The Market Today
Initial March PMIs and Initial Jobless Claims Show Economic Traction
by Craig Dismuke, Dudley Carter
CORONAVIRUS UPDATE (VS Coronavirus Chartbook – PDF)
Short Sundry List of Virus Headlines: Belgium tightened restrictions again and the U.K. said it may need to strengthen measures at its borders “very soon.” German Chancellor Merkel apologized publicly for proposing a more stringent lockdown around the Easter holiday. Canada’s Trudeau said he is “concerned” about countries implementing restrictions on vaccine exports following the EU’s announcement earlier in the day that it was clamping down on shipping shots abroad. A pandemic adviser to the White House said that around 70% of Americans over the age of 65 had received at least one dose of a vaccine.
Two-Day EU Summits Kicks Off with Heavy Focus on Pandemic: Germany reported its largest case increase Thursday since early January and ICU occupancy in French hospitals is running at its highest level of the year. European leaders kicked off a two-day summit Thursday with the pandemic and bumbling vaccine rollout surely at the top of the agenda.
24 HOURS OF MARKET ACTIVITY
Wednesday’s Air of Caution Evident in Global Markets Sticks Around on Thursday: After spending most of the day in positive territory, stocks dipped late Wednesday to end near their lows of the session. The Nasdaq slumped 2% while the S&P 500 dropped 0.6%. The Dow ended nearly on top of its opening level after earlier rising more than 1.1%. Energy companies led most cyclical sectors within the S&P 500 higher while tech-related names declined. Crude prices recovered sharply Wednesday as the cargo ship blocking the Suez Canal, a key route for moving world oil and other products, was not able to be quickly moved. The nearly 6% gain closely mirrored the size of Tuesday’s decline and marked the commodity’s strongest daily performance since November. The afternoon reversal for stocks pulled longer Treasury yields back lower for the day. After rising above 1.64% around the time PMI data showed the U.S. recovery continued in early March (more below), the 10-year Treasury yield ended 1.2 bps lower at 1.61%.
Before another update on weekly jobless claims in the U.S., an air of caution continued to pervade global markets, giving a lift to the Dollar and Treasury prices (yields lower) while weighing on most global equity indices. A deteriorating virus situation in the EU, as discussed above, remains a notable headwind to broader economic optimism. European equities were 0.8% lower, outpacing smaller losses registered by an index tracking Asian indices. After PMI data yesterday showed surprising strength for the EU economy in early March, economic confidence measures from Germany and France reported Thursday picked up nicely. The more recent dynamics of the European pandemic, however, and new and extended lockdowns are expected to reverse those gains. Just before the jobless claims data were released, U.S. equity futures were down 0.4% and the 10-year yield was 0.7 bps lower at 1.60%. The 10-year yield barely budged despite initial and continuing claims hitting new bests for the post-pandemic period.
Markit PMIs Pick Up: Preliminary Markit PMIs showed the U.S. recovery continued to move forward in early March, although the pace was slightly less brisk than expected. Manufacturing recovered from 58.6 to 59.0 while the services index inched up from 59.8 to 60.0, an 80-month high. Manufacturing orders were the strongest since June 2014 while supply chain disruptions, the worst in records since 2007, led to price increases (highest in 10 years) and bloated order backlogs (highest in records since 2007). The story was similar in the services sector. Markit said, “Another impressive expansion of business activity in March ended the economy’s strongest quarter since 2014,” adding that “rates of both input cost and selling price inflation [were] running far above anything previously seen in the survey’s history,” primarily due to the supply-chain congestion.
Powell and Yellen Appear Before the Senate Banking Committee: Fed Chair Powell told members of the Senate Banking Committee that the recent rise in Treasury yields has been “orderly” and reflects growing optimism in the economic outlook. He again said he expects strong growth this year and an imminent move higher in inflation to be temporary. A return of workers to the labor force, which he called a “highly desirable outcome,” should serve to offset some impact of stronger hiring and moderate the decline in the unemployment rate. Treasury Secretary Yellen said for a second consecutive day that plans to raise spending in future years will require revenue raisers to ensure fiscal stability.
Williams Watching the Employment Rate: New York Fed President John Williams believes the economy will fully recover more quickly than after the Great Financial Crisis. However, there remains a “ways to go” to and lingering labor market slack should keep inflation pressures subdued. Williams said he would like to see unemployment fall back to 3.5%, a 50-year low reached prior to the pandemic. However, as Chair Powell has pointed out, Williams stressed that the unemployment rate is an incomplete measure of maximum employment, adding that he would also like to see the employment-to-population ratio, currently at 57.6%, rise back above 61%. Based on current levels of employment from the household survey, that target rate would imply additional job gains of around 9 million workers. He said Fed policy is in “a really good place.”
Initial Unemployment Claims Show Positive Traction: Initial jobless claims for the week ending March 20 finally showed convincing evidence of improvement with traditional claims falling from 781k to 684k, the lowest level since the pandemic began, and initial PUA claims falling from 284k to 242k, the program’s second-lowest level since the opening report.
Continuing Claims Remain Elevated and Noisy: The continuing jobless claims programs continue to show a picture of week-over-week volatility and no convincing evidence of improvement. Traditional continuing claims for the week ending March 13 encouragingly dropped 264k to 3.87mm, the lowest level since the pandemic began. The improvement was widespread with 45 states reporting declines. However, this was overshadowed by a 119k increase in continuing PUA claims and a 735k increase in continuing PEUC claims for the prior reference week (March 6). The usual state suspects reported large swings driving the overall results higher; but, even excluding the most volatile states, the central trend is not necessarily one of improvement. Combining all programs, total continuing claims for the week ending March 6 rose 734k to 18.83mm, the second highest level since December.
4Q GDP Revised Up to 4.3%: In its final revision, 4th quarter GDP was revised from 4.1% to 4.3%, primarily driven by a $14 billion adjustment higher to inventories. Also affecting the tally, business investment in structures was revised from +1.1% QoQ, SAAR down to -6.2%, wiping out the slight improvement to the hardest-hit category of expenditure. Going forward, expectations are for an acceleration in the rate of recovery in 2021 with the tailwind of additional fiscal stimulus, particularly as areas/regions of the economy reopen.
Fed Communication Continues: The flurry of Fedspeak continues today with comments from Vice Chair Clarida (9:10 a.m.), Atlanta’s Bostic (11:00 a.m.), Chicago’s Evans (12:00 noon), and San Francisco’s Daly (6:00 p.m.).