The Market Today
Initial Jobless Claims Fall to a New Low Since 1969
by Craig Dismuke, Dudley Carter
A Solid Morning for the U.S. Data: This morning U.S. economic data was consistent with story that the U.S. labor market is strong and broader economic activity remains steady. Initial jobless claims dropped 8k to 207k for the week ended July 14, a new low for the cycle and the best reading since December 1969. The initial claims data is consistent with the signals of strength from various other labor indicators, including extremely low layoffs data from the JOLTS report to concerns of worker shortages from the Fed’s most recent Beige Book (more below). The four-week average for claims dropped from 223.3k to 220.5k. Except for a three week stretch in May, the four-week average is also at its strongest since 1969. Continuing claims were up slightly for a third week in a row.
The Philadelphia Fed also released its July Business Outlook index, which bounced back from a disappointing June result and is back in line with its 18-month average. The details were mixed, however, with disappointing expectations for six months from now offsetting a recovery in the current assessment. Current new orders recovered to one of its best levels of the cycle alongside improvements in unfilled orders, delivery times, inventories, and prices paid and received. Disappointingly, the employment readings pulled back with number of employees matching its softest level since September. Combining the key indexes on a ISM-weighted basis, the results showed almost no change in activity from June’s pace. Looking ahead, almost every indicator showed more subdued expectations for early 2019.
At 8 a.m. CT, Fed Governor Quarles will be participating in a roundtable event in New York focusing on alternative reference rates. At 9 a.m. CT, the Conference Board is expected to report that the Leading Index (LEI) rose 0.4% in June after a 0.2% gain in May. After skyrocketing through 2017, the YoY rate of change in the LEI has leveled off just above 6%.
Also today, the U.S. Commerce Department will began a two-day hearing to determine whether auto imports result in a national security threat. The outcome could determine whether the White House will attempt to move forward with a possible 25% tariff on autos imported into the U.S.
Yesterday – Yield Curve Steepened as Stocks Strengthened: Stocks were generally stronger Wednesday and the yield curve steepened 1.7 bps between 2s and 10s, the third most in a single day since mid-May. The Dow gained 0.3% as the S&P 500 added 0.2% and the Nasdaq ended almost exactly where it began. Within the S&P, the strength was centered in financials and industrials as six of the remaining nine sectors slipped below their previous close. While banks may have received a boost from modestly higher rates and a slightly steeper curve, the diversified financials group accounted for majority of the financials sector’s gain. Berkshire Hathaway was the strongest performer, adding more than 5% in response to news the company was relaxing internal guidelines to allow for more share buybacks. Industrials jumped on strength in airlines following a positive earnings report from United Continental. About the time stocks began to strengthen, roughly 10 a.m. CT, longer yield started higher. The 10-year yield closed up 0.9 bps on the day at 2.87% matching its highest close since June 26. The timing also coincided with a firming in oil and gas prices after the EIA showed a surprise build in oil inventories but a large draw of gasoline stocks. The 2-year yield and Fed Funds futures barely budged after an uneventful day two of Fed Chair Powell’s semi-annual congressional testimony (more below).
Overnight – Stocks Sag as Yields Rise and Dollar Hits a New One-Year High: There were mixed emotions in the overnight session as equities moved in different directions, commodities weakened, and the 10-year Treasury yield briefly rose to 2.895%, its highest yield since June 26. China’s Shanghai Composite slipped for a fifth consecutive session to lead a downbeat day across Asia. Top White House economic advisor Larry Kudlow said yesterday “I do not think President Xi has any intention of following through on any of the discussions we’ve made” before adding that the Chinese President is “holding the game up.” China’s PBOC set its daily reference rate to the lowest level since last August and the offshore Yuan traded to its weakest level against the Dollar in more than a year. European equities were also weaker and being driven by mixed corporate earnings results and U.S. futures were down more than 0.3%. While softer stocks may be behind the stronger Yen and U.S. Dollar, they haven’t created a safety bid for sovereigns. Most core sovereign yield curves had ticked higher except for in the U.K., where yields slipped for a second day in a row on another soft economic report. The British Pound is off more than 1% over the last two days as soft inflation and retail sales have pushed the currency below $1.30 for the first time since September. In the U.S., the 2-year Treasury yield was 0.6 bps higher to 2.62%, a new high for the cycle, and the 10-year yield had added 1.3 bps to 2.88%, a new high for the month.
Inflation Risk is Roughly Balanced But Powell has an Eye on the Downside: Powell recycled Tuesday’s prepared remarks before members of the House Financial Services Committee. In the Q&A session, Powell was asked about a range of topics but the most popular themes were consistent with those from his Senate appearance. He again said “we stay in our lane at the Fed” when asked about a possible trade war. He was willing to note his understanding is that the administration is aiming for freer and fairer trade and believes “an open trading system with low barriers is good, generally.” However, if the ultimate outcome is “a more protectionist world”, it “will be bad for our economy.” The balance sheet was discussed with Powell saying he expects it to take three or four years for it to shrink to its equilibrium size. He clarified that size has yet determined but would ultimately be dictated by demand for currency and reserves. When asked about the yield curve, Powell echoed the paradigm that the 10-year Treasury yield reflects market pricing of the long-run neutral rate. Maybe the most interesting exchange, if forced to pick and considering the focus on the “for now” caveat for future rate hikes in the prepared remarks, related to inflation. When asked about inflation risks, Powell said “I would say it’s roughly balanced, maybe slightly more worried about low inflation still.”
Not Much New in Fed Beige Book; Steady Growth But Growing Trade Concerns, Tight Labor Market But Modest Wage Growth: The Fed’s July Beige Book reported slightly weaker activity on the margin when compared with May. After activity expanded moderately in late April and early May, the more recent trend was for “modest or moderate growth” across 10 of the 12 Districts. The Dallas District remained an upside outlier with “strong growth driven in part by the energy sector” while St. Louis was downgraded to “slight”. Consumer spending was stronger but the discussion around manufacturing was more gloomy. “Manufacturers in all Districts expressed concern about tariffs and in many Districts reported higher prices and supply disruptions that they attributed to the new trade policies.” A tight labor market continued to create worker shortages and modest to moderate wage increases on average, but “a couple of Districts cited a pickup in the pace of wage growth.” Price increases were modest to moderate across all Districts but the ability to push those through to consumers was only slight to moderate.
Former Fed Chair Bernanke Could be Sold on This Time Being Different for a Yield Curve Inversion: In a Wednesday WSJ piece, Former Fed Chair Ben Bernanke indicated he could see this time being different if the yield curve were to tip into an inversion. From the piece: “Mr. Bernanke acknowledged that an inversion is ‘a good forecaster of economic downturns,’ but said the Fed must look at a broad array of factors to think about the future of the economy. ‘There’s an argument’ that maybe inversions aren’t the signal they once were because long-term interest rates ‘are unusually low,’ as is the market-based compensation for risk, Mr. Bernanke said. He added that bond buying by other central banks and regulatory changes are also altering bond-market levels. The yield curve ‘is one indicator, but you wouldn’t want to religiously consider that being the only indicator,’ Mr. Bernanke said.”