The Market Today

Small Business Confidence Drops on Supply and Employment Issues; Job Openings Cross 10 Million

by Craig Dismuke, Dudley Carter

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

The CDC raised its travel advisory for Singapore to level 2 and for France and Israel to the highest level, while lowering its advisory level for Canada. Reports indicated the EU will not impose travel curbs on visitors from the U.S., despite the recent spike in cases that has pushed new daily infections to levels last seen in early February. Vaccines remained a focal point. BioNTech said evidence indicates its joint vaccine with Pfizer is effective against variants. The U.S. Defense Secretary wrote a memo to employees at the Pentagon informing them that he would ask President Biden to approve mandatory vaccinations for members of the military once the FDA gives full clearance to the Pfizer-BioNTech, which could occur in early September. President Biden said he approves of mandatory vaccines for military personnel.



Small Business Confidence Drops on Supply and Employment Issues: The NFIB’s Small Business Optimism Index fell from 102.5 in June to 99.7, disappointing expectations for a smaller decline to 102.0 and unwinding most of the prior month’s 2.9-point increase. The details indicated that small businesses expected activity to slow amid continued struggles with supply-chain issues and worker shortages. The number of businesses expecting higher real sales over the next three months dropped 11 points, the largest decline in underlying indexes, while the net share reporting a better earnings trend over the last three months and the net number expecting better business conditions six months from now both declined 8 points. Notably, the largest increase in a major underlying index was a 3-point rise to another record high in the number of small businesses that said they had job openings they couldn’t fill. Nonetheless, the number planning to hire and the number planning to raise wages each inched back up 1 point to near the highest levels in records. Monitoring the inflation indicators, actual and planned price increases remained elevated near their highest levels since the 1980s.

Nonfarm Productivity Edges Lower, Unit Labor Costs Rise: Productivity measures have been volatile since the onset of the pandemic as severe disruptions make it difficult to discern an underlying trend. Productivity fell from 4.3% in 1Q21 to 2.3% in 2Q21 as hours worked accelerated from a 4.0% QOQ SAAR rate to 5.5% while output cooled from 8.4% to 7.9%. Unit labor costs rose 1.0% last quarter as the 3.3% increase in compensation per hour outpaced the productivity gains.

Keeping an Eye on Washington: Senate Democrats released late Monday the framework of the budget resolution they hope to use to pass their $3.5 trillion social spending plans via the reconciliation process. Those plans are expected to become the focus after the Senate passes the bipartisan infrastructure bill. The $1 trillion infrastructure bill, which includes $550 billion in new spending items, is scheduled for a vote this morning.


Job Openings Topped 10 Million in June for Another Record: Job openings rose more than expected in June, above 10 million for the first time and to a fifth consecutive all-time high. The 590k increase from a May level which was revised higher pushed total job openings at the end of June to 10.073 million. Last Friday’s nonfarm payroll report showed there were 9.48 million unemployed workers during the June payroll reference week, meaning there were fewer unemployed workers than open positions that month. Adjusting the June openings down for the 943k hired in July would leave the ratio below 1.0x for a second month, a highly unusual occurrence for the current position in the economic cycle. Professional and business services led sector gains by posting 227k positions while retail trade and leisure and hospitality both added more than 100k employment opportunities. Tracking the report’s other metrics, the hires rate jumped from 4.2% to 4.6%, the quits rate rose from 2.5% to 2.7%, and the layoffs rate remained at a record-low 0.9%. Cumulatively, the data showed the labor market continued to recover in June but that businesses also faced persistent problems finding workers. Notably, the lagged data wouldn’t reflect any effects from the rise of the delta variant beginning later in July.

Monday’s Fed Commentary Echoes Growing Support for Tapering Soon, Signals Relative Calm Around Spread of Delta:

Richmond Fed President Barkin acknowledged it’s “fair to say on the price side we made substantial progress, maybe more than substantial progress,” but believes “there is still more room to run in the labor market.” He stressed that inflation expectations have been “impressively stable” and said he would consider an employment-to-population ratio of around 59% to mark “substantial further progress.” That rate printed at 58.4% in last Friday’s stronger-than-expected July jobs report.

Atlanta Fed President Bostic called last Friday’s labor report “quite encouraging,” saying, “My sense is if we are able to continue this for the next month or two I think we would have made the ‘substantial progress’ toward the goal and should be thinking about what our new policy position should be.” He went on to say, “Right now I’m thinking in the October-to-December range [for a tapering announcement], but if the number comes back big” like in July “or maybe even a little bigger, I’d be open to moving it forward.” Stylistically, Bostic favors “a balanced approach” towards tapering Treasurys and MBS and is “in favor of going relatively fast.” Among the first to quantify a possible lookback period for the Fed’s new flexible average inflation targeting framework, Bostic said a 5-year annual average of core PCE might make sense.

Separately, President Rosengren from the Boston Fed, who will vote on policy decisions next year, threw his support behind announcing the start of tapering soon. Discussing the recent strong jobs reports, Rosengren said, “I would expect if we continue to have reports like we’ve had over the last two, with very substantial payroll employment gains, that by the September meeting, we would, in my view, meet the substantial further progress criteria, and that would imply starting to taper sometime this fall.”


Ten-Year Treasury Yield Back Above 1.30% On Taper Talk and Technical Support: U.S. equities posted modest changes Monday that left the Dow and S&P 500 marginally below last Friday’s record closes and nudged the Nasdaq up by 0.2%. The changes were consistent with overnight futures trading which had reflected a cautious global tone amid rising cases of the delta COVID-19 variant. Within the S&P 500, more sectors fell than rose, although the membership of the groupings lacked a cohesive story. Energy was the clear underperformer as oil prices tumbled back near lows from late May, hurt by worries about demand possibly being impacted by rising global infections. U.S. WTI for next month’s delivery dropped 2.6% to below $66.50 a barrel. Treasury yields, however, rose steadily throughout U.S. trading. Longer yields began to climb after job openings rose above 10 million for the first time (more above), a move that accelerated as the benchmark yield crossed back above its 200-day moving average. The trend higher was further supported by a couple of Fed officials sounding supportive of beginning to taper asset purchases soon (more above). For the day, the 5-year and 10-year yields added 2.7 bps each to 0.80% and 1.32%, respectively. The 2-year yield rose 1.2 bp to 0.22%. Early Tuesday, markets were unexcited. U.S. equity futures and Treasury yields were mixed and little changed as part of a highly uneventful global session.

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