The Market Today
Yellen Stirs Markets; ADP Projects Accelerating Labor Recovery
by Craig Dismuke, Dudley Carter
ADP Continued Job Recovery but Weaker Rate of Acceleration Than Expected: The economy added 742k private payrolls in April according to data from ADP, slightly disappointing expectations albeit a continued acceleration in the monthly rate of recovery. April saw the best pace of job recovery since last September. The goods-producing sector recovered 106k jobs while the service sectors added the most jobs since last June. As restaurants and travel activities continue to resume, the leisure/hospitality sector added 237k private jobs, the best pace of any sector although it continues to have 3.5 million missing jobs. After losing 21.4 million private sector jobs at the nadir of the pandemic, ADP now reports 8.27 million payrolls remain missing.
Mortgage Applications: Mortgage applications for the week ending April 30 fell 0.9% as the average 30-year mortgage rate inched up 1 bp to 3.18%. Refi apps managed to gain 0.1% after having declined in 12 of the last 15 reports. Over that period, refis are down 32%. Purchase apps fell 2.5% during the reference week and are now down 21% since mid-January.
Service Sector Expected to Remain Steady in April PMIs: The April service sector PMIs from Markit (8:45 a.m. CT) and the ISM (9:00 a.m.) are expected to show just fractional improvement from March’s elevated levels.
Fedspeak: Three Fed officials are slated to make comments today: Chicago’s Evans (8:30 a.m. CT), Boston’s Rosengren (10:00 a.m.), and Cleveland’s Mester (11:00 a.m.).
TREASURY SECRETARY YELLEN OPINES ON RATE ENVIRONMENT
Yellen Part 1 – Pre-Recorded: Fiscal Spending Proposals Are Necessary but May Necessitate Higher Rates: Treasury Secretary Yellen got markets worked up a bit on Tuesday with remarks, previously recorded on Monday, related to interest rates and the government’s push to spend $4 trillion on U.S. infrastructure projects and American families. Addressing the president’s Build Back Better proposals, Yellen said, “These are investments our economy needs to be competitive and to be productive, and I think our economy will grow faster because of them, …This has a demand effect on the economy but really it’s going to have important supply effects on the economy.” However, markets responded to the former Fed Chairwoman’s remark that, “It may be that interest rates will have to rise somewhat to make sure our economy doesn’t overheat.”
Yellen Part 2 – Live: In live remarks later in the day, Yellen said of her comment on interest rate increases, “Let me be clear it’s not something I’m predicting or recommending.” If inflation does become a problem, however, she is confident in the Fed’s tools and abilities to address it.
CORONAVIRUS UPDATE (VS Coronavirus Chartbook – PDF)
24 HOURS OF MARKET ACTIVITY
Stock Sell-Off Intensified and Treasury Yields Reversed Higher After Yellen Says Rates May Need to Rise
What started as a calm overnight session quickly became a disappointing day for long equity investors. A slide in tech shares began a couple of hours ahead of U.S. trading and continued for a couple of hours after the opening bell. The downward reversal pulled the 10-year Treasury yield back down below Monday’s closing level. Shortly after 10 a.m. CT, equities fell to new lows while Treasury yields reversed higher. The catalyst was a comment from Treasury Secretary Yellen that interest rates may have to move up to keep economic activity from overheating. Her comments dragged the Nasdaq down by nearly 3% and sent the 10-year Treasury yield back up near unchanged for the day, erasing an earlier decline of more than 4 bps. By the close, the Nasdaq had dropped 1.9% while the S&P 500 had shed 0.7%. Although Yellen later clarified that she wasn’t expecting inflation to be a problem or calling for interest rate increases, the 10-year yield ended down just 0.5 bps at 1.59%.
A partial equity recovery was underway Wednesday before ADP announced its April job’s estimate, lifting stocks across Europe and giving U.S. futures a boost. The Stoxx Europe 600 was 1.4% higher amid corporate earnings and after the bloc-wide composite PMI for April was nudged up 0.1 points in revision to 53.8, a high back to July. Tech stocks led yesterday’s declines and were driving the gains ahead of the ADP data. Nasdaq futures were up 0.6% while contracts tracking the S&P 500 had gained 0.4%. Treasury yields were also higher but trailing larger declines in Europe. The 10-year Treasury yield had added 1.8 bps at 7:13 a.m. CT while Germany’s 10-year Bund was trading up 2.1 bps. The slight miss for the ADP jobs estimate had little impact, with the 10-year yield holding steady around 1.61%.
Factory Orders Data Include Favorable Revisions to Initial Estimates for Business Equipment Activity: The March Factory Orders report included mixed results for overall activity but favorable revisions to initial estimates for durable goods and the categories that track business investment in equipment. Total factory orders and orders excluding transportation categories rose 1.1% and 1.7%, respectively, coming up just shy of expectations. However, February’s declines were less severe than previously projected. Included in the report were 0.3% positive revisions to durable goods orders (+0.8%) and durable goods orders excluding transportation activity (+1.9%). Encouragingly, the estimated gains for capital goods orders and shipments were notched up from 0.9% to 1.2% and from 1.3% to 1.6%, respectively, continuing a solid run for business investment in equipment.
San Francisco Fed President Daly said Tuesday that the economic outlook has brightened but activity remains far from its pre-pandemic state. She said “a little inflation would be good for us” and believes the coming rise on base effects and bottlenecks will be temporary. Therefore, she believes it’s too soon for officials to discuss tapering asset purchases.
President Kaplan from Dallas, on the other hand, said, “I think it will make sense to at least start discussing how we would go about adjusting these purchases and start having those discussions sooner rather than later.” “A lot has changed since December,” Kaplan said, adding that “At least for me, I have better visibility and have more confidence that we can at least see light at the end of the tunnel.” Kaplan has said, and repeated again on Tuesday, that he’s concerned about the possible “costs and side effects” of extremely easy monetary policy on asset valuations.