The Market Today
Positive Economic Data Continues
by Craig Dismuke, Dudley Carter
Jobless Claims Data Show Less and Less Labor Destruction: Initial jobless claims for the week ending November 27 rose from 194k, their lowest level since 1969, to 222k. The result beat expectations for an increase to 240k. While the claims data are infamously volatile during holidays and the recent reports have been bracketed by Veterans Day and Thanksgiving holidays, initial filings for unemployment have turned convincingly lower. On a non-seasonally adjusted basis, claims for the current week fell 42k to 212k as 39 states saw improved results. Initial claims prior to the pandemic were trending at 212k per week. Continuing jobless claims for the week ending November 20 fell more than expected, down 107k to 1.96mm. On a non-seasonally adjusted basis, 43 states reported declines. Continuing claims remain just 230k above their pre-pandemic trend level.
Fed Communications: There are four Fed officials officially on the tape today including Bostic (7:30 a.m. CT), Quarles (10:00 a.m.), Daly (10:30 a.m.), and Barkin (10:30 a.m.).
OTHER ECONOMIC NEWS
ISM Manufacturing Picks Up on Favorable Changes in Underlying Details: The ISM’s Manufacturing Index came in close to expectations in November and reflected encouraging changes across many key details. The headline index rose from 60.8 to 61.1, below March’s cycle peak of 64.7 (highest since 1983) but strong historically. New orders, production, and employment all picked up. While still notably elevated, supplier delays and prices paid both eased. Inventories grew again while orders backlogs increased at a slower rate. The ISM said, “U.S. manufacturing…remains in a demand-driven, supply chain-constrained environment, with some indications of slight labor and supplier delivery improvement.” Separately, the Markit Manufacturing PMI for November was revised down from an initial estimate of 59.1 to 58.3, now reflecting a fourth monthly slowdown for activity.
Construction Spending Inches up in October After Strong Prior Revisions: Construction spending rose 0.2% in October, short of an estimated 0.4% gain. Total dollars spent, however, exceeded expectations as the prior two months saw a positive net revision. With positive implications for 3Q GDP, September’s decline was revised from -0.5% to -0.1% and August’s 0.1% gain was notched up to 1.0%. In the October data, public spending jumped 1.8%, its strongest month since May 2020, while private spending dipped 0.2%. Private residential construction dropped 0.5% on declines in new construction and improvements to existing structures. Non-residential spending rose for a fourth month on gains across most categories. Lodging, however, remained the clear underperformer. A 1.8% monthly drop pushed the sector’s total decline since February 2020 to 47%.
Beige Book Shows Persistent Economic Tensions Driving “Moderate to Robust” Inflation: The Fed’s Beige Book showed growth continued at a “modest to moderate” pace during most of October and the first half of November. Despite strong demand, several Districts said “growth was constrained by supply chain disruptions and labor shortages.” Low auto inventories were singled out but some improvement in the supply of semiconductors was noted. Leisure and hospitality activity improved as Delta waned. “The outlook for overall activity remained positive in most Districts, but some noted uncertainty about when supply chain and labor supply challenges would ease,” the Book noted. Hiring was described as “modest to strong” while inflation was said to be “moderate to robust.” Labor demand was “robust” but finding workers remained a challenge. As a result, “nearly all Districts reported robust wage growth.” Higher prices were “widespread across sectors of the economy” but “strong demand generally allowed firms to raise prices with little pushback.”
Auto Sales Slip Unexpectedly in November: Auto sales fell unexpectedly in November to their second lowest level since May 2020. Sales were expected to improve slightly to 13.45 million annualized units but instead drifted down from 12.99 million to 12.86 million, a 31% drop from April’s peak and an unusually low level outside of a recession. The auto industry has been particularly hard hit during the pandemic as a result of a chip shortage that has depressed production and inventories. Sales of autos and auto parts contracted at a 50% annualized rate in the third quarter and knocked 2.2% off of headline growth.
ICYMI – November 2021 Monthly Review: The economic outlook grew increasingly uncertain in November as the Fed began to normalize policy amid strong inflation and the risk from the virus increased as Europe faced a new outbreak and another variant emerged. After the Fed announced on November 3 that it would begin tapering asset purchases, inflation printed firmer and broader than expected, leading to speculation officials may speed up the pace in order to more quickly acquire optionality to tighten if inflation doesn’t subside. Despite the emergence of the Omicron variant, Fed Chair Powell said he supports considering a faster taper at December’s meeting. The uncertainty created by the mutated virus strain and shifting policy spooked stocks. Treasury yields fell and the curve flattened to its tightest level since early January. Click here for the full Monthly Review.
Market Optimism Evaporates in the Second Half of U.S. Trading: Positive momentum had returned overnight in global trading and persisted through the early part of Wednesday’s U.S. session. Equities, oil, and Treasury yields all recovered higher from another fear-driven sell-off Tuesday related to Omicron and Fed Chair Powell supporting a faster taper. Despite a positive ADP payroll report and a better-than-expected ISM Manufacturing index (more above), however, market sentiment softened mid-morning. The U.S.-session peak for the major equity indices, U.S. WTI crude, and Treasury yields occurred around 10:30 a.m. CT, about the time South Africa reported new infections that nearly doubled Tuesday’s tally. Intraday charts showed stocks took another step down on the inevitable identification of the U.S.’s first Omicron case. By the close, the S&P 500 had erased a 1.9% morning gain to close down 1.2%, at session lows and below its 50-day moving average. Oil prices were 0.9% lower at a three-month low around $65.50 per barrel. The 10-year Treasury yield had flipped a 4.6-bp gain to a 4.1-bp decline, settling below its 200-day moving average at 1.40%, the lowest level since September 22.
While European equities and sovereign yields fell Thursday in response to yesterday’s afternoon risk-off shift in the U.S., S&P 500 and Dow futures were attempting to rebound again and Treasury yields recovered higher, although the recent curve flattening has continued. Prior to and shortly after the release of the weekly jobless claims report, the 2-year yield was 4.4 bps higher at 0.59% while the 10-year yield was up 1.4 bps to 1.42%. The roughly 82-bps spread was the flattest since January 4.
The CDC confirmed the first U.S. case of Omicron. The fully-vaccinated San Francisco resident had recently traveled to South Africa and was experiencing mild symptoms. South Korea, Ireland, and the UAE were among other countries to announce their first Omicron cases. South Africa’s daily infections nearly doubled Tuesday’s tally and testing positivity rose to 16.5%. Officials in South Africa noted hospitalizations have picked up and said it’s too soon to assess the severity of Omicron. The White House said travel bans are a temporary measure while Germany’s outgoing Chancellor Merkel proposed mandatory vaccinations from February 2022 and restrictions for the unvaccinated.