- Fed officials push back on market’s inflation fears
- Claims expected to show further improvement in the U.S. labor market
Fed officials push back on market’s inflation fears — The stock market on Wednesday stabilized after Tuesday’s sharp sell-off as Fed officials made a concerted effort to alleviate market concerns about inflation and higher interest rates.
The S&P on Wednesday closed slightly higher by +0.07% after Tuesday’s -0.67% decline. The Nasdaq 100 index on Wednesday closed -0.30% for the fourth consecutive loss, but remained well above Tuesday’s 1-month low.
The stock market on Wednesday gained support after Ms. Yellen late Tuesday walked back her comment from earlier in the day that interest rates may “have to rise somewhat to make sure our economy doesn’t overheat.” She said that higher interest rates are “not something I’m predicting or recommending.”
A slew of Fed officials on Wednesday then tried to reassure the markets that the U.S. is not headed for a sustained burst of inflation that might require the Fed to start raising interest rates or tapering QE sooner than expected.
New York Fed President Williams said on Wednesday he doesn’t see higher asset valuations in the stock market or the housing market as being a significant risk for financial stability right now that would argue for dialing back bond purchases. Minneapolis Fed President Kashkari said the Fed shouldn’t cut off the jobs recovery prematurely with roughly eight million Americans still out of work.
For his part, Chicago Fed President Evans said monetary policy would be accommodative for “some time,” and the risk of an outbreak of accelerating inflation is remote. Finally, Cleveland Fed President Mester said she “wouldn’t consider the increase in inflation this year to be the type of sustainable increase needed to meet the forward guidance on our policy rate.”
Despite those comments, the 10-year breakeven inflation expectations rate on Wednesday climbed to a fresh 8-year high of 2.474% and finished the day up +3.6 bp at 2.466%. The markets in the past week have become more concerned about inflation with the rise in various inflation measures. The ISM manufacturing prices-paid index on Monday soared by +4.0 points to a 13-year high of 89.6. Last Friday, the March PCE deflator on a 3-month annualized basis rose by +4.3% and the core deflator rose by +2.6%, both well above the Fed’s +2.0% inflation target.
Despite all the recent press attention about higher inflation and interest rates, the federal funds futures market has shown little net change in the past 1-1/2 weeks. The federal funds futures market is still not fully discounting the Fed’s first +25 bp rate hike until early 2023.
Indeed, the Fed’s reassurances seem to be working since the 2-year T-note yield yesterday eased to a 2-week low of 0.15%. Meanwhile, the 10-year T-note yield yesterday closed at 1.57%, down by -20 bp from the late-March 15-month high of 1.77%.
The recent decline in the 10-year yield suggests that T-note investors are not overly worried about inflation or higher interest rates, regardless of the recent media attention and the 8-year high in the 10-year breakeven rate.
Claims expected to show further improvement in the U.S. labor market — Today’s unemployment claims report is expected to show a continued improvement in the labor market. The consensus is for today’s initial claims report to show a decline of -18,000 to 535,000, adding to last week’s decline of -13,000 to 553,000. Meanwhile, continuing claims are expected to fall -40,000 to 3.620 million, more than reversing last week’s rise of +9,000 to 3.660 million.
Despite the recent improvement in the labor market, claims are still well above their pre-pandemic levels. Initial claims are still 337,000 above their pre-pandemic level, while continuing claims are 1.952 million above their pre-pandemic level. That means that there are still 1.95 million more people on the unemployment rolls than before the pandemic.
On the labor front, the markets are mainly looking ahead to Friday’s April unemployment report. The consensus is for Friday’s April payroll report to show a sharp increase of +995,000. Payroll growth was modest at +233,000 in January, but then rose to +468,000 in February and surged by +916,000 in March, producing a 3-month average monthly gain of +692,000.
Job growth is picking up quickly now that the pandemic is fading and more businesses are reopening. Restaurants, retail stores, and travel are making a come-back and are hiring. Still, payrolls need to rise by another 8.4 million jobs to get back to the record high seen in February 2020 before the pandemic devastated the labor market.
Yesterday’s April ADP jobs report showed a +742,000 rise, which was encouraging although weaker than the consensus of +860,000. ADP jobs in the first four months of this year have shown a monthly average increase of +421,000.
The consensus is for Friday’s April unemployment rate to fall by -0.3 points to 5.7%, which would be a 13-month low. Still, the expected unemployment rate of 5.7% would be well above the pre-pandemic record low of 3.5% seen in late 2019 and in February 2020. The unemployment rate is likely to fall more slowly in coming months because more people will be coming back into the labor market as jobs reappear.
