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  • Weak U.S. economic data undercuts stocks
  • Unemployment bonus expires today with no progress in Washington negotiations
  • Final-July U.S. consumer sentiment expected to be revised mildly lower
  • Core inflation expected unchanged even as inflation expectations reach 5-month high


Weak U.S. economic data undercuts stocks 
— The U.S. stock market sold off sharply Thursday morning after the release of weak U.S. economic data, but was able to partially recover later in the day on expectations for strong tech-company results.  Indeed, after Thursday’s close, the big-name technology stocks of Apple, Amazon, and Google all beat quarterly earnings estimates and moved higher in after-hours trading.

The S&P 500 index on Thursday closed the day mildly lower by -0.4% after having been down as much as -1.7% on the morning low.  The Nasdaq 100 index on Thursday closed the day moderately higher by +0.49%.

Yesterday’s Q2 U.S. GDP report of -32.9% (q/q annualized) was not quite as bad as expectations of -34.5%, but was still the worst quarter by far in post-war history.  Q2 GDP fell by -9.5% on a quarter-on-quarter basis, which produced a first-half-2020 peak-to-trough decline of -10.8%.  That decline was worse than the commonly-accepted definition of a depression of a GDP decline of more than -10%.

The markets might have been willing to overlook what everyone knew would be an unmitigated disaster, but yesterday’s unemployment claims data was also weak and suggested a slow U.S. economic recovery.  Weekly initial unemployment claims rose by +12,000 to 1.434 million, which was the second consecutive week of rising claims.  Also, continuing claims rose +867,000 to 17.018 million, showing a weaker labor market than expectations for a rise to 16.200 million.  

The rise in unemployment claims illustrated the backsliding in the labor market being caused by the second Covid wave that is sweeping across the U.S., and that is much worse than the first wave.  The only good news is that the 5-day average of new U.S. Covid cases has been fluctuating between about 60,000-70,000 cases in the past two weeks, suggesting that recent safety restrictions have at least prevented a surge in new cases above 70,000 per day.

Unemployment bonus expires today with no progress in Washington negotiations — The federal unemployment bonus expires today, meaning millions of people will lose the extra $600 per week they have been receiving over the past several months.  That will put a new hole in consumer spending and will undercut the economic recovery.

Negotiations in Washington have made no real progress.  Now that the unemployment bonus has lapsed, the only real deadline is the Senate’s desire to leave for their August recess next Friday.  The House was originally scheduled to leave on their recess today, but House Speaker Pelosi said that House members will be available to vote on a new pandemic bill if one becomes available.

Senate Majority Leader McConnell on Thursday tried to bring unemployment extension legislation to the Senate floor but was blocked by Democrats who oppose a piece-meal approach to a new pandemic bill.  Senator Romney offered a bill that would give a 3-month extension of unemployment benefits of $500 per week in August, $400 per week in September, and $300 per week in October, with an option for states to substitute an 80% wage replacement payment.

House Democrats want an extension of the current $600 per week through year-end, while the Republican plan is currently offering $200 per week with a switch to a 75% wage replacement system in three months.

On the other contentious issue, Democrats have so far flatly refused to accept Mr. McConnell’s demand for a Covid liability shield for businesses, schools, and other organizations.

Final-July U.S. consumer sentiment expected to be revised mildly lower — The consensus is for today’s final-July University of Michigan U.S. consumer sentiment index to be revised mildly lower by -0.3 to 72.9, producing an overall -5.2 point drop from June, rather than the preliminary drop of -4.9 points.  The Conference Board’s U.S. consumer confidence index in July fell by -5.7 points to 92.6.

U.S. consumer confidence took a hit in July due to the resurgence of the Covid pandemic that began in mid-June.  U.S. consumers are now aware that it will be a long haul before the pandemic is over, and they have turned more cautious.  There is also renewed concern about the labor market as shutdowns continue and as broad swathes of the U.S. economy remain largely shut down, such as travel and entertainment.  Initial unemployment claims have risen for the past two weeks, illustrating that the labor market is deteriorating rather than improving.

Core inflation expected unchanged even as inflation expectations reach 5-month high — The consensus is for today’s June PCE deflator to rise to +0.9% y/y from May’s 4-year low of +0.5%.  The headline deflator is expected to rise mainly because of the sharp recovery in crude oil prices seen in May and June.  Meanwhile, the June core PCE deflator is expected to be unchanged from the 9-year low of +1.0% y/y seen in April and May.  On a 3-month annualized basis, the core PCE deflator in May was down -1.5%.

Despite the -10.8% plunge in the economy in the first half of 2020, the markets are not convinced that deflation is around the corner.  In fact, inflation expectations have steadily risen in the past several months and are currently only mildly below where they were before the pandemic.  The 10-year breakeven inflation expectations rate posted a panic low of 0.47% in March but has since recovered to 1.52%, which is near a 5-month high and is only 18 bp below the average of about 1.70% seen before the pandemic.

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