The Market Today
Jobless Claims Data Point to Improving Trend after Period of Weakness
by Craig Dismuke, Dudley Carter
CORONAVIRUS UPDATE (VS Coronavirus Chartbook – PDF)
Democrats Push Forward Efforts for Major Stimulus Package: A Republican Senator that took part in Monday evening’s stimulus meeting with President Biden said Wednesday that the White House mostly pushed back on the GOP’s more-targeted counterproposal. Another said he expects no Republican support of the president’s $1.9 trillion plan in its current state. A couple of Democratic Senators met with the president on Wednesday, saying later he was determined to pass a package in the very near future and would not compromise on certain items out of principle. After the president joined a called with House Democrats, some who were present said he indicated he was not open to shrinking the size of individual checks, but would consider limiting the pool of recipients. However, efforts to pass the president’s plan without Republican support progressed further in both the House and Senate with procedural votes.
The Virus and Vaccines: The CDC addressed what has become a contentious issue in some parts of the country, saying incoming data increasingly suggests schools can safely reopen. The White House indicated new CDC guidance related to reopening schools will be released “soon.” Separately, the White House announced it was establishing a couple of federally-run vaccination centers in California, the beginning of its push to ramp up inoculations in the first 100 days of the administration.
ISM Services Strengthens Unexpectedly: While manufacturing disappointed earlier in the week, the ISM Services Index rose unexpectedly from 57.7 to 58.7 in January, its highest mark since February 2019. The gain was driven by the strongest employment reading of the pandemic and a six-month high for new orders. Improved supplier delivery times kept the index from being even stronger while current business activity was little changed. Away from the drivers of the headline PMI, and potentially reflecting the divergence between the U.S. and foreign economies, exports slowed sharply while imports improved. Collectively, the comments reflected optimism in the outlook beyond the first quarter.
Fed’s Bullard Betting on “Very Strong” 2021 Recovery: St. Louis Fed President Bullard sounded optimistic, saying, “The U.S. labor market recovery is about four years ahead of where it was following the 2007-09 recession,” and may get stronger as 2021 unfolds, keeping him comfortable with his forecast for 4.5% unemployment by the end of the year. However, he also said it’s too early to start discussing or planning for the Fed exiting its current accommodative policies, considering the significant uncertainty that remains.
Fed’s Evans Expects Inflation to Lag the Recovery: Similar to President Bullard, President Evans from Chicago, who votes on policy this year, sees the recovery making “significant strides” this year, in part because he expects another fiscal package of around $1 trillion. Unemployment could fall to 3.5% by the end of 2023 but inflation will likely undershoot the Fed’s goal until the middle of the decade. Of note, he said 3% inflation wouldn’t be a problem. As a result, the Fed’s current policy will remain in place “for a while.”
Fed’s Mester Not Concerned About Delayed Tightening in Average Inflation Framework: Cleveland Fed President Mester said monetary policy is well positioned but believes additional fiscal support is warranted. She noted that the recovery will depend on the virus and vaccines and sounded relaxed about the potential for inflation pressures. She’s not concerned about the Fed being behind on raising rates considering the recent shift to average inflation targeting.
24 HOURS OF MARKET ACTIVITY
Weekly Market Optimism Continued Wednesday, Calms Thursday: Stocks climbed for most of Wednesday after ADP’s monthly private payrolls estimate beat expectations and the ISM services index accelerated unexpectedly. Despite the improved data, however, the White House and Democrats continued their push towards party-line passage of President Biden’s $1.9 trillion stimulus plan, despite objections from Republicans. The S&P 500 opened higher and recovered from an early dip to peak up 0.6% shortly after lunch. However, the index trimmed its gains into the close to finish up 0.1%. Following the positive economic data, a 5.6-bp increase for the 30-year Treasury led the curve higher and steeper. The Long Bond closed at 1.93%, its highest level since February and widest spread to the 5-year yield, which added 2.2 bps to 0.46%, since October 2015.
After rising 4.1 bps yesterday to 1.14%, the 10-year Treasury yield, after spending most of the overnight session little changed, was being dragged higher by rising U.K. yields ahead of the jobless claims data. The U.K. gilts curve rose sharply after the Bank of England kept policy unchanged and said its discussion of negative interest rates, and exploratory steps to study their hypothetical implementation if needed, were in no way a signal sub-zero rates were imminent. Additionally, after a 4.2% forecasted contraction in 1Q, officials expect a rapid recovery for the remainder of 2021. The U.K.’s 10-year yield rose 8.9 bps to 0.46%, its highest level since March. Prior to the jobless claims data, the U.S. 10-year yield was 1.9 bps higher and S&P 500 futures were up 0.2%. Both were little changed after further improvement in the report’s trends.
Unemployment Data Improving: The most recent unemployment insurance data continues to contain some week-over-week noise from different states, but generally reflects an improving trend. Traditional initial jobless claims fell 33k to 779k as 34 states reported lower claims, and initial PUA claims fell 55k to 349k. Combined, total new filings fell 88k to 1.128 million. For the week ending January 23, traditional continuing jobless claims fell 193k to 4.592 million with 22 states reporting fewer totals. On both seasonally adjusted and non-seasonally adjusted bases, traditional continuing claims are now at their lowest level since the pandemic began. For the week ending January 16, Continuing PUA claims fell 126k to 7.218 million and continuing PEUC claims fell 290k to 3.603 million. In total, the data show 17.836 million people filing for some form of unemployment assistance as of January 16, down 486k from the previous week.
Factory Orders, FedSpeak: At 9:00 a.m. CT, the December factory orders report is expected to show strong activity. Dallas Fed Bank President Kaplan will speak at 12:00 noon CT and San Francisco Bank President Daly at 1:00 p.m. Treasury Secretary Yellen is overseeing a meeting of financial market regulators today to discuss recent market excitement.