but “some pessimism” was noted and “Continued uncertainty…related to the pandemic, and its negative effect on consumer and business activity, was a theme echoed across the country.”
Fed Speakers Show Support for Keeping Rates Low for a Long Time: Cleveland Fed President Mester said the Fed should make it clear to economic participants what the plan is for policy. However, she also noted that the markets clearly understand their plans to keep rates low for a long time. She noted that the recovery has slowed and that downside risks continue to outweigh the upside risks. New York Fed President Williams addressed last week’s policy shift as an explicit clarification that inflation moderately above 2% is “actually desirable.” He added that, “Even the topic of raising interest rates is so far off in the future that I’m not going to focus on that right now.” While he is “a believer” in fiscal responsibility, the response from Washington has been right and “hugely important.” On providing more explicit forward guidance in the near future, President Barkin from the Richmond Fed said some “refinement” will be needed because the current language is “time-limited.”