After three weeks of drifting higher, treasury yields were largely unchanged given the shortened holiday week. UST maturities five years and longer all saw flat or slightly lower yields and were effectively range bound within 5 to 10 basis points. The two-year part of the curve edged higher five basis points is currently sitting at 38bps. Meanwhile US equities should finish the week higher as all three major indices saw rallied this week. The economic calendar was plentiful as key reports for inflation and jobs were released along with the FOMC’s Minutes from their September meeting.
Looking at the labor markets, on Tuesday the monthly JOLTS report (Job Opening and Labor Turnover survey) was released, indicating that US job openings continue to remain at record highs (11mm) albeit a slight decline in August (10.4mm). More people continue to voluntarily leave their jobs as the quit rate is currently at a record high of 2.9%. Recent wage increases as well as other sign-on incentives are creating more turnover. This trend continues to illustrate the mismatch between the supply of labor versus demand in the economy. For example, for every unemployed American there are currently 1.2 job openings. On Thursday weekly Initial Jobless claims fell to the lowest level since March of 2020 as employers continue to retain workers in a competitive labor market. Still, the September payrolls report released last week was the slowest month of job creation this year (194k) unfortunately as the end of pandemic unemployment benefits and school year beginning did not lead to any significant increases in hiring. The unemployment rate currently stands at 4.8% as the labor force participation remained depressed from people leaving the labor force due to the pandemic. The Fed’s long run goal of eventually returning to pre-pandemic levels of approximately 3.5% which is not expected to occur until 2023.
Turning to inflation, the headline Consumer Price Index (CPI) released on Wednesday indicated further price pressures in the economy as it came in above analyst expectations. The month-over-month headline rate increased 0.4% and the year-over-year increased to 5.4% matching the largest annual gain since 2008. When stripping out the more volatile items such as food and energy, core inflation increased 0.2% and 4.0% (M-O-M/Y-O-Y). The current shipping and transportation challenges, higher commodity prices and rising wages continue to drive these factors. The report will reinforce the Fed’s aim to soon start it’s tapering of asset purchases which is likely to be around $15 billion per month ($10 UST / $5 Agency MBS). Given those taper expectations that would put the $120 billion monthly purchase program down to zero at some point later next year.
Retail sales were released Friday and unexpectedly increased last month in a broad advance as strong demand remains for merchandise in spite of recent supply chain challenges. Retail sales advanced 0.7%, much stronger than the 0.2% estimated drop by economics. This figure will wrap a quarter in which consumer spending will likely slow from the second quarter (12%) as the fourth quarter will be key as the holiday season approaches.
Next week’s is fairly light looking at the economic calendar. Key releases for next week will be the Building Permits on Tuesday, Crude Oil Inventories on Wednesday and Existing Home Sales and the Philadelphia Fed Manufacturing Index on Thursday.
Transitory or not transitory, that is the question. Fed officials remain in a challenging position as price pressures continue beyond Summer and have recently flown into other categories unrelated to re-opening of the economy.
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