The Market Today
Healthy Labor Market Signals: Jobless Claims Return to 44-Year Low, Employment Index in Philly Fed Outlook Hits Record-High
by Craig Dismuke, Dudley Carter
Today’s Calendar – Jobless Claims Dropped Back to a More-Than-Forty-Three-Year Low: Thursday’s early economic data was better-than-expected as jobless claims dropped to 222k and the Philadelphia Fed’s Business Outlook jumped unexpectedly. Initial jobless claims dropped 22k last week, from 244k to 222k for the four days following the Columbus Day holiday, and returned to their lowest levels since 1973. Initial claims spiked after Hurricane Harvey but have declined in five of the last six weeks as those displaced workers returned to work. The recent improvement continues to lower the four-week moving average which improved another 9.5k to 248.3k. Interestingly, this initial claims report covered the reference week for the October nonfarm payroll report. The strong result is likely to add to optimism for a potentially big number when the payroll report is released on November 3. Continuing claims for the week of October 7 were also improved.
Elsewhere, the Philadelphia Fed’s latest Business Outlook index jumped from 23.8 to 27.9 compared to expectations for a decline to 22.0. The October result was the strongest since May but below the post-election peak of 43.3 in February. The details of the report were mixed. Consistent with the anecdotal evidence from yesterday’s Fed Beige book, the prices paid index improved but the index tracking prices received weakened; not a positive sign for corporate margins. On the softer side of the details, new orders eased with shipments and unfilled orders. On the stronger side, the index tracking the number of employees surged to its strongest level on record and the average workweek was the longest since June. Stable economic activity and a strong labor market continue to be a consistent theme in most of the economic reports.
Later, the Conference Board will release its latest Leading Index and the U.S. Treasury will disclose the monthly budget results for September.
Overnight Activity – Economic Data, Corporate Earnings, and Spanish Politics Drive Thursday Trading: Global investors turned cautious Tuesday following mixed economic data in Asia, mixed quarterly corporate earnings in Europe, and the latest elevation of political uncertainty in Spain. Equities in Hong Kong plunged to lead a mostly disappointing day in Asia, but the soured tone failed to derail the bull train in Japan. Japan’s Nikkei 225 managed a 0.40% gain Thursday to avoid a daily decline for a 13th consecutive session. Earlier, data showed slightly slower growth in Japan’s September trade flows and as-expected 3Q GDP growth in China of 6.8% YoY. The risk-off really revved up as European markets opened and sold-off quickly thereafter. Disappointing corporate earnings and political tensions in Spain were blamed for the Stoxx Europe 600’s 0.81% drop. Spain’s IBEX 35 index performed equally as poorly after Spain’s central government dug its heels in and said it will begin the process of suspending the powers of the regional leadership in Catalonia. The Catalan President didn’t shy away but instead doubled down with a threat of a formal declaration of independence from Spain. Treasury yields dropped the most as European stocks sold-off. The 2-year yield (1.54%) is down 2.6 bps, the 5-year (1.96%) is 3.8 bps lower, and the 10-year yield (2.31%) dipped 3.4 bps. U.S. equity futures yielded to the global selling with Dow contracts down 100 points (0.43%) early and the best performer of the big three.
Yesterday’s Trading Activity – Dow Closes above 23,000 for the First Time, Treasury Yields End at Weekly Highs: All three major equity indices added another record close to their tallies but it was the Dow’s 160 point (0.70%) move that was the topside outlier. The S&P rose a more modest 0.07% while the Nasdaq barely cleared breakeven with a 0.01% improvement. Driving the divergence between the Dow and everyone else was an outsized surge in shares of IBM which accounted for 89 points of the Dow’s 160-point move. Shares of IBM rose 8.86%, the biggest single day gain in nearly nine years (January 2009), to its highest level since April. The company reported a smaller-than-expected revenue decline for 3Q but forecasted revenue will grow in 4Q17. Revenue growth in 4Q would be the first quarter of growth in the last 22 quarters. Goldman also recovered from a Tuesday sell-off and added another 41 points to the index’s total. Financials and tech flipped flopped for the one and two spots in the S&P where 52% of companies closed up on the day. Higher rates likely also helped financials. Treasury yields held an overnight rise and the 2-year yield closed up 1.7 bps at 1.56% while the 10-year yield rose 4.7 bps to 2.35%.
Kaplan and Dudley Discussed the Economy in New York: The presidents of the New York and Dallas Federal Reserve Banks appeared together Wednesday in a panel discussion covering a range of topics. New York’s Dudley said he believes the overall economy is in good shape and doesn’t see signs of significant imbalances. He added that the labor market is relatively tight and eventually will drive up wages over time. As a result, he still expects another rate hike this year. Away from monetary policy, he would like to see a simpler tax system but isn’t including the benefits of a reformed tax code in his current forecast given that he still thinks it’s a ways off. Dallas’ Kaplan said the U.S. economy is solid and expects growth of just under 2.5% for 2017. He didn’t address whether he will support another rate hike this year but did state that he is wary of the Fed’s overnight rate up too close to the 10-year yield. He believes the current level of the 10-year yield is the market’s projection of less-than-stellar economic growth in the future.
Not Much Changed in the October Beige Book: The Fed’s latest beige book showed little had changed from the previous period surveyed. Total economic activity continued to be described as growing modestly to moderately across all 12 Fed Districts. Consumer spending increased, housing inventory remains a headwind for sales, and construction activity in both the residential and commercial categories was positive. Employment growth was positive and the labor market remained tight as worker shortages continued to plague certain industries. Nonetheless, wage pressures were just modest to moderate. Overall price pressures remain only modest and what increases are being seen in input costs are still, by and large, not being pushed down to the consumer. As has been the case with the recent data, Hurricanes Harvey and Irma disrupted the anecdotal data as well. The Richmond, Atlanta, and Dallas Fed Districts reported “major disruptions” from the storms.