Struggling Stimulus Bill Sours Risk-On Mood
While Republicans appeared to have reached a ‘fundamental agreement” for a $1 trillion stimulus package, time is running short for all the legislative procedures to be accomplished before month-end. So it looks like some provisions of earlier stimulus bills, like the supplementary unemployment benefits, will expire at least briefly before something similar is reinstated. While a payroll tax cut didn’t make it in the Republican’s agreement it does look like another round of $1,200 stimulus checks will be part of the bill. Still there is a lot to be hashed out before any of it becomes law. The various measures in the agreement have to be put into legislative text and passed in the Senate which can be time-consuming in itself but the biggest hurdle will be coming to agreement with House Dems who passed a $3.5 trillion package weeks ago. This legislative logjam has turned the risk-on tone sour with equities struggling and Treasuries continuing to move to the lower end of the multi-month range or below in the case of the 5yr note. Lastly, China ordered a US consulate in Chengdu to close in diplomatic tit-for-tat and that has soured the tone as well.
Given the absence of top-tier economic releases this week we are turning once again to two of the high frequency data points that are giving us an early tell on the impact spiking virus cases are having and it looks to be slowing the economic rebound. And that slowing could be even more concerning just as federal aid winds down as noted above. First, initial jobless claims rose to 1.42 million in the week ended July 18, up 109,000 from the prior period and making it the first advance since March 27. It also exceeded the 1.3 million expectation. On a non-seasonally adjusted basis, claims actually declined. The Labor Department said its seasonal factors had assumed an unadjusted decline of about 247,000 initial claims while the count actually fell by 142,000. So some of the increase in claims can be attributed to seasonal adjustment issues but there has been a clear slowing in the pace of improvement since mid-June and that is reflected in the graph below.
Continuing claims, which lag initial claims and measures the overall pool of recipients receiving aid in state programs, fell to 16.2 million from 17.3 million. Bloomberg consensus expectations were for a 17.1 million reading so a somewhat better outcome than expected. The insured unemployment rate fell from 11.8% to 11.1% which puts it right on the BLS rate of 11.1%. The BLS rate typically runs 2 to 3 points higher so expect an increase in that rate when the July jobs report prints on August 7.
Bloomberg Consumer Comfort Reading Resumes Uptrend
Another high frequency report we’ve been watching is the Bloomberg Consumer Comfort reading that comes out weekly. While the more well-known Conference Board’s Consumer Confidence and University of Michigan Consumer Sentiment readings get more attention, they are monthly reports so any changes in sentiment brought on by rising virus cases will be slow to be reflected. Yesterday’s Bloomberg report showed consumer confidence is actually resuming an uptrend after taking a dip two weeks ago. So, while case counts continue higher it looks like sentiment continues to improve from the May lows and that could bode well for future consumption and equity prices. It may be too early to say, but so far, the consumer seems to be hanging tough.
FNMA 30yr MBS Yield Spread Continues to Tighten
We’ve been showing on and off again the FNMA 30yr MBS yield spread to a blend of 5yr and 10yr Treasuries since the pandemic-inspired market meltdown in March. As the graph shows MBS yield spreads spiked as panic selling sent prices plunging. But as is also shown, prices have continued to improve since then and now yield spreads have moved below the one-year average of 103bps to 98bps. For those with a stable of 30yr MBS pools in portfolio and with concerns over higher prepayments it may be an opportune time to scour your holdings and perhaps swap out of more prepayment-sensitive pools to newer, lower coupon issues and take advantage of the multi-month MBS rally.
|Treasury Curve||Today||Chg Last Wk.||LIBOR Rates||Today||Chg Last Wk.||FF/Prime||Rate||Swap Rates||Rate|
|3 Month||0.09%||-0.02%||1 Mo LIBOR||0.18%||-0.01%||FF Target Rate||0.00%-0.25%||3 Year||0.218%|
|6 Month||0.12%||-0.02%||2 Mo LIBOR||0.26%||-0.01%||Prime Rate||3.25%||5 Year||0.302%|
|2 Year||0.15%||UNCH||6 Mo LIBOR||0.33%||-0.02%||IOER||0.10%||10 Year||0.572%|
|10 Year||0.58%||-0.05%||12 Mo LIBOR||0.46%||-0.03%||SOFR||0.10%|