The Market Today
Jobless Claims Improve but Stimulus Negotiations Remain “Trillions” Apart
by Craig Dismuke, Dudley Carter
Monitoring the Virus Headlines: It was a relatively slow day for virus headlines considering the heavy hitters in stimulus negotiations didn’t meet until later in the afternoon. Prior to the meeting, Senator Romney proposed extending the current $600 per week federal supplement to regular state unemployment through the end of the year, addressing one of the major sticking points in negotiations. After administration officials met with Democratic leadership, Treasury Secretary Mnuchin said, “Our objective is to try to reach an understanding of the major issues by Friday, …If we can’t reach an agreement on the major issues, it’s going to be hard to complete a deal.” House Speaker Pelosi noted, “I feel optimistic that there is light at the end of the tunnel, …But how long the tunnel is remains to be seen.” White House Chief of Staff Meadows said negotiations were still “trillions of dollars apart.”
Initial Jobless Claims Improve More Than Expected: With the $600 weekly federal bonus for unemployment having expired at the end of last week, the already-important jobless claims data will be even more heavily followed and crucial to watch if negotiators fail to reach a deal to extend the enhanced benefits. There are fundamental disagreements in Congress around whether the federal bump to regular state aid is keeping continuing claims higher than they otherwise would be (i.e. creating a disincentive for workers to go back to lower-paying jobs). For now however, initial jobless claims for the week ending August 1 improved more than expected, dropping 249k to 1.19mm. Economists expected the number of new filings for unemployment to drop just 35k during the week. Unlike in previous weeks, the seasonal adjustments did not distort the story in this week’s initial claims data. New PUA-related claims remained higher than expected at 656k, but did drop 253k from the previous week.
Continuing Claims Improve but Remain High: Continuing claims for the week ending July 25 also improved more than expected, dropping 844k to 16.1 million. On a non-seasonally adjusted basis, continuing claims dropped an even-larger 966k to 15.8mm. Using the past five years trends to imply an add factor, in lieu of using a seasonal adjustment rate, claims would have declined 946k to 15.9mm. The Pandemic Unemployment Assistance program showed an almost-unchanged number of continuing claims for the week ending July 18. Continuing PUA claims fell 70k but continuing extended PUA claims rose 89k. At the state level, there remains a great amount of noise. Arizona is now back to reporting PUA claims after taking a two-week break. They reported 762k continuing PUA claims after reporting zero in the previous week. California reported a 778k increase while Pennsylvania reported a 1.9mm decrease. Adding the PUA-related programs with the traditional continuing claims data, there remain 31.1mm people receiving some form of unemployment assistance.
Fedspeak: Dallas Fed Bank President Kaplan is scheduled to speak at 9:00 a.m. CTG
Stocks Kept Uptrend Intact: Stocks rose for a fourth consecutive session and Treasury yields recoiled from record lows set on Tuesday despite mixed signals about the pace of recovery and a lack of meaningful progress on breaking the stimulus stalemate. A big day for Disney contributed to the Dow rising 1.4%, easily passing the S&P 500 which rose 0.7% and the Nasdaq which gained a smaller 0.5%. The entertainment company posted a surprise profit Tuesday after markets closed, sending the company’s shares up nearly 9% on Wednesday in the third-largest daily gain of the year. The rally kept the communication services sector afloat, although the group trailed larger gains for industrials, materials, and financials.
Treasury Yields Bounced Off Tuesday’s Record Lows: U.S. banks received a boost from a rise in Treasury yields that steepened the curve by more than 3 bps between the 2-year and 10-year notes. Notwithstanding a dreadfully disappointing ADP report and lack of a breakthrough in negotiations for more stimulus, yields were supported by a stronger-than-expected ISM Services survey and Treasury’s quarterly refunding announcement which included a record amount of longer borrowings. The 2-year yield rose 0.6 bps to 0.11% while the 10-year yield added 3.1 bps to 0.54%, although the shifts failed to lift an ailing Dollar or dislodge gold prices from all-time highs.
Equities Ease as Uncertainty Builds: Global equities finally checked up overnight and sovereign yields slipped lower, pushing Treasury yields back close to their all-time lows from Tuesday ahead of this morning’s update on weekly unemployment claims. Stocks were mixed across Asia Pacific but exclusively lower in Europe, with the transatlantic downturn dragging U.S. futures into negative territory after a positive start. Analysts blamed a slate of disappointing earnings reports for Europe’s trading lower, although broader uncertainty has gradually built up throughout the week.
Treasury Yields Retrace Portion of Yesterday’s Rise: In addition to gridlock in Congress over more stimulus, yesterday’s ADP report struck a nerve ahead of today’s claims data and tomorrow’s nonfarm payroll report and tensions between the U.S. and China over TikTok have spread to Chinese-made apps more generally. Before the claims report, equity futures were off 0.3%, the 10-year yield was down 2.6 bps to 0.523%, and the Dollar was marginally stronger. Against the British Pound, however, the Dollar was at its weakest level since early March. The Bank of England kept policy steady overnight and noted a significant improvement in activity since April’s low, but Governor Bailey said, “There’s a lot of hard yards to be done from here onwards” with “an awful lot of risk” that’s “obviously distributed one way.” After the claims report printed less bad than expected, futures moved back to around even and Treasury yields trimmed their declines, with the 10-year yield 1.8 bps lower on the day.
ISM Services Index Posts Surprise Rise: The ISM’s Services Index was surprisingly strong in July, rising unexpectedly from 57.1 to 58.1 easily exceeding the 55.0 economists expected. Production inched 1.2 points higher to 67.2, a high back to 2004, while new orders jumped 6.1 points to 67.7, its highest on record. Important to note, the levels represent the breadth of change of an index – the relative number of “better” responses versus “worse” responses, but not the degree to which that trend has been experienced, or how much better or how much worse. Discouragingly, but consistent with the disappointing ADP report from earlier in the day, the employment index fell from 43.1 to 42.1, signaling a slowdown in the labor market.