The Market Today
Total Unemployment Claims Plunge 6.2MM as First Effects of Expiration Appear
by Craig Dismuke, Dudley Carter
TODAY’S ECONOMIC DATA
Total Unemployment Claims in All Programs Plunged 6.2MM in the Week of September 11 as First Effects of Expiration Appear: Initial jobless claims in traditional programs rose from 351k to 362k for the week ended September 25, a seven-week high and disappointment relative to expectations for a modest decline to 330k. Continuing claims in those state programs declined by less than expected from 2.82mm to 2.80mm. However, the real story was found further down the page in updates on claims in federal emergency programs. Continuing claims in the PUA program sank 3.8mm during the week ended September 11, from 4.9mm to 1.1mm. Continuing claims in the PEUC program tumbled 2.7mm that week, from 3.6mm to 992k. The combined 6.5mm drop reflects the first effects of the legal expiration of those benefits on September 6. Stating the obvious, those states that didn’t end participation in those programs early, which had also seen a greater share of their populations receiving those benefits, registered the biggest declines (see Chart of the Day). While the state-level employment data has yet to show a significant boost to hiring in those states that ended federal benefits early, some believe these programs lapsing will free up labor supply and help alleviate a worker shortage. While the large drop in total claims occurred prior to the September payroll survey’s reference week, any impact or boost to hiring may not show up until October or later, particularly considering the effects of the Delta variant in the August data.
U.S. 3Q GDP Growth Revised from +6.6% to +6.7%: The U.S. economy grew at an annualized rate of 6.7% in the second quarter, 0.1% better than previously estimated and confirming the transition from recovery to expansion. The underlying revisions in the final release were minor. Personal consumption was nudged up from 11.9% to 12.0%, contributing an extra 0.1% to the headline level. Business investment was unchanged and housing was marginally weaker. Inventories and net trade were slightly smaller drags on growth, conceptually a net negative for 3Q activity. Government spending was nudged lower.
Flood of Fedspeak to Hit on Thursday: A flock of Fed officials are scheduled to speak at various times throughout the day. Following Tuesday’s testimony before the Senate, Fed Chair Powell will appear before the House Financial Services Committee at 9:00 a.m. CT alongside Treasury Secretary Yellen to discuss the monetary and fiscal responses to the pandemic. New York Fed President Williams (9:00 a.m.), Atlanta Bank President Bostic (10:00 a.m.), Philadelphia Fed President Harker (10:30 a.m.), Chicago Fed President Evans (11:30 a.m.), St. Louis Fed President Bullard (12:05 p.m.), and San Francisco Fed President Daly (1:30 p.m.) are also all scheduled to speak.
YESTERDAY’S ECONOMIC NEWS
Pending Home Sales Surged Back in Second Strongest Month Since 2010: Pending home sales surged 8.1% in August, easily beating the 1.4% increase economists expected and more than making up for the cumulative 3.9% drop over the prior two months. The increase was slightly smaller than May’s 8.3% jump which, outside of the initial rebound from pandemic shutdowns last year, was the strongest since April 2010. Strength was evident across all four geographic regions, bounded by a 4.6% advance in the Northeast and a 10.4% jump in the Midwest. The NAR’s chief economist said, “Rising inventory and moderating price conditions are bringing buyers back to the market” while noting that, “Affordability…remains challenging.” Although still historically low, the recent slowdown in sales has relieved some pressure on inventories. While Tuesday’s home price reports showed another record for annual gains, the pace of monthly increases has moderated from stronger rates earlier in the spring.
Fed Chair Powell Joins Panel Discussion Alongside Heads of Central Banks of Japan, England, and the Eurozone: Chair Powell repeated Wednesday that supply-side constraints, exacerbated by the Delta wave, are creating tension within the Fed’s dual mandate by keeping a lid on the economic recovery while lifting inflation by more and for longer than expected. He believes that inflation will fall from current high levels as supply-side pressures abate, but admitted, “It’s very difficult to say how big the effects will be in the meantime or how long they last.” It’s “frustrating to see the bottlenecks and supply chain problems not getting better, in fact at the margin apparently getting a little bit worse,” he noted, adding that “We see [it] continuing into next year probably and holding inflation up longer than we had thought.” He doesn’t expect it will “lead to a new inflation regime, in which inflation remains high year after year,” however, but is watching longer-term inflation expectations for signs of an upward drift away from the Fed’s 2% target.
Harker Supports Taper Plans, Then Can “Think About” Rate Hikes: Philadelphia President Harker said, “I am in the camp that believes it will soon be time to begin slowly and methodically — frankly, boringly — tapering our $120 billion in monthly [bond] purchases,” because the problems currently plaguing the economy are “on the supply side, not with demand.” Looking ahead, Harker noted, “After we taper our asset purchases, we can begin to think about raising the federal funds rate. But I wouldn’t expect any hikes to interest rates until late next year or early 2023.” He forecasts inflation will be “a bit over” the Fed’s 2% target on average next year and “right at” 2% in 2023.
Daly Likely to Support Taper But Doesn’t See a Hike in 2022: San Francisco Fed Bank President Daly, a current year voter, said she supports tapering monthly asset purchases this year but noted “we are a long way” from raising the fed funds rate. She’s pleased to see some moderation in monthly inflation momentum but expects the above-target annual readings to continue into 2022 due to “ongoing disruptions from the pandemic and the delta variant.” Nonetheless, she said economic conditions are unlikely to warrant a rate hike next year, implying she doesn’t anticipate a return to maximum employment until sometime in 2023.
Treasury Yields Receded Wednesday Following Four-Day Spike, Recover Higher on Thursday: U.S. equities recovered Wednesday but ended near session lows with tech stocks flagging as Treasury yields trimmed their overnight declines during stock market hours. Longer yields had receded overnight after a sharp four-day rise, driven by the Fed’s signal that it would likely soon taper asset purchases and could contemplate a rate hike as early as next year. The jump since last Wednesday’s decision had pushed the 2-year yield up to its highest level since March 2020, the 5-year yield to its highest level since February 2020, and the 10-year yield to a three-month high. Momentum faded on Wednesday, however, with yields running into technical resistance. The 2-year yield slipped 1.2 bps to 0.29%. Medium and longer maturities had turned higher throughout the day but ultimately reversed back lower late in the session. The 5-year yield closed back below 1.00%, down 2.9 bps to 0.991%. The 10-year yield edged 2.1 bps lower to 1.52%. The shortest bills continued to move around in response to concerns about a possible government shutdown, despite signs a stopgap bill could pass Congress and be signed by the President prior to tonight’s midnight deadline. Nasdaq futures had led the overnight rebound for equities but faded to the back of the pack on the midday move up in Treasury yields. While the S&P 500 and Dow rose 0.2% and 0.3%, respectively, the Nasdaq ended down 0.2%.
U.S. equity futures had moved higher by around 0.5% shortly after 6 a.m. CT despite mixed sessions in Asia and Europe and Treasury yields nudging higher after Wednesday declines. Stocks in China rose Thursday after mixed PMI data showed a recovery in services activity in September but continued weakness for manufacturing. The official Non-manufacturing PMI jumped from 47.5 to 53.2 while two separate manufacturing PMIs diverged, one signaling a slight contraction while another pointed to no change. Asian stocks fell roughly 2.5% in September and more than 5% in the third quarter. Stocks around Europe were trading in different directions with the U.K. FTSE 100 leading those indexes that had improved. The final of three estimates for 2Q GDP revised unannualized quarterly growth up from 4.8% to 5.5%. Europe’s Stoxx 600 had gained 0.3%, on track for a 3.1% September decline and a small gain for the quarter. While annual inflation rates in Europe remained high in September releases, sovereign yields were mixed and little changed across the region. Prior to the third release of U.S. 3Q GDP and update on jobless claims, equity futures pared their gains to around 0.3% and the Treasury curve was back near its highs of the day. The 5-year yield was 2.6 bps higher to 1.02% with the 10-year yield up 2.3 bps to 1.54%.