The Market Today

Labor Market Continues to Recover; Mixed Inflation Data

by Craig Dismuke, Dudley Carter

CORONAVIRUS UPDATE (Chartbooks: Vining Sparks Coronavirus Chartbook and Vining Sparks Coronavirus State Charts)

Rising Virus Cases Across the Country Continued to Draw Responses from Municipalities and Corporations: California announced that it would require all public school employees to be vaccinated or subject to testing. Philadelphia reinstated a mask mandate for citizens who enter a business. The NYSE announced that, effective September 13, employees must be vaccinated to enter the trading floor. Amtrak will require its employees to be vaccinated by November 1 or subject to testing. And McDonald’s became the latest company to delay the reopening of its corporate headquarters, pushing its return date out to October 11. Watching for signs that the ongoing outbreak could be impacting economic activity, Southwest Airlines said in a statement that it “has recently experienced a deceleration in close-in bookings and an increase in close-in trip cancellations in August 2021, which are believed to be driven by the recent rise in COVID-19 cases associated with the Delta variant.” Frontier Airlines sounded a similar alarm about slowing travel bookings last week.



Jobless Claims Continue to Decline Despite Delta Wave: Initial jobless claims for the week ending August 7 declined 2k to 480k including an encouraging 12k decline in traditional state programs and a 10k increase in pandemic-program claims.  Traditional state continuing jobless claims fell from 2.98mm to 2.87mm for the week ending July 31, the lowest level of the pandemic and gradually progressing toward the 1.70mm pre-pandemic level. Thirty-eight states reported declines.  Continuing pandemic-program claims decreased 730k for the week ending July 24 to 8.67mm, the lowest level since the pandemic’s onset.  Encouragingly, despite the rise in confirmed COVID-19 cases beginning in early July, the jobless claims data show the labor market continuing to gradually recover.

PPI Strength Contrasts CPI Moderation, Keeping Inflation Front and Center: While consumers saw some pricing moderation in July, producer prices were firmer than expected again. Headline producer prices and prices excluding food and energy rose 1.0% MoM last month, firmer than the 0.6% and 0.5% gains expected. Removing trade categories, prices rose 0.9% in July, also above the 0.5% expectation. The stronger-than-expected monthly pressures pushed the three year-over-year rates higher to 7.8% (expected 7.2%), 6.2% (5.6%), and 6.1%, (5.7%); the annual rates were the highest since a break in the data in 2010. Unlike in the CPI report, where details showed some leveling off across some categories, the PPI strength was broad-based. Contrasting the drop in airfares in the CPI data, passenger transportation prices in the PPI data, the source for the Fed’s preferred PCE inflation measure, jumped sharply. The report showing producer prices continuing higher is consistent with anecdotal evidence, including comments in the ISM and Markit business surveys and the Fed’s Beige Book. In July, the Beige Book noted, “Supply-side disruptions became more widespread, including shortages of materials and labor, delivery delays, and low inventories of many consumer goods,” and cautioned that, “While some contacts felt that pricing pressures were transitory, the majority expected further increases in input costs and selling prices in the coming months.”

Fed’s Public Pondering of Tapering Timeline Continues: Chicago Fed President Evans said, “I’d like to see a few more employment reports” before deciding on whether to support kicking off the tapering process. However, “I do expect that we are going to be at the point where we’ve seen substantial further progress later this year,” he added. Further, “if we were to [taper] in proportion to the way that we’ve been purchasing [Treasurys and MBS] – reducing them in line with those proportions – that would be fine.” He continues to believe that inflation will moderate over time as a result of longer-term forces that pre-existed the pandemic, which could shape his opinion on raising rates down the road.

Kansas City Fed President George was more definitive, saying the “time has come” for the Fed to “transition from extraordinary monetary policy accommodation to more neutral settings.” “While recognizing that special factors account for much of the current spike in inflation,” George said, “the expectation of continued strong demand, a recovering labor market, and firm inflation expectations are consistent, in my view, with the committee’s guidance regarding substantial further progress toward its objectives. I support bringing asset purchases to an end under these conditions.” She did later acknowledge that the spread of the Delta variant might “complicate” the tapering timeline.

Dallas Fed President Kaplan told CNBC that he would like the Fed to announce in September that tapering asset purchases would begin in October and be wrapped up in June 2022.

After saying Monday that he believes “there is still more room to run in the labor market,” Richmond Fed President Barkin said Wednesday that the economy could make the “substantial further progress” needed to taper asset purchases “in the next few months,” and that he is “very supportive of tapering and moving back toward a normal environment as quickly as the economy allows us.”

While Atlanta Fed President Bostic signaled support on Monday for tapering “relatively fast”, he is less convinced that sustained strong inflation pressures will necessitate the Fed to raise its overnight funds rate anytime soon. “Obviously, we have seen inflation rise above 2% as the economy recovers, …But most of that rise is fueled by forces that should recede over time,” Bostic noted. As a result, “Without actual data demonstrating that an inflationary problem has arrived and is likely to be sustained, we will allow labor markets to run their course” without pre-emptively raising rates out of a fear of inflation.

Monthly Budget Deficit Rises: The monthly U.S. federal deficit expanded from -$174.2b in June to -$302.1b in July, as a $59b drop in expenditures was more than offset by a $188b decline in revenues on lower individual and corporate income tax collections. The trailing 12-month deficit rose from -$2.63t to -$2.86t as a much smaller monthly deficit for July 2020, which included the extended tax filing deadline, rolled out of the calculation.


Yields Decline on CPI Inflation Relief and Strong 10-Year Note Auction: Longer yields took two sharp steps lower Wednesday after July’s CPI report showed some early relief from breakneck monthly increases and the auction of 10-year Treasury notes stopped through by more than 3 bps. Year-over-year inflation rates remained elevated and are likely to stay high for some time. However, monthly changes moderated and there was evidence in the details of less collective upward pressure. The downward momentum in yields that ensued had ebbed somewhat, but returned sharply after the 10-year note auction drew strong demand from non-primaries that pushed the awarded yield convincingly through the when issued yield. The 10-year yield fell from 1.35% to 1.30% shortly after the auction. By the close, it had pared its daily decline to 1.9 bps, ending at 1.33%. The daily drop ended a six-day run higher that had pushed the yield up nearly 18 bps, from 1.17% to 1.35%. The 2-year yield fell 2.0 bps to 0.22%. Cyclical sectors continued to strengthen and lift the Dow and S&P 500 0.6% and 0.3%, respectively, both setting new record highs for a second day. The Nasdaq declined 0.2% and for a third time in four sessions.

Shorter Treasury yields were little changed Thursday ahead of the weekly jobless claims data while longer yields had edged higher, nudging the 10-year yield up 1.3 bps to 1.36%. Stock futures were in positive territory, but only marginally. Globally, stocks were mixed and sovereign yields were relatively uneventful.

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