The Market Today
Unemployment Insurance Program Data Disappoints Expectations for Improving Labor Market
by Craig Dismuke, Dudley Carter
Monitoring a Muted Day of Virus Headlines: While some states continue to see cases accelerate, New York’s outbreak continues to recede, evidenced by its 0.2% growth rate and a new low for its positivity metric. Governor Cuomo, who said Friday will mark his final daily press briefing, announced that New York City was on track to enter phase two on Monday. Vice President Pence seemed to dismiss upticks in some states, saying only two percent of counties across the country are seeing a significant increase in their case numbers. Cinemark announced that it would reopen all of its U.S. theaters by July 17. Outside of the U.S., Chile extended and added new areas to its quarantine, Germany extended a ban on large events to October, and the president of Honduras was hospitalized with the virus.
Initial Claims Fail to Drop As-Expected: Initial jobless claims for the week ending June 13 only dropped 58k to 1.508 million. They were expected to decline to 1.290 million. The virus has now resulted in a thirteen-week period that has seen 45.738 million new applications for unemployment benefits.
Continuing Claims Show Less Evidence Than Expected of Return to Labor Market: Those continuing to file for unemployment benefits fell from 20.61 million to 20.54 million, a very disappointing decline of just 62k. Economists expected continuing claims to decline by more than 1.0 million. The continuing claims data have arguably been a better predictor for changes in nonfarm payrolls for a variety of technical and methodological reasons. As such, the result was quite disappointing. However, once again there was broad improvement but a handful of states dragged down the overall results. There were 37 states that saw their number of people continuing to file for unemployment decline, only thirteen which saw an increase. Of those thirteen states, California’s 322k increase accounted for 54% of the total. Oregon posted the second-worst results, for a third consecutive week, with a 144k increase.
Another Sign of Improvement from a Regional Fed Report: The Philadelphia Fed’s report on regional manufacturing activity joined the New York Fed’s report (released Monday) in handily beating expectations. The headline index rose from -43.1 to +27.5, a 70.6 point gain and the largest monthly gain on record. The report showed broad improvement in every category, including a 42-point jump in the new orders index. While the employment index improved, it did remain in negative territory. However, the strength in the most recent regional Fed reports is encouraging.
Leading Index and Fedspeak: At 9:00 a.m. CT, the Conference Board will release its Leading Index report for the month of May which is expected to rebound from negative territory to positive. Cleveland Fed Bank President Mester (11:15 a.m.), St. Louis Bank President Bullard (1:00 p.m.), and San Francisco Bank President Daly (6:00 p.m.) are all scheduled to speak today.
Equities Took a Breather: Showing little response to mixed housing data ahead of the open, U.S. equities turned negative early following more discouraging updates on virus outbreaks in a couple of key U.S. states. Equities made discernible moves lower on separate headlines showing a record surge in virus hospitalizations in Texas and an above-average daily increase in new infections in Florida. Stocks slowly recovered, climbing throughout the second half of Fed Chair Powell’s semiannual Congressional testimony. Consistent with his message to senators on Tuesday, Fed Chair Powell told members of the House Financial Services Committee, “We at the Fed need to keep our foot on the gas until we’re really sure that we’re through this, and that’s certainly our intention. I think you may find there’s more for you to do as well.”
Caution Came Back After Three-Day Hiatus: The intraday recovery, however, was cut short and stocks slid into the close to break a three-day win streak. The push and pull between economic optimism and worries about the virus re-accelerating has been the major market story since early last week. In addition to the developments mentioned above, Texas reported another above-average increase in cases and Arizona recorded a record for new hospitalizations. For the day, the S&P 500 slipped 0.4%, splitting a larger 0.7% loss for the Dow and a small 0.2% gain for the Nasdaq. Treasury yields closed marginally lower after an up-and-down day, with the 2-year yield falling 0.4 bps as the 10-year yield shed 1.5 bps.
Equities Remain Weak as Caution Persists: Global equities remain weak Thursday after wavering Wednesday to finish essentially flat in the aggregate. Investors have taken little solace in comments overnight from China’s top virus expert claiming that the new group of infections in Beijing appeared to have already peaked and be under control. Those cases have combined with worrisome virus trends in some U.S. states to bring caution back into the markets since early last week. Concerns that new infections could snuff out a nascent economic recovery have caused risk assets to wobble and pulled Treasury yields back down into previous ranges. Despite some signs of recovery, evidence of widespread global destruction continues to roll in and policy makers remain active in supporting their economies.
Bank of England Expands Bond-Buying as More Data Confirms Deep Global Contraction: Before the notorious weekly U.S. jobless claims report was released, data showed New Zealand’s economy contracted 1.6% in the first quarter, its worst quarter since 1991, and unemployment in Australia jumped to 7.1%, the highest level of joblessness since 2001. Keeping up with their counterparts, the Bank of England left rates unchanged in their latest decision but, as expected, expanded their purchases of U.K. government bonds by 100 billion pounds to 745 billion pounds, describing the outlook as “unusually uncertain.” Just before the jobless claims data were released, equity futures were off by more than 1% and the 10-year Treasury yield had dropped 3.8 bps, both back near their respective lows for the day after an earlier recovery. With the sting of disappointing claims somewhat offset by the surprisingly strong regional Fed report, markets mostly held their positions.
Not Much News in the Fed Headlines: The second half of Fed Chair Powell’s semiannual Congressional testimony mirrored closely his appearance before the Senate on Tuesday. The Chair rattled off myriad data points confirming a historic downturn and stressed that both the Fed and Congress will likely need to do more to support a slow and uncertain recovery for the economy. Cleveland Fed President Mester didn’t break any news or veer far from the consensus messaging in her remarks, although she said she expects more fiscal support will be needed for state and local governments.