The Market Today
Jobless Claims Jump; Biden to Announce Details of New Stimulus Plan in the Trillions
by Craig Dismuke, Dudley Carter
CORONAVIRUS UPDATE (VS Coronavirus Chartbook – PDF)
Monitoring the Virus Headlines: Wednesday’s headlines revolved around Europe’s outbreak and new restrictions, continued efforts to broaden vaccinations against the virus, and the prospects of additional stimulus in the U.S.
On the Virus: U.K. Prime Minister Johnson said there are some signs that cases could be leveling off in certain spots, but reiterated that it was too early to determine if restrictions could be relaxed by the middle of February. He’s worried that there is “substantial” risk hospitals’ ICU capacity could be overwhelmed in the days and weeks ahead. Later, the U.K. reported a record for new fatalities. Elsewhere, Denmark extended current restrictions through February 7, Switzerland said it will close non-essential businesses starting January 18 and extend its closing of restaurants until the end of February, and Scotland said it would soon add new restrictions to its existing lockdown.
On Vaccines: Johnson & Johnson said it plans to apply for EU approval of its vaccine in February and expects a decision from U.S. officials by March. A top official with Operation Warp Speed cited expectations for the Johnson & Johnson shot to be between 80% and 85% effective. During the day, reports indicated a medical journal review of early trial results would say the vaccine appeared to be safe and show promise in blocking the disease across demographic groups.
On Stimulus: Headlines late in the afternoon updated expectations for today’s announcement by President-elect Biden of his proposal for additional emergency fiscal aid. Last week, he had said he would seek stimulus “in the trillions of Dollars,” including supplementing the $600 direct payments provided by December’s aid package with an additional $1,400, raising the total paid to individuals to $2,000. Wednesday reports indicated that today’s proposal would be more focused on immediate relief, leaving a larger stimulus plan that would include infrastructure spending for a later effort. There was some speculation that the President-elect and Senator Schumer had discussed immediate relief near $1.3 trillion.
Jobless Claims Show Labor Weakness to Begin 2021: It appears the labor market weakened further in the first few weeks of January, although the data around holidays has a history of being volatile. Initial jobless claims for the week ending January 8 rose 181k to 965k, the largest weekly increase since March. On a non-seasonally adjusted basis, claims were up 231k, the second-largest weekly increase since March. Thirty-five states saw new claims go up. New PUA claims rose 123k for the week, now back up to 284k. In total, new filings for unemployment rose 304k to 1.25 million, the highest level since September, with the exception of the two-week jump in early December.
Continuing jobless claims for the week of January 2 also rose more than expected, up 199k to 5.27 million. On a non-seasonally adjusted basis, claims rose 474k as 37 states reported increases. In what is almost irrelevant data because of the two-week lag in reporting, continuing PUA claims fell 940k to 7.44 million for the week ending December 26. Continuing PEUC claims fell 325k to 4.16 million for the same week. This brought the total number of people filing for some form of unemployment insurance down 745k to 18.4 million, the lowest level since the pandemic began. However, the increase in claims, as seen in the traditional state-level programs, is more current than this lagged data.
Fedspeak: Fed Chair Powell is scheduled to speak at 11:30 a.m. CT. Also speaking are Boston’s Rosengren (8:00 a.m.), Atlanta’s Bostic (10:00 a.m.), and Dallas’s Kaplan (12:00 noon).
Safer Stocks Handed S&P 500 a Gain While Treasury Yields Declined Further from Tuesday’s Pandemic High Following Another Solid Auction: Treasury yields dropped rapidly during the morning session and continued to new lows after an auction of 30-year bonds was well received. While the S&P 500 did manage a modest daily gain of 0.2%, the cautionary tone from the Treasury market was reflected in the movements of individual sectors. Defensive sectors such as real estate and utilities led all gains and technology shares, which outperformed during most of the pandemic, closed in third place. Cyclical sectors such as energy and industrials, which had led the major indices to record levels in recent days on hopes more stimulus would continue to drive the recovery, faltered. The morning decline for Treasury yields was a continuation of downward momentum from Tuesday which had knocked the benchmark yield off of its highest level since March. For a second day, following Tuesday’s auction of 10-year notes, longer maturities found favor with investors. The $24.0-billion auction of 30-year Treasury debt stopped through by more than 1 bp and saw direct and indirect bidders steal away allocations from primary dealers, both reflective of solid demand. Although largely expected, the House’s vote to impeach President Trump for a second time ended a small recovery for the 10-year Treasury yield. The key yield slipped 4.6 bps on the day to 1.08%, near the session low of 1.07%.
Yields Reverse Higher on Reports of Larger Stimulus as Investors Await Actual Proposal: Yields staged a notable upside reversal early in overnight trading following reports that President-elect Biden’s proposal would be for an additional $2 trillion in emergency stimulus for the economy, a much larger figure than the $1.3 trillion figure reports on Wednesday had said was being discussed. Yields have rocketed higher since Democrats reclaimed Senate control early in the new year, hitting new highs for the pandemic on Monday. However, the trend paused Tuesday and the 10-year yield declined from 1.15% to 1.08% over the last session. As headlines hit late Wednesday evening about the larger stimulus plan, the benchmark yield rose almost immediately from 1.07% to 1.12%. With uncertainty around what the actual proposed amount will be, Thursday’s announcement could create further market volatility. After the disappointing claims report, the 10-year yield fell back to 1.09%, a low since the initial spike in Asian trading.
Equities Shift Back to Cyclicals, But See Slight Net Changes: U.S. equity futures also unwound some of yesterday’s risk-off rotation, as the Dow reclaimed positive territory with a 0.3% gain at 7 a.m. CT as the Nasdaq inched just below breakeven for the day. Global stocks were mixed Thursday, although the bias was generally firmer. China’s major indices were among the few decliners in Asia, despite some encouraging economic reports on trade. Exports out of China jumped 18.1% in December while imports improved 6.5%, both topping expectations for gains of 15.0% and 5.7%, respectively. Most economic indicators showed the global economy slowed in December amid a virus surge that sparked a return of restrictions for many, ending a historic year on a sour note. Data released overnight reported that Germany’s economy shrank 5.0% in 2020, less than the 5.2% contraction expected but the sharpest decline since 2009’s 5.7%.
Fed’s Beige Book Reflects the Slowdown Since the Virus Surge: The Fed’s Beige Book, covering the period from November 21 to January 4, reflected a slowdown in growth and increased concerns about a virus surge. Growth across most Districts was described as modest, a bit weaker than the “modest or moderate” characterization from the prior report. Contacts in some regional Districts cited weaker consumer spending and a majority of Districts noted a shift from in-person to online purchases. As has been the case, manufacturing and residential real estate continued to see better activity. Consistent with the dynamics of the drop in payrolls in December, leisure and hospitality jobs saw cuts, a “growing number of Districts” said the pace of job recovery had stepped down, but goods sectors and transportation were cited as areas of strength. Inflation indications were modest overall. The broader outlook remained one of cautious optimism, captured in the comment that, “Although the prospect of COVID-19 vaccines has bolstered business optimism for 2021 growth, this has been tempered by concern over the recent virus resurgence and the implications for near-term business conditions.”
Brainard Says Fed and Fiscal Support Needed to Broaden the Recovery: Fed Governor Brainard said it could be a while for the Fed to see “substantial further progress” towards its dual goals. As a result, she said the current pace of bond purchases is likely to be appropriate for “quite some time.” She’s concerned about the near-term outlook and noted the trajectory of the recovery will depend on the virus. She said a faster rollout of vaccines could pose upside risks to a recovery that has, so far, been uneven and felt disparately by different demographic groups. Because of base effects from notably weak reading during the initial outbreak last spring, Brainard said inflation could move up above 2% in the first half of the year, likely temporarily. She commented that fiscal support had been key in driving the recovery and that the Fed’s bond purchases were providing “substantial support” through their easing of financial conditions.
Fed’s Clarida Seems to Give Even Stronger Forward Guidance: Fed Vice Chair Clarida put a bit of a different spin on the new guidance for initial lift-off of the fed funds rate. The forward guidance in the statement said the Fed’s key policy rate will remain at its current setting at least until “inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time.” Clarida appeared to raise the bar even further when he declared, “We are not going to lift off until we get inflation at 2% for a year. … We are trying to tie our hands. We are saying we are not going to hike until we get to 2%.” On the broader outlook, Clarida said he’s somewhat optimistic for the recovery in 2021 because of the vaccines.