As Case Counts Increase Treasury Yields Move Lower
The continued rise in virus cases has knocked the momentum out of stocks this week, especially with limited economic releases to divert attention. And that seems to be the case this morning with futures pointing to a lower open for stocks while Treasury yields dip to levels last seen nearly three months ago. We do get June PPI this morning, but that will come and go without much of a ripple. The more consequential CPI report will be released next Tuesday and that will garner more attention. That report is expected to show a significant bump in the overall reading of 0.6% for the month bringing the YoY rate to 0.5% from 0.1% as food and energy both are in for healthy increases. The core rate, ex-food and energy is expected to increase 0.1% for the month and 1.1% YoY versus 1.2% in May. So, while the overall rate may move away from zero, the more important core level should remain docile and well under the Fed’s 2% target. Inflation will not hinder the Fed in keeping its very accommodative posture. In the meantime, case counts will continue to be the primary market driver today and next week.
Given the dearth of economic releases this week we’re going to focus on two of the high frequency data points that give us an early tell on the impact spiking virus cases are having in slowing the economic rebound. The first, Initial Jobless Claims, declined last week by more than expected, falling 99,000 — the most in a month — to 1.314 million in the week ended July 4. The Bloomberg consensus called for 1.375 million. The recent easing in layoffs is a welcome respite for the labor market, but the threat of future job cuts looms large as companies deal with depressed demand and fading government support. Wells Fargo is preparing to cut thousands of jobs starting later this year and could ultimately eliminate tens of thousands of positions. United Airlines notified about half of its U.S. workforce — some 36,000 employees — that their jobs are at risk after federal payroll aid expires at the end of September.
Continuing claims — the total number claiming ongoing unemployment benefits — declined from 18.8 million to 18.1 million in the week ended June 27, beating the Bloomberg consensus of 18.8 million. The insured unemployment rate fell from 12.9% to 12.4% which puts it at odds with the BLS rate of 11.1%. The BLS rate typically runs 2 to 3 points higher so expect an increase in that rate for the July jobs report.
Bloomberg Consumer Comfort Reading Shows
Another high frequency report we’re going to look at is the Bloomberg Consumer Comfort reading that comes out weekly. While the more well-known Conference Board and University of Michigan Consumer Sentiment readings get more attention, they are monthly reports so any changes in sentiment brought on by the rising virus counts will be slow to be reflected. Yesterday’s Bloomberg report showed consumer confidence cooled for the first time in seven weeks no doubt reflecting increased concern with spiking case counts. If those counts continue higher expect these sentiment readings to reflect more concern, tempering economic expectations and that’s part of the reason we’re seeing stocks struggling of late.
Copper/Gold Ratio Rises While Treasury Yield Don’t
From time to time we wonder over to the Copper/Gold Ratio versus the 10-Yr Treasury yield to see if the lockstep relationship is remaining intact. The quick answer to that is no. As shown in the red circle the copper/gold ratio—which is a measure of economic optimism—has been rising (white line) but Treasury yields have been unmoved (blue line). It’s another indication that the Treasury market is taking its cues more from case count growth rather than from economic indicators. Also, the copper/gold story is more global reflecting the better outlook vis-à-vis virus cases while Treasury yields are being driven by U.S.-only case count growth. If some stabilization is achieved, yields are likely to realign with the copper/gold ratio, but that’s not today’s trade.
|Treasury Curve||Today||Chg Last Wk.||LIBOR Rates||Today||Chg Last Wk.||FF/Prime||Rate||Swap Rates||Rate|
|3 Month||0.12%||-0.01%||1 Mo LIBOR||0.19%||+0.01%||FF Target Rate||0.00%-0.25%||3 Year||0.216%|
|6 Month||0.14%||-0.02%||2 Mo LIBOR||0.27%||-0.01%||Prime Rate||3.25%||5 Year||0.305%|
|2 Year||0.14%||-0.04%||6 Mo LIBOR||0.35%||-0.03%||IOER||0.10%||10 Year||0.569%|
|10 Year||0.58%||-0.08%||12 Mo LIBOR||0.49%||-0.07%||SOFR||0.10%|