The Market Today

“Substantial Majority” of Fed Officials See Inflations Risks “Tilted to the Upside”

by Craig Dismuke, Dudley Carter


Continuing Jobless Claims Continue to Grind Lower: Initial jobless claims for the week ending July 3, expected to decline to 350k, disappointingly rose from 371k to 373k.  Initial PUA claims declined 15k to 99k, bringing total initial claims filed down 13k to 472k.  Continuing jobless claims, however, were decidedly better than expected, falling from 3.48mm to 3.34mm for the week ending June 26.  While they still remain elevated, continuing claims averaged 1.70mm in 2019, they are now at their lowest level of the pandemic.  The pandemic-related programs saw another weekly decline as state reporting remained volatile.  Texas and California both reported outsized declines in pandemic-program claims.  The 25 states ending their pandemic insurance programs early do appear to be experiencing a faster rate of decline in claims; the next step will be seeing if they also report a faster rate of rehiring.  Total continuing claims in all programs for the week ending June 19 fell 450k to 14.21 million, the lowest of the pandemic.


Stocks Reclaimed Records and Treasury Yields Extended Declines after Fed Minutes Signaled Inflation Concerns Not Strong Enough Yet to Trigger Policy Change: U.S. stocks recovered Wednesday after the Minutes from the Fed’s June meeting reiterated inflation concerns but showed the consternation wasn’t strong enough to warrant a policy change just yet (more below). The S&P 500 was volatile during the morning session, moving into and back out of negative territory after a higher open. However, the index was near session highs heading into the release of the Fed’s Minutes, up 0.3% on the day. The 10-year Treasury yield had declined overnight in stages, with momentum to the downside picking up after Tuesday’s low failed to hold. After briefly falling below 1.30% for the first time since February 18, the benchmark U.S. yield was 2.9 bps lower at 1.32% before the Fed’s Minutes were posted. With the Minutes shedding no new light on the future path of monetary policy, both the S&P 500 and Treasury curve generally held their pre-release levels. The S&P 500 ended the day up 0.3%, near its session peak and with a new all-time high close for an eighth time in nine tries. The Dow also rose 0.3% and an 0.01% tilt higher was enough to hand the Nasdaq a new record high close. The 10-year yield finished 3.2 bps lower at 1.316%, still the lowest close since February 18.

Risk-Off Tone Thursday Sends Treasury Yields Even Lower; ECB Changes Inflation Target: Equities’ recovery was brief, however, and the move lower in longer Treasury yields gathered pace as a risk-off tone overwhelmed global markets on Thursday. Stocks in China fell more than 1% and Hong Kong’s Hang Seng was lower by nearly 3%, with a recent increase in regulatory scrutiny from the Chinese government on major tech companies creating angst in recent days. Japan’s Nikkei fell 0.9% after a state of emergency was declared in Tokyo because of rising virus cases, leading to the announcement of a spectators ban at the Olympics next month. The major stock indices across Europe were broadly and deeply in the red amid the global weakness, with most lower by at least 2%. In true risk-off fashion, most sovereign yields were moving lower while riskier European countries saw their borrowing costs rise. Chinese yields were leading all global declines. Hints from Chinese government officials that the central bank may lower banks’ reserve requirements soon was seen by some as a sign of concern about the country’s recovery. In Europe, Germany’s 10-year yield was down 2.2 bps to -0.32%, a low since early April, despite the ECB announcing a change to its inflation target. One of the key policy changes resulting from a framework review, similar to the Fed’s recent exercise, was altering the inflation target from “below, but close to, 2%” to a “2% inflation target over the medium term” that is “symmetric.” Treasury yields, down 2.9 bps before the jobless claims update, slipped to down 4.3 bps on the day after the data disappointed. The 7:30 a.m. CT level of 1.27% was higher than the overnight low below 1.25%, the lowest mark since February 16.


Job Openings Slow Pace of Gain but Remain Elevated: Job openings slowed their pace of gain in May, rising just 16k but hitting a new record-high level of 9.21 million.  Openings in education and healthcare (+117k) led the way. After jumping 667k in the past three months to the highest level on record, leisure and hospitality only saw 10k new job openings in May.  Job quitters remained elevated but fell 388k while layoffs fell another 82k to a new record-low level.  With 9.32 million persons reporting as unemployed, the ratio of unemployed persons to job openings fell to 1.01.  Government (0.50), professional services (0.63), manufacturing (0.83), and leisure and hospitality (0.83) all have ratios of less than one unemployed person per job opening. Other evidence, including 15.4 million persons still receiving unemployment payments during the May reference week, point to dysfunction within the labor market.

Fed Officials Increasingly Uneasy with Balance of Inflation Risks, but Not Enough to Warrant Tapering Purchases: The Minutes from the FOMC’s June 15-16 meeting highlighted progress towards the Committee’s economic goals but insufficient progress to warrant changing policy just yet.  While the general economic assessment throughout the Minutes was improved, “the Minutes stated, “The Committee’s standard of ‘substantial further progress’ was generally seen as not having yet been met.” However, enough progress had been made for participants to agree to “begin to discuss their plans for adjusting … asset purchases” in coming meetings. Notwithstanding the improvement, officials again “reiterated their intention to provide notice well in advance” of any changes. Participants appear split on the technicalities of tapering asset purchases once the time is deemed appropriate. “Several participants saw benefits to reducing the pace of [MBS] purchases more quickly or earlier while “Several other participants, however, commented that reducing the pace of Treasury and MBS purchases commensurately was preferable.”

While a growing number of participants saw upside risks to inflation, officials generally remained unalarmed. The Minutes noted, “participants remarked that the actual rise in inflation was larger than anticipated.“  Looking forward, “a substantial majority of participants judged that the risks to their inflation projections were tilted to the upside because of concerns that supply disruptions and labor shortages might linger for longer and might have larger or more persistent effects on prices and wages than they currently assumed.“  Thirteen officials saw the risks to upside inflation versus just five who viewed the risks as broadly balanced and none who saw them to the downside.  However, as it applies to monetary policy, officials coalesced around the conclusion that, “Although inflation had risen more than anticipated, the increase was seen as largely reflecting temporary factors, and participants expected inflation to decline toward the Committee’s 2 percent longer-run objective.”

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