Baker Market Update – wk210618

As we close out another hot and humid week in many parts of the country, all eyes were on the Federal Reserve’s June meeting that concluded earlier this week. Was this the meeting where the Fed changed from “thinking about thinking about raising rates” to “thinking about raising rates?” As expected, the policymakers at the Fed unanimously left its benchmark short-term borrowing rate anchored near zero. Chairman Powell stated during his press conference that “you can think of this meeting that we had as the ‘talking about talking about’ meeting.” This statement from Powell came after the Fed raised its expectations for inflation this year and indicated that rate hikes could come as soon as 2023. However, the central bank gave no indication as to when it will begin cutting back on its aggressive bond-buying program.

Chairman Powell continued to stick to the theme in which the recent inflation will be transitory as he stated that “our expectation is these high inflation readings now will abate.” Additionally, he downplayed the dot plot saying it is “not a great forecaster of future rates moves.” Those of you that have followed the Fed’s dot plot since its inception in 2012 are probably thinking “tell us something we don’t already know Mr. Powell.” In the event you put a lot of faith into the dot plot, the latest release now has 12 out of 17 members wanting a rate hike before year-end 2023 vs. only 7 out of 17 in March. The median implied Fed Funds Rate by year-end 2023 is now 0.625% vs. 0.125% in March as this would imply at least two 25bp rate hikes by year-end 2023.

A little bit of a surprise came in yesterday’s weekly release of initial jobless claims as claims totaled 412K, an increase of 37K from the previous week and higher than the 360K estimate. This week’s release put an end to a six-week streak of improvements, even as economic activity ramped further. In the coming weeks, 25 states have either ended or are scheduled to end the enhanced federal unemployment benefits ahead of their September 6th expiration date. The early termination of the unemployment benefits is scheduled to affect an estimated 4 million people.

The 2-year Treasury yield has risen steadily since Chairman Powell’s press conference on Wednesday as the Fed implied that it might raise rates earlier than it had previously expected. The 2-year currently sits at 26bps, up from 15bps earlier in the week. The 10-year Treasury yield fell today where it currently sits at 1.46%, down a few bps from earlier in the week. Stocks have had a tough week as they are on pace to post their worst week since January. The Dow Jones Industrial Average is down 400 points in early trading this morning as the stock market doesn’t appear to be liking this week’s news out of the Fed. Have a great weekend and I know I’m not even thinking about thinking about going outside unless there is a pool involved!

Baker Market Update – wk210604

Happy Friday to everyone! As our friend Lester rode off into the sunset last Friday (I assume on a horse named Bullet), I will be with you for this week’s economic review. Let’s first discuss the movement of Dogecoin and its potential effect on the Fed’s outlook for interest rates…kidding! All eyes were on the monthly jobs data released this morning. 559K jobs were added in the month of May, while expectations were for 675K. Today’s print was lower than expected, but not as big of a miss as we saw last month. Many anticipate it will take several months for the labor market to continue to work itself out and we shouldn’t expect to see one to two million jobs added every month, it will be a gradual process. The unemployment rate fell from 6.1% to 5.8%, slightly lower than expectation for a 5.9% rate.

The labor-force participation rate, or the share of people working or seeking work, down 0.1% from 61.7% to 61.6%. This seems to indicate that people are holding back and not reentering the workforce despite the economy re-opening. Other notable data in this morning’s jobs report included the 0.5% month-over-month increase in average hourly earnings, well above the estimate of a 0.2% increase. The rising demand for labor associated with the recovery from the pandemic seems to be putting upward pressure on wages.

Yesterday, the weekly initial jobless claims fell to 385,000, which was the first time below 400,000 since March 2020. The claims numbers are expected to continue their decline as more workers return to their jobs and as states curtail Federal unemployment benefits before, they are set to expire in September of this year.

Earlier this week, the May ISM Manufacturing registered 61.2%, an increase of 0.5% form the April reading of 60.7%. This figure indicates expansion in the overall economy for the twelfth month in a row after contraction in April 2020. The manufacturing sector is having its challenges with meeting the increasing levels of demand. Material shortages and rising commodity prices continue to affect manufacturers’ ability to keep up with the increased level of demand.

The 10-year treasury yield remained relatively flat this morning and currently sits at 1.60% with the long bond at 2.30%. Stocks are up early, with the Dow Jones Industrial Average up 124 points at opening.

Until we meet again next Friday…be careful out there!