The Market Today
Jobless Claims Show Renewed Recovery in Labor Market
by Craig Dismuke, Dudley Carter
Monitoring the Virus Headlines: After the Big Ten and Pac-12 announced Tuesday they were cancelling their fall football seasons, the Big 12’s decision to move forward with its plans to play gave fans hope for some sense of normalcy for upcoming Saturday traditions. More important for the broader economy, however, were signs that both sides of the stimulus negotiations remained fully committed to their respective priorities for more aid. Treasury Secretary Mnuchin said, “If the Democrats are willing to be reasonable, there’s a compromise.” He prefers a smaller package of “a little more than $1T” and “can’t speculate” if negotiators will be able to bridge the gap to reach an agreement. Speaker Pelosi said the sides were “miles apart” on certain issues and that Democrats “are willing to resume negotiations once [the White House] start[s] to take this process seriously.” Late Wednesday evening, Fannie Mae and Freddie Mac made headlines with their announcement of a 0.50% “adverse market fee” to compensate for COVID-related risks that will be applied to most refinance mortgages settling after August (Kevin Smith, Director of Investment Product Strategies, weighs in below).
Initial Jobless Claims Show Labor Market Beginning to Heal Again: Initial jobless claims for the week ending August 8 fell 228k to 963k, almost tripling the expected decline. Looking at the non-seasonally-adjusted data, claims dropped back to 832k and are approaching the previous all-time high. Initial claims under the PUA program declined 167k to 488k. Overall, new claims in both programs declined 395k to 1.45mm. Claims are now down 892k in the past two weeks, the best two-week result in ten weeks and evidence that the labor market has once again begun to heal.
Continuing Claims Affirm Migration Back Out of Unemployment: Continuing jobless claims showed the same better-than-expected result, declining 605k to 15.5mm. Continuing PUA claims for the week ending July 25 also dropped sharply, down 2.2mm to 10.7mm. Overall, the total number of continuing claims fell 3.0mm for the reference week to 28.0mm. The only negative found is a small, 67k uptick in claims in the Pandemic Emergency Unemployment Compensation (PEUC) program, showing a small percentage of the drop in continuing claims was people rolling out of state programs into the extra 13 weeks the CARES Act offered.
Stocks Breached February’s Record Before Edging Back Down by the Close: The S&P 500 staged an impressive recovery Wednesday that briefly pushed the index above its all-time high from February. Tech turned it around after three daily declines, with the Nasdaq rallying more than 2.1% to lead gains among the major indexes. The tech sector also sat atop the S&P 500’s sector rankings by the close, although widespread gains across 10 of the underlying 11 sectors contributed to the index’s 1.4% rise. At 3,380.35, the index finished within 6 points, or less than 0.2%, of its February record high. The gains accumulated despite continued bickering between the two sides of stalled negotiations for more fiscal stimulus.
Yields Kept Inching Higher: The strong move up for equities helped keep Treasurys under pressure, a force that persevered through the afternoon despite solid results from a record-sized auction of $38 billion of 10-year notes. The auction stopped through by 0.4 bps with steady demand metrics, but couldn’t keep the curve from finishing higher on the day. The 2-year yield rose 1.2 bps to 0.16%, the 5-year yield added 2.9 bps to 0.30%, and the 10-year yield moved up 3.3 bps to 0.68%. The benchmark 10-year yield has added nearly 14 bps over the last four sessions since July’s payroll report beat expectations. Gold recovered a portion of its Tuesday decline while silver gave up an overnight gain, and oil prices rose more than 2%.
Yields Remain Little Changed after Encouraging Claims Report With Equities Pausing Near Record Highs: Treasury yields finally broke off their persistent acceleration and turned lower as U.S. equity futures paused with the S&P 500 near its all-time high after Wednesday’s rally. Most stock indexes in Asia rose but Europe’s Stoxx 600 drifted 0.4% lower from one of its highest levels since the first days of the pandemic. Oil prices leveled off near the highest levels since early March and Treasury yields edged lower after an incessant rise over the last several sessions lifted yields to their highest levels in at least a month. Considering a lack of progress in Washington on the stimulus front and little foreign economic data or breaking news overnight, investors shifted their focus to this morning’s U.S. jobless claims data. Despite another encouraging drop in both initial and continuing jobless claims, the 10-year yield stuck at its pre-release levels at down 0.2 bps on the day to 0.683% and the rest of the curve remained lower. Stock futures, however, turned positive after a mixed overnight session with the S&P 500 up 0.1% and the Nasdaq higher by 0.4%.
Director of Investment Product Strategies, Kevin Smith, On Fannie and Freddie’s Adverse Market Fee: “Last evening, on August 12th, both Fannie Mae and Freddie Mac announced a new 50bps ‘adverse market fee’ that will apply to substantially all refinancing transactions. … The 50bps fee will be implemented, according to the Enterprises, due to increased risk and anticipated higher costs related to COVID-19 and will be effective on September 1st, 2020. … As of now, this doesn’t appear to be a big impediment to elevated levels of refinance activity…. For owners of premium mortgages (virtually anyone who invests in Agency MBS these days), I wouldn’t expect a material decline in prepayments due to this.”
It is important to note this is an up-front, rather than an ongoing fee like mortgage insurance premiums. For the average mortgage, it will equate to an additional $1,400 in up-front expenses to refinance a mortgage. Since this is an upfront fee, the potential to lower refinancing activity is lessened as compared to an ongoing 50bps fee. It does add some friction though.
Fed Officials Remain Cautious: Several Fed officials sounded cautious about the outlook on Wednesday, with a couple vocalizing support for face coverings as a necessary measure to allow the economy to more fully reopen. In remarks that struck a similar tone, regional Fed Presidents Rosengren, Kaplan, and Daly said they are concerned the virus resurgence is dulling the economic recovery. Kaplan said its imperative the economy reopen to prevent a wave of business failures, but the right reopening process will be the key to prevent another surge in infections. Rosengren weighed in by stressing that it will be “very difficult” to sustain a recovery as long as the risk of a jump in new virus cases hangs over the economy. Daly said the resurgent virus from mid-June meant the U.S. won’t see a V-shaped recovery. While fiscal negotiations remain stalled, each official said more fiscal stimulus is critical.