Baker Market Update Archives

Baker Market Update – wk210924

Jeffrey Caughron September 24, 2021

With a wink and a nod, Federal Reserve Chairman Jerome Powell signaled to markets that a gradual reduction in the size of the Fed’s QE asset purchases could begin in November assuming the September jobs data is “decent.” Moreover, the Chair said a taper that “concludes around the middle of next year is likely to be appropriate.” A little quick, speculative math tells us that this could mean monthly reductions of $10bn in Treasuries and $5bn in MBS which allows for the complete elimination of the $120bn/month purchase program by that time. The willingness to telegraph an endpoint in advance is quite different from the 2013-14 experience when it was a less certain month-by-month process. Revised FOMC economic and interest rate projections were also released, showing a median GDP growth estimate for this year that was marked down to 5.9% from 7%, but for ’22 was bumped up to 3.8% from 3.3%. Core inflation is estimated to come in at 3.7% this year, but falling to 2.2% over the next two years. The “dot plot” projections of the trajectory for Fed Funds showed that nine of the eighteen officials expected one or more rate hikes next year, up from seven who thought so in July.

Initial market reaction to all of this was remarkably muted, but on reflection and absorption of the ripple effects, the bond market sold off sharply and pushed the 10yr T-Note yield up to 1.42%, the highest in over two months. The yield curve flattened initially, then steepened out to the widest since Independence Day as the difference between a 2yr versus 10yr Treasury yield now sits at 118bps. For its part, the stock market traded in a scatterbrained pattern (not a technical term) partly because of credit contagion fears from Evergrande, the Chinese property giant that’s facing a serious debt crisis and could presage a broader economic slowdown in China, where the real estate sector makes up about 30 per cent of GDP. If that wasn’t enough to cause tremors, we’re also having to witness the uniquely American ritual surrounding whether or not to pay our debts, when politicians are asked to raise the “debt limit” after they’ve already made irreversible commitments. Ugh. It’s no wonder the Dow traded in a 1200-point range Wednesday and Thursday.

On the data ledger this week, Housing Starts, Building Permits, Leading Indicators and New Home Sales all came in better than expected. While Existing Home Sales were weaker than expected and jobless claims jumped at bit. On balance, the data was neither good nor bad. Goldilocks would approve. Next week, look for fresh news on consumer sentiment and second quarter GDP data… and hopefully the US will decide to pay its bills.

US 10-Year T-Note Yield: Sept 2020 – Today

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INTENDED FOR USE BY INSTITUTIONAL INVESTORS ONLY. Any data provided herein is for informational purposes only and is intended solely for the private use of the reader. Although information contained herein is believed to be from reliable sources, The Baker Group LP does not guarantee its completeness or accuracy. Opinions constitute our judgment and are subject to change without notice. The instruments and strategies discussed here may fluctuate in price or value and may not be suitable for all investors; any doubt should be discussed with a Baker representative. Past performance is not indicative of future results. Changes in rates may have an adverse effect on the value of investments. This material is not intended as an offer or solicitation for the purchase or sale of any financial instruments.

Baker Market Update – wk210917

Ryan Hayhurst September 17, 2021

This week’s economic data were welcome news for the Federal Reserve, showing both a slowdown of inflation and an unexpected increase in Retail Sales. The Fed has long held to its expectation that the recent spike in consumer prices was driven by temporary pandemic related factors and the currently higher than desired level of inflation would be “transitory.” Tuesday’s release of the Consumer Price Index (CPI) seemed to confirm that expectation as the index rose just 0.3% in August, smaller than expectations for a 0.4% increase and a third as much as the 0.9% increase just two months ago in June (see Chart 1 below). A big reason for the moderation of CPI since early summer was the 1.5% drop in Used Car Prices in August versus the 7-10% increases each month in the Apr-Jun period. Also contributing to the moderation was the 2.3% drop in the price of Transportation Services which includes airfares. As more pandemic related bottlenecks in the economy and the supply chain continue to work themselves out, the Fed is betting the recent moderation in prices will continue and inflation will ultimately average 2% over time.

We won’t have to wait long to hear from the Fed as the FOMC meets this week and will release updated economic projections on Wednesday. While no one is expecting a significant change in the Fed’s statement, analysts will be closely watching for any potential news on two fronts. First, the Fed will release an updated “Dot Plot” and we will be looking for any indication FOMC members have altered their view of when and how quickly the Fed should begin raising rates (currently pegged at 2 hikes in 2023). Second, Chairman Powell’s press conference will be closely monitored for any additional indication the Fed is getting closer to “tapering” their $120 billion of monthly bond purchases. Economist recently surveyed by Bloomberg expect an official taper announcement to come in November with the slowdown in bond purchases beginning in December or January and lasting 6-10 months. So far, the Fed has managed expectations of the upcoming taper much better than it did in 2013 when the Fed spooked the market with poor communication and the 10yr Treasury Yield rose 140bp in four months before falling all the way back to record lows by 2016. This week the 10yr yield rose just 3bp to finish the week at 1.37%.

Source: Bureau of Labor Statistics

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Ryan W. Hayhurst

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Baker Market Update – wk210910

Dale Sheller September 10, 2021

Even though football weather isn’t quite here yet in this part of the country, I think we can all say that football is officially back! Tough loss for the Cowboys last night as Tom “Father Time” Brady got the ball back with too much time on the clock. This week brought a relatively low number of economic releases as we observed Labor Day on Monday and no releases were schedule on Tuesday.

On Wednesday morning, job openings hit record high as employers struggle to find workers. Job openings jumped 749,000 to 10.9 million on the last day of July. It was the fifth straight month that job openings, which have been increasing since January, hit a record high. Additionally, layoffs rose moderately, suggesting last month’s sharp slowdown in hiring was due to employers being unable to find workers rather than weak demand for labor. The shortage of labor supply may ease in the coming months with the recent expiration of the Federal unemployment benefits, however, soaring COVID-19 cases could cause some hesitation among some people to return the labor force.

Thursday’s initial jobless claims hit a new pandemic low of 310,000 for last week. The four-week moving average fell to 339,500, also a pandemic low. Claims have trended lower signaling employers are holding onto workers despite a rise in COVID cases. Continuing claims fell to 2.78 million, a drop of 22,000.

This morning’s reading of the Producer Price Index 0.7% for the month, above the estimate of 0.6%, though below the 1% increase in July. On a year-over-year basis, the producer price index rose 8.3%, which is the largest annual increase since records have been kept going back to late 2010. The data comes during a time of heightened inflation fears fed by supply chain issues, a shortage of various consumer and producer goods and robust demand related to the pandemic. Taking a look at the market’s this morning we see that treasury markets are seeing somewhat of a selloff, more so on the longer end of the curve. The 10-Year Treasury Yield currently sits at 1.33% and the Dow Jones Industrial Average is off 114 points.

Next week’s economic release calendar is much heavier than what we saw this week. Many eyes will be on Tuesday morning’s release of the Consumer Price Index (CPI). Core CPI (excludes food and energy) is expected to have a monthly increase of 0.3% and headline CPI’s increase is expected to be 0.5%. Next Thursday brings another weekly update of initial and continuing jobless claims in addition to retails sales data. Lastly, Friday brings the University of Michigan’s Consumer Sentiment Index’s monthly update.

Enjoy your first weekend of a full slate of college and professional football games!

Producer Price Index – Year over Year Change (%): 2011 to Today

Source: Bloomberg, LP

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Dale Sheller

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Financial Strategies Group
The Baker Group LP
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Baker Market Update – wk210903

Jeffrey Caughron September 3, 2021

The first week of September brought relief to long-suffering college football fans along with a slew of economic data that raises questions about the pace and strength of the US economic recovery. The recent data stream included a disappointment from the Dallas Fed’s manufacturing index which came at 9% versus 23% estimated, and down sharply from 27.3 the prior month. We also saw another ugly consumer confidence survey, this time from the Conference Board which clocked 113.8%, a drop of over 15 points. The ISM manufacturing index ticked up slightly to 59.9, but that’s still far below the 64.7% high last March. Numbers for factory orders, durable goods and capital expenditures all came in close to estimates, but that certainly cannot be said about the non-farm payrolls employment data released this morning.

The labor department tells us that job creation for August was a paltry (by comparison) 235k versus a consensus forecast of 733k and the prior month’s revised gain of over 1mm. Moreover, the participation rate remained unchanged at 61.7% and hours worked showed no improvement for the month. There was noteworthy weakness in the services sectors such as retail, leisure and hospitality. That is almost certainly an effect of the rising number of COVID-19 cases tied to the Delta variant which has slowed the return to work for employees in those sectors. Importantly, there are large and growing disconnects between available jobs and available (and qualified) workers to fill those openings. This is not just due to COVID knock-on effects, but also caused in part by the challenge of skills mismatch. The longer people are out of work, the more likely they are to lose their ability to compete in a labor market where technology is quickly changing how work gets done. Fully 37% of unemployed persons have been out of work for more than half a year. These mismatch dynamics are part of the reason that average hourly earnings popped by 4.3% YOY, well above the 4% estimate, as employers pay up to find qualified workers. One bright spot in the report was the so-called “underemployment rate” (those working part-time but wanting full-time) which has steadily fallen from its 22.9% high to just 8.8% today. And the headline unemployment rate dropped two ticks to 5.2%, the lowest level since COVID first hit.

As for Fed policy and market behavior, we were reminded by Fed Chairman Powell at Jackson Hole last week that there is an important distinction between reducing or “tapering” the pace of Quantitative Ease asset purchases and actually raising the Fed Funds rate. That distinction, along with sluggish growth data, would argue for a steepening of the yield curve which is indeed what we are seeing as the week comes to an end. There may be an argument that the urgency of tapering is lessened, but it’s a fairly weak case. If for no other reason, that’s because the distortion effect on financial markets needs to be removed and a steady chorus of FOMC officials has said as much. For now, the bond market seems content with a somewhat steeper curve, and an eye toward the next batch of numbers which include the JOLTS job openings report and wholesale inflation data next week.

US Long-Term Unemployment: 2005 – Today

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The Baker Group LP
jcaughron@GoBaker.com
800.937.2257

Baker Market Update – wk210827

Ryan Hayhurst August 27, 2021

All eyes were on the Federal Reserve this week leading up to the virtual Jackson Hole Symposium as markets awaited any news that the Fed would soon begin to “taper” their $120 billion of monthly bond purchases. Atlanta Fed President Raphael Bostic spoke early Friday morning saying “We should be trying to get our policies back into a more normal situation…We have been at a very extreme level of accommodation” and “the economy calls for us to pull off of that a little bit and let the economy stand on its own.” His comments added to those of Fed Presidents from Kansas City, St. Louis and Dallas this week urging an early taper. But it was Chairman Jerome Powell’s closely watched Friday speech that finally cemented the expectation that the Fed will begin tapering their bond purchases soon. Powell said the economy had now met the prerequisite of “substantial further progress” needed to taper, while also cautioning that they will be “carefully assessing incoming data and the evolving risks” as the Delta variant spreads rapidly. Powell was also careful to avoid a repeat of the 2013 “taper tantrum” when the 10yr yield nearly doubled in 4 months as the market assumed the beginning of the taper meant rate hikes were close behind. Powell sought to draw a sharp distinction between taper and rate hikes by stating, “The timing and pace of the coming reduction in asset purchases will not be intended to carry a direct signal regarding the timing of interest rate liftoff, for which we have articulated a different and substantially more stringent test.” This carefully coordinated Fed communication seems to have paid off. The 10yr yield had risen about 10bp this week in anticipation the Fed would announce a taper, but following the Friday morning speeches, the 10yr rallied slightly to 1.33% at publication.

The economic news this week was mixed. New and Existing Home Sales were reported to have increased more than expected in July despite surging prices and limited inventories, while Durable Goods Orders fell slightly and a closely watched Purchasing Managers Index was weaker than expected for August. But more than 2/3rds of U.S. GDP comes from consumer spending and Friday’s Personal Income and Spending report showed that despite a boost in income from the advanced child tax credit payments, real consumer spending actually fell in July. With income exceeding spending yet again, the personal savings rate rose slightly to 9.6% which is up from 8.8% last month but down from 27% in March of this year and 34% in April 2020. A drop in the personal savings rate from earlier this year was welcome news for financial institutions flush with deposits and eager for loan demand so any rebound in the savings rate driven by even more government stimulus payments will be closely watched in the months ahead.

Personal Savings as a % of Personal Income: 2011 – Today

Source: Bloomberg, LP

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Ryan W. Hayhurst

Manager/Financial Strategies Group
Managing Director/The Baker Group LP
ryan@GoBaker.com
800.937.2257

Baker Market Update – wk210820

Matt Harris August 20, 2021

Markets

For a week with significant geopolitical turmoil and the continued threat of the Delta variant, the bond market was largely unchanged. Yields as across the curve remained range bound as the 10Yr started the week at 1.27% and is currently 1.24%. Both short- and long-term rates acted similar as the 2 Year sits at .21-.22% and long bond (30Yr) dropped 5 basis points from 1.92% down 1.87%. Turning to the equity markets, all three major indices lost a little ground this week coming in approximately 0.3% and 0.5% lower before Friday’s market close which is positive today. Oil prices came lower this week as West Texas Intermediate decreased from $67.29 a barrel to around $63 currently.

Economic Data

Looking at this week’s economic data there was a slew of releases, most of them to the downside. On Monday, the Empire State Manufacturing Index tumbled losing almost all of the gains in prior month’s as it was previously hitting record highs. The index dropped to 18.3 from 43.0 with a median forecast of 29.0 meaning there were expectations of a pullback but not a complete reversal. Investors will look further into manufacturing when the August ISM index is released in early September, it has fallen the last two months. On Tuesday retail sales (including automobiles) dropped -1.1%, the second time in three months as analyst were expecting a drop of only 0.3%. While retail sales are still up 16% in the last year and still exceed pre-pandemic levels, expectations are for it to continue to weaken as the effects of government stimulus and pent-up demand wear-off. Wednesday saw US housing numbers from the National Association of Realtors. Homebuilding fell more than expected as new housing starts fell 7% in July. Housing permits on the other hand did see slight uptick. Also, on Wednesday the FOMC released their July meeting minutes which suggested the tapering of bond purchases could begin as early as late 2021. More on this next week as the FOMC will travel to Jackson Hole, Wyoming for the KC Fed Economic Symposium. Finally, on the positive side of the data releases, Leading indicators (a composite index which forecasts the future direction of the economy) grew in July 0.9% compared to June (0.7%).

Next Week

Turning to next week’s economic calendar, Monday and Tuesday, US existing and new home sales will be released. On Wednesday durable goods orders will be published as investors continue to get a hold of the business investment outlook. On Thursday, the 2nd Quarter GDP will see the second estimate which currently sits at 6.5% from the initial release. The Fed’s Summary of Economic Projections indicate GDP to be approximately 7% for the year. And on Friday to wrap the week, investors will see personal income, consumer spending, and the University of Michigan Consumer Sentiment index.

Treasury Yields and Taper Talk

The market’s reaction to the Fed discussing tapering was for stocks to decline and Treasuries to remain steady with the long end outperforming. This is in line with prior QE events and market history. An end to prior QE rounds sent yields lower (aside from the short lived Taper Tantrum of 2013) and saw stocks lose momentum as investors reprice expectations of less central bank stimulus and lower growth outlook.

*SOURCE: H/T – BLOOMBERG/CHART OF THE DAY Garfield Reynolds*

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The Baker Group LP
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Baker Market Update – wk210813

Jeffrey Caughron August 13, 2021

As we move through mid-August, the economic data stream continues to give Fed officials reason to stay on task with an expected shift to dial back monetary accommodation. We learned this week that there are well over 10 million unfilled job openings in the US, and labor supply is expected to increase in coming months as supplemental federal jobless benefits expire and schools reopen. Still, the rapidly spreading Delta variant of COVID-19 could delay more significant progress in labor market participation if growing health concerns spur Americans to delay returning to work.

We also learned that core consumer price inflation is on a downtrend while producer price inflation remains hot. The core consumer price index fell to 4.3% year-over-year from 4.5% previously, but the same version of producer prices came in over 6%, the highest level since 2008. Continued pandemic-related supply chain disruptions and sclerotic trade flows are delaying deliveries, keeping prices elevated and forcing substitution of higher cost sources. Assuming an eventual resolution of the COVID disruption, all of this should normalize and inflation will revert to the mean. That, anyway, is what the Fed tells us and what markets appear to believe as breakeven inflation rates embedded in the Treasury market show expected inflation to remain well-behaved between 2 and 2.5% in coming years.

This morning the University of Michigan Consumer Sentiment Survey showed an ugly drop in confidence. The index plummeted to the lowest level in a decade. That doesn’t portend good things for consumption expenditures and GDP.

Fed officials continue to offer a steady drumbeat of opinions on whether and when to begin tapering down their asset purchase program, now totaling $120 billion a month. Chair Powell suggests that we’re still “a ways off” from the necessary “substantial further progress” needed to justify a policy change. Several other FOMC members however (Kaplan, Bullard, Bostic, and Daly to name a few) seem ready at least to sketch out and communicate a plan that will give clarity to markets without causing a tantrum of the sort we saw in 2013. Their Jackson Hole retreat later this month is the perfect venue to formally announce such a change.

Next week we can look forward to plenty of new data: retail sales, capacity utilization, building permits and housing starts among others. Oh, and pre-season football… we can’t forget that. Yes, all of the signs are here. The end of summer is upon us.

University of Michigan Consumer Sentiment Survey: 2001 – Today

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Jeffrey F. Caughron

President and Chief Executive Officer
The Baker Group LP
jcaughron@GoBaker.com
800.937.2257

Baker Market Update – wk210806

Matt Harris August 6, 2021

Treasuries yields edged slightly higher across the curve this week as the 10-Year UST Note sits at 1.28% from 1.17%, Monday’s close. These levels may look familiar as the 10Yr yield has bounced between 1.2 and 1.4% over the last month of trading. Equity markets look to end the week higher as all of the major indices (Dow/S&P/NASDAQ) are .5 to .7% higher for the week. On the economic data front, the week saw key economic releases such as the ISM Manufacturing and Services Surveys along with monthly BLS Julys Jobs report.

On Tuesday, the ISM Manufacturing release for July indicated a second month of slow down as raw material shortages persist and supply chains are strained. Falling 1.1 points to 59.5, in contrast to an estimate for an increase 61.0, this was the lowest reading since January of this year. The results did show some encouraging pickup in employment figures which was later reinforced by the jobs report on Friday.

Wednesday gave us the ISM Services release which improved an impressive 4 points to 64.1 versus a consensus projection of 60.0. The latest results showed an encouraging pickup in activity and orders however also that input costs continue to remain at extreme levels along with inventory contraction.

All Eyes on Jobs Friday

The unemployment report for July as well as the upward revisions to June’s numbers indicate that employment growth could be accelerating as labor slack eases up. In June, non-farm payrolls increased 943k and the unemployment fell to 5.4% versus expectations of 5.7%. Wage growth accelerated to 4% year-over-year, also better than expected. While labor force participation still remains stubbornly weak since the beginning of the pandemic, it ticked up .1% to 61.7%. Recently, FOMC Board members Richard Clarida and Christopher Waller have discussed a run of stronger jobs reports could be enough to reach the “substantial further progress” and could line up for further discussion at the Kansas City’s Federal Reserve Jackson hole Summit later this month.

Olympics Update

While viewership may be down, US Olympic medals are up. As it stands, the United States leads all countries with 98 total medals won for the games (31 in Gold). Kevin Durant and the US Men’s Basketball team will play France for the Gold tonight at 9:30pm CT. GO USA!

Next week brings another slew of economic data as the BLS Job Opening and Labor Turnover Survey (JOLTS) report will be released on Monday followed by key inflation indicator CPI on Wednesday and Michigan’s Consumer Sentiment Survey on Friday. Have a great weekend!

The Fed’s Summary of Economic Projections indicate that the median unemployment rate will not lower to 3.5% until 2023. Before the pandemic began, there were approximately 132mm people in the labor force, today there is only 127mm.

US Unemployment Rate (January 2019 to Today)

Source: Bloomberg LP

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Matt Harris, CFA

Senior Vice President/Assistant Director of Asset/Liability Management
The Baker Group LP
mharris@GoBaker.com
800.937.2257

Baker Market Update – wk210730

Dale Sheller July 30, 2021

As we close another hot July week, eyes were on this morning’s release of an inflation indicator the Federal Reserve uses as its key guide, the personal consumption expenditures price index. The core personal expenditures price index, which excludes food and energy, increased 3.5% year-over-year, slightly below expectations of 3.6%. On a month over month calculation, the core PCE index rose 0.4%, which was below the 0.6% estimate, potentially indicating that inflationary pressures may be starting to subside at least a bit.

New consumer spending data was also released this morning and it rebounded 1.0% last month after dropping 0.1% in May. While consumer spending on goods remains strong, the pace has slowed amid shortages of motor vehicles and some household appliances, whose production has been constrained by a shortage of semiconductors worldwide. Additionally, personal income increased unexpectedly 0.1% after falling by a revised 2.2 percent in May.

Earlier in the week, the Federal Reserve wrapped up their two-day meeting on Wednesday and updated the world on their thoughts about inflation and employment in the United States. The central bank decided not to raise interest rates from near zero nor adjust the pace at which it buys government bonds each month. Investors hang onto every word Chairman Jerome Powell speaks during his post Fed meeting press conference and Powell said, “The U.S. economy is still a good deal away from making substantial further progress” toward the Fed’s dual mandates of stable prices and maximum employment. Additionally, Powell stated, “I’d say we have some ground to cover on the labor market side. I think we’re some way away from having had substantial further progress toward the maximum employment goal.” Some analysts have questioned why the Fed is buying billions of mortgage-backed securities each month at a time when home prices have surged. Powell states that he didn’t think the purchases of those assets had a significant impact on the housing market outside of the broader accommodative approach from the central bank.

The first estimate of U.S. gross domestic product was released Wednesday and the U.S. economy rose at a disappointing rate in the second quarter of 6.5% on an annualized basis. Yes, you read that correctly, I said disappointing as expectations were much higher at 8.4%. With the impact of fiscal stimulus waning, surging prices, and the delta variant running throughout the country, many are expecting GDP growth to slow in the second half of this year.

In taking a look at the markets this morning, the 10-year Treasury yield is down this morning to 1.23% and yields across most parts of the curve are also down slightly. The Dow Jones Industrial Average is off slightly this morning, down around 100 points.

Next Friday brings monthly job and employment data for the month of July. Estimates are for an increase of 850,000 in nonfarm payrolls and a headline unemployment rate of 5.9%. Early next week we will get the updated ISM manufacturing index as well as the ISM services index. Stay safe!

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Dale Sheller

Senior Vice President
Financial Strategies Group
The Baker Group LP
dsheller@GoBaker.com
800.937.2257

Baker Market Update – wk210723

Ryan Hayhurst July 23, 2021

This week saw Treasury yields endure another roller coaster ride only to end relatively unchanged from last Friday. Concern over surging COVID-19 cases around the world driven by the virulent Delta variant caused stock prices and bond yields to plunge Monday. The Dow Jones was down nearly 950 points at one point before finishing the day down 725 while the 10yr yield fell 10bp to 1.18%. But investors once again bought the dip in stocks and by the end of the week prices had recovered all their losses plus some while the 10yr finished the week about where it started. At one point this week the 10yr yield was down 56bp from its recent peak of 1.74% on March 31 following a 123bp rise from the August 2020 low of 0.51%. This is yet another reminder that yields never move in a straight line forever but instead rise and fall in patterns of significant moves in one direction followed by a slightly less significant retracement before the next big move. The most important question for investors today is just how long this retracement period will last before the next big reversal.

The economic calendar was relatively light this week with reports on housing and an unexpected jump in jobless claims dominating the news. Tuesday was a mixed bag with Housing Starts jumping 6.3% in June while Build Permits unexpectedly fell 5.1%. Since Building Permits are a better indicator of future economic activity, analysts speculated that soaring house prices and building costs may finally be taking their toll on the housing market. This notion was reinforced Thursday when Existing Home Sales rose a less than expected 1.4% while the median price of a home sold surged 23% to a record high $363,300. To put into perspective just how expensive housing has gotten, house prices are now 57% higher than they were just prior to the financial crisis and they are up a staggering 134% from the low in January 2012. While there remains a heated debate as to whether or not the housing market is in a stimulus driven bubble, the chart below paints a picture of an unsustainable rise in house prices that threatens to price more and more homeowners out of the market and potentially destabilize the economy if prices reverse.

US Existing Home Sales Median Price: 2001 to Present

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Ryan W. Hayhurst

Manager/Financial Strategies Group
Managing Director/The Baker Group LP
ryan@GoBaker.com
800.937.2257

Baker Market Update – wk210716

Jeffrey Caughron July 16, 2021

It was a busy week for financial markets as Federal Reserve Chairman Jerome Powell gave his semi-annual “Humphrey Hawkins” testimony in consecutive days to both houses of congress. The economic data was plentiful and included eye-popping consumer price data for the month of June. The behavior of the bond market, however, seemed to reinforce the Fed’s view that the inflation we’re seeing today, no matter how stunning, will not last. The yield on the benchmark 10yr Treasury fell slightly after release of the consumer price index (CPI), and remained below 1.40% as we approached end-of-week.

The CPI report was striking indeed as the core number jumped 4.5% YOY, the highest reading since 1991. Details of the report, however, revealed that a small number of components most directly impacted by post-COVID economic reopening accounted for most of the jump. In fact, the inflation rate for 90% of the components remains at or near the Feds 2% target. That reality, combined with the baseline effect of dreadfully low inflation numbers from the early weeks of the pandemic shutdown last year caused the outsized increase, and markets exhibited clear understanding of that.

Meanwhile, the Fed Chairman entered the lion’s den of congressional testimony Wednesday and Thursday where a few thoughtful questioners alternated with blowhards who gave speeches disguised as questions. Powell stuck to the script and explained that the Fed wouldn’t hesitate to use their tools to crush any signs of sustained inflation or expectations thereof. He explained repeatedly that the sharp price increases were caused by the above-mentioned “baseline effects” which conspired with temporary production bottlenecks and supply constraints along with a surge in demand as the economy reopens.

Overall, in his two days of testimony markets showed less concern about inflation fears than about the rising tide of Treasury supply that is hitting the market. The auction of $24 billion 30yr Treasury Bonds on Wednesday was not well received, and those results caused some afternoon indigestion as yields popped higher. That backup didn’t last long, and by Friday morning yields were again flirting with the lowest levels seen since February.

Other economic news included a couple of regional Fed reports which gave mixed signals. From New York, the Empire Manufacturing Index leaped to 43% from a prior reading of 17.4%, while the Philly Fed Index dropped from 30.7% to 21.9%. Retail Sales data for the month were also mixed. The headline number was up 0.6%, a touch stronger than expected, while the core (control group) number bounced a healthy 1.1% after a downdraft the prior month. And finally, a big drop in the University of Michigan consumer confidence index to a five-month low of 80.8% in July despite an acceleration of employment growth and continued resilience of the stock market. That transitory jump inflation is clearly causing a transitory drop in confidence. It would sure be nice to know when we can transition away from all of this “transitory” stuff. Wish the Fed would tell us that.

US Treasury Yield Curves: March 31^st and Today

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Baker Market Update – wk210709

Dale Sheller July 9, 2021

The 4th of July Holiday on Sunday allowed us to ease into the week by observing America’s Birthday once more on Monday. This also allowed for this week to be a lighter week of economic releases. The week began with a disappointing Institution for Supply Management (ISM) number which fell to 60.1% in June, down from 64% in May and much lower than expectation of 63.3%. Lack of demand is not the problem, rather companies’ inability to obtain enough supplies on time or to attract enough people to do the work. In normal times, any ISM survey reading above 50% signals expansion and a reading above 60% would normally be exceptional, but these aren’t normal times. Both supply chain and labor shortages are having a major impact on the ISM survey.

A day later brought U.S. job openings which rose slightly in May to a record 9.21 million, reflecting an extremely high demand for labor as the economy fully reopens and businesses scramble to keep up with soaring demand for goods and services. The number of available jobs has set a record for three straight months and even though the U.S. added $850K new jobs in June, there is a still a long way to go before we would see employment at pre-pandemic levels.

Thursday brought us both initial and continuing jobless claims. Initial jobless claims rose by 2K to 373K from the previous week while continuing claims fell from 3.48 million to 3.34 million. Twenty-six states have cut off extra federal benefits in an effort to push unemployed people back to work, but it is still too early to tell whether that will have a big impact. The enhanced federal unemployment benefits are set to expire in all states in September.

As light as the economic calendar was on this shorter work week, the equity and bonds markets saw plenty of volatility. A college professor of mine always used to say that “fear and greed” drive the markets. This week, the markets seemed to be plenty fearful of the delta Covid variant that is fueling worries about the global economic comeback. The Olympics further added to that fear by announcing a ban of spectators at Tokyo’s summer games as Japan declared a state of emergency to curb the spread of coronavirus. The Dow closed Thursday’s session lower by nearly 260 points and the Dow has rebounded strong this morning with an early 375 point increase.

The bond markets saw its fair share of volatility as the 10-Year Treasury Yield fell below 1.30% yesterday. Yields have rebounded early this morning with the 10-Year sitting around 1.35%. A 1.35% 10-Year yield is down over 30bps from this year’s high back in late March. Along with stocks, treasury yields have been volatile this week and mainly falling with the spread of the delta variant dampening overall sentiment.

Next week’s economic release calendar is a little more hefty and noteworthy with Core CPI coming out Tuesday morning followed by the Produced price index Wednesday. Next Friday will bring new retail sales numbers as well the consumer sentiment index. Until then, have a great weekend!

The Baker Group is one of the nation’s largest independently owned securities firms specializing in investment portfolio management for community financial institutions.

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Dale Sheller

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Financial Strategies Group
The Baker Group LP
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Baker Market Update – wk210702

Jeffrey Caughron July 2, 2021

This week we crossed the mid-year threshold and closed out a second quarter that was punctuated by continued strong growth and an unwelcome but unsurprising jump in inflation to the highest levels in a decade or more. We learned that manufacturing activity remains in expansion mode, that home prices around the country are soaring, and that consumer sentiment is buoyant with positive expectations about the future.

The big event for the week was the labor department’s employment report this morning which showed that US non-farm payrolls growth was a solid 850K in June, well above estimates and the biggest jump since last August. However, the labor force participation rate remained stubbornly stuck at 61.6%. The unemployment rate (calculated from a different survey) showed an uptick to 5.9% which was three ticks higher than the estimate. Underemployment, which includes marginally attached and part-time workers wanting full-time jobs, fell four tenths to 9.8%. Average hourly earnings came in as expected at 3.6% annualized, and average hours worked unexpectedly fell to 34.7 a week.

Labor market indicators remain well below pre-pandemic levels when the unemployment rate was 3.5% and the participation rate was over 63%. There are still nearly 7 million fewer employed persons in the US than at the beginning of 2020. Still, the June report shows clear and steady improvement. Sectors hit hard by the pandemic continued to show progress in returning to full employment. Jobs in leisure and hospitality increased by 343,000 as restrictions continued to ease. There remains a lot of noise in the numbers as staffing fluctuations in education due to the pandemic, in part reflecting the return to in-person learning and other school-related activities, have distorted the normal seasonal buildup and layoff patterns, likely contributing to the job gains in June. The number of persons not in the labor force who currently want a job was 6.4 million, little changed over the month but still up by 1.4 million since the beginning of last year.

Other data for the week included the US Merchandise Trade Balance for June which was slightly lower at $71.2b, factory orders which ticked up to 1.7%. Durable goods orders and capital expenditures showed modest but steady improvement.

Fed officials continue to reinforce the idea that the US economy is making good progress toward meeting their objectives, and that the inflation surge will fade in the second half of the year. Still, policymakers now expect to be shifting gears on policy and raising rates a bit sooner than previously thought. An actual policy pivot won’t take place until the economy achieves “substantial further progress,” the cryptic and undefined phrase that allows the Fed to waffle on precise timing. The first increase in the fed funds rate is now plotted for 2023, two years from now. Still, that is sooner than previously expected, and QE “tapering” will certainly begin before that. Dallas Fed President Kaplan, made clear this week that it will soon be time to slow the pace of asset purchases from the current $120 billion a month. “If we take our foot off the accelerator gently now, we’ll have more flexibility down the road to avoid more abrupt action.” Amen to that. Let’s steer clear of tantrums this time. Happy Independence Day!

US Labor Force Participation Rate: June 2015-Today

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Jeffrey F. Caughron

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Baker Market Update – wk210625

Ryan Hayhurst June 25, 2021

It’s now been a week since the FOMC released their updated “Dot Plot” showing voting members expect two 25bp rate hikes by the end of 2023 and the bond market remains unfazed. The 10-year Treasury yield is down about 10bp since the June 16 meeting and is now down a full 25bp since the March 31 high of 1.74%. Partly credited with driving yields lower, is the plunge in 5-year inflation expectations priced into the TIPS market which are down 37bp from 2.55% in May to just 2.18% now. The market apparently believes the Fed may be right in its bet that the recent inflation spike is “transitory” and will dissipate as many of the reopening driven supply/demand imbalances fix themselves. To emphasize this point further, multiple Fed officials were on the speaking circuit this week touting their expectation that inflation will return to 2% by next year.

This week’s economic reports highlighted just how much record high home prices are impacting the housing market. Both new and existing home sales fell again in May as house prices hit yet another record high. Existing home sales are now down 14% since the recent peak in October as the median price surged by a record 24% to a record high $350,000. New home sales fared worse, down 22% since January as the median price of a new home surged 18% to a record high $374,000. The housing market has been red hot during the recovery, as pandemic weary buyers flush with stimulus and more able to work remotely have sought more room and better living conditions. But the recent drop in sales suggests there may be a limit to just how much buyers are willing to pay for that extra room and any additional rise in mortgage rates could spell further trouble for housing in the critical summer buying season.

Also reported this week, personal income fell by another 2% in May in the absence of additional stimulus and that impacted spending which was flat in May versus expectations for a 0.4% increase. The chart below highlights just how significant the 3 rounds of stimulus checks were to boosting incomes in April 2020, January 2021 and March 2021 as noted by the sharp spikes during those months. While it’s not surprising that incomes will spike if the government mails a free check to millions of consumers, what is a little more surprising is just how little spending increased during those months and how weak spending was when those checks were not there. After all the trillions of dollars of stimulus pumped into the economy, it is a little discomforting that consumer spending which is 70% of GDP is only now back to the long-term trend it was on prior to the pandemic.

Personal Income vs. Personal Spending: 2007 – Today

Source: Bloomberg

Turning to the week ahead, all eyes will be on Friday’s employment report to see if the economy can break the two-month streak of weaker than expected job gains. During the last two months, economists had expected the economy to add 1,675,000 jobs, but it added just 837,000 or 50% fewer than expected. Current expectations are for an increase of 700,000 jobs in June and a continued decline in the Unemployment Rate to 5.6%.

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The Baker Group is one of the nation’s largest independently owned securities firms specializing in investment portfolio management for community financial institutions.

*The Baker Group LP is the sole authorized distributor for the products and services developed and provided by The Baker Group Software Solutions, Inc.

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Ryan W. Hayhurst

Manager/Financial Strategies Group
Managing Director/The Baker Group LP
ryan@GoBaker.com
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Baker Market Update – wk210618

Dale Sheller June 18, 2021

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!

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US 10-Year T-Note Yield: Sept 2020 – Today

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Producer Price Index – Year over Year Change (%): 2011 to Today

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US Long-Term Unemployment: 2005 – Today

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Personal Savings as a % of Personal Income: 2011 – Today

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University of Michigan Consumer Sentiment Survey: 2001 – Today

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US Unemployment Rate (January 2019 to Today)

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US Labor Force Participation Rate: June 2015-Today

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Personal Income vs. Personal Spending: 2007 – Today

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