The Market Today
Initial Jobless Claims Rise Unexpectedly, Highlighting Persistent Uncertainty for the Recovery
by Craig Dismuke, Dudley Carter
VS Coronavirus Chartbook (PDF) (Link) *Updated by 10 a.m. CT
Monitoring the Virus Headlines: Daily virus developments did little to shift the broader narrative, with investors more focused on the Minutes from the Fed’s July meeting (more below). The virus situation appeared to continue its recent improvement while daily updates from Italy, Spain, and France continued to create concerns about trends across Europe. On the stimulus front, there were no major breakthroughs but chatter about growing bipartisan support for a smaller stimulus bill continued to pick up. White House Chief of Staff Meadows said the outlook for a narrow aid package had improved drastically. While the two sides were still yet to agree on such a deal, he said talks with Democrats had gone well.
Mixed Jobless Claims Data Includes Unexpected Rise in New Filings for Unemployment: Offering mixed signals about the status of the labor market recovery, initial jobless claims rose unexpectedly and for the first time in three weeks while continuing claims fell more than expected to their lowest level since early April. After dropping below 1MM for the first time since March, initial claims rose 135k to 1.106MM in the week ended August 15. On a non-seasonally adjusted basis, new claims rose 53k to 892k with more than half of all states reporting a small increase. However, continuing claims, which are reported with a one-week lag, fell 636k to 14.844M, the lowest since 11.914MM (April 3) on the way up.
While some of the improvement in continuing claims is certainly related to the slow but persistent decline in the number of new weekly claims, a portion of the drop is also related to expiration of benefits offered through regular state programs. The Pandemic Emergency Unemployment Compensation (PEUC) program, which was created by the CARES Act to provide additional weeks of benefits past the regular 26 weeks offered by most state programs, has seen claims rise in each of the last seven reported weeks to 1.289MM as of August 1. In other non-traditional programs, new claims under the Pandemic Unemployment Assistance (PUA) program rose 53k to 543k while continuing claims under that program rose 501k for the week of August 1 to 11.225MM after a prior week’s decline. Bottom Line: The rise in new jobless claims is discouraging and more than 28MM Americans were still receiving unemployment benefits through all programs as of August 1, two factors that highlight the uncertain and slow recovery the economy faces.
Philadelphia Fed Business Outlook Index Moderates: Consistent with other signals that the recovery leveled off in July as previous virus acceleration slowed a more rapid pace, the Philadelphia Fed’s Business Outlook index slipped more than expected in August. The headline index dropped from 24.1 to 17.2 for the current month as indices tracking new orders, shipments, and employment all cooled. Nonetheless, the index held well above April’s low of -56.6 and above most readings from 2019, even after two months of declines. Offering additional consolation, an index tracking expectations six months from now inched higher after a big decline from a record high in June.
Stocks Retreated as Fed Minutes Lacked Clarity on Next Steps: Ambiguity in the Fed’s July Minutes about how the Fed will conduct monetary policy going forward and when they will make an announcement (more below) led to a midday market reversal that erased solid stock market gains and pushed yields higher. The S&P 500 had climbed to another record in the morning after Target and Lowe’s both showed consumer spending remained resilient in the face of historic unemployment, Apple became the first U.S. company valued at more than $2 trillion, and investors hoped the Fed Minutes would provide clear instructions about how officials plan to strengthen monetary accommodation as the economy recovers. Despite stocks’ gains, the latter factor had led Treasury yields lower by early afternoon.
Treasury Yields Rose after Falling Overnight: However, those moves quickly reversed as investors struggled to find any new information in the 13 pages of Fed discussion as to when the Fed might shift its policy framework and how a change could enhance the historic steps the Committee has already taken to support markets and the economy amid the pandemic. Stocks quickly turned negative and fell into the close, leaving the S&P 500 0.4% lower after the index had earlier gained as much as 0.3%. The Dow stumbled 0.3% while the Nasdaq dropped 0.6%. The lack of clarity in the Minutes sent longer yields higher in the afternoon and the curve steeper by the close. The 2-year yield barely budged while the 10-year yield added 1.1 bps to 0.68% after falling as many as 2.4 bps overnight.
Stocks Slide Following Wall Street Decline After Fed Minutes: Global stocks are exclusively lower on Thursday, tracking losses for U.S. equities that piled up Wednesday afternoon as investors read through the Fed’s July Minutes (more below). Stocks in Asia slumped 1.6% and Europe’s Stoxx 600 remained down 1% despite moving up off the lows. Oil prices were knocked down 1% amid the daily avoidance of risk that has helped gold prices recover from a big decline Wednesday and pressured sovereign yields lower. The Minutes, which showed the Fed is clearly concerned about the virus and the economy but offered an opaque discussion about how officials will plan to accommodation, came one day after the S&P 500 finally broke through February’s record high. In similarly cautious Minutes from the ECB’s mid-July meeting which were released overnight, officials said the swift market recovery wasn’t fully consistent with underlying data.
Treasury Yields Reverse Yesterday’s Rise Amid Risk-Off Tone: Before the weekly jobless claims were released, U.S. equity futures had broadly declined by 0.4%, although the Nasdaq fared somewhat better with a decline of less than 0.2%, while Treasury yields were at their lows of the session. The 2-year yield was 0.6 bps lower at 0.13% and the 10-year yield was down 3.6 bps to 0.64%.
No Surprises in the Economic Assessment As Minutes Reflect Willingness for Prolonged Monetary Support Amid Heightened Risks: While investors hoped the Minutes from the Fed’s July meeting might shed more light on the review of the monetary policy framework and potential changes to forward guidance for interest rates, the afternoon release left them none the wiser. Starting with the economic assessment, the discussion unsurprisingly highlighted that activity had picked up in the weeks leading up to the meeting, but quickly cautioned that the recovery to date had only been partial and the outlook remained highly uncertain and contingent on the unknowable path of the virus. Consumer spending had recovered more than business investment, dynamics credited to the significant fiscal stimulus amid a highly uncertain economic environment. As a result, the Fed pledged continued support from its full range of tools until achieving its full employment and inflation mandates are a probable outcome.
Framework Review Could Be Finalized “In the Near Future” While Stronger Forward Guidance Is Likely “at Some Point”: However, the bigger interest was in any insight on the status of the framework review, the culmination of which could be accompanied by a shift in how the Fed addresses its inflation mandate (e.g. a change to average inflation targeting) that leads to stronger forward guidance for interest rates. Those that believe an announcement could come at the September meeting could point to a desire to “finalize all changes to the [Statement on Longer-Run Goals and Monetary Policy Strategy] in the near future” to support their position. Those that expected more were likely disappointed by the statement “that providing greater clarity regarding the likely path of the target range for the federal funds rate would be appropriate at some point,” somewhat softer language than the “at upcoming meetings” reference in the June Minutes. Nonetheless, the eventual adoption of outcome- or calendar-based forward guidance, or a mix of the two, clearly has more support than yield caps and targets. Bottom Line: There remains quite a bit of uncertainty about how the Fed will conduct monetary policy moving forward and the timing of an announcement remains open for debate. However, officials are quite certain and clear they plan to keep rates low for an extended period in whatever framework they ultimately choose. The lack of a final answer should heighten the interest in next week’s virtual “Jackson Hole” policy symposium.