U.S. Initial Claims for Unemployment Insurance are Signaling Volatility Again

By | March 1, 2021

Welcome to FTR’s “Monday Morning Coffee “ blog. The following article is designed to keep busy executives up to date with the latest economic data releases. Released every Monday, this blog promises to keep our clientele updated with the latest weekly economic news and developments, highlighting its impact on the transportation, freight, and equipment markets. Hopefully, this will be an informative addition to the fine body of work associated with FTR.

Overview

Global stocks fell on Friday, with Asian shares down by the most in nine months, as a rout in global bond markets sent yields flying and spooked investors amid fears that heavy losses could trigger distressed selling in other assets. MSCI’s Emerging markets equity index suffered its biggest daily drop in nearly 10 months and was 2.7% lower on Friday. The pan European STOXX 600 was down nearly 0.7%, recovering from bigger losses earlier in the day. Friday’s carnage was triggered by a whiplash in bonds. Fed funds futures are now almost fully priced by a rise to 2.25% by January 2023.

Markets were hedging the risk of an earlier rate hike by the Federal Reserve, although officials this week vowed any upward move was long in the future. Five and ten year-inflation expectations embedded in bond markets are back to 2.0% to 2.5%, which is actually a welcome move since the Fed has struggled to hit its 2% target for much of the last decade. The surge in government bond yields and related wobble in equity markets has markets harking back to 2013’s “taper tantrum), when the prospect of the Federal Reserve winding down its bond buying nearly doubled 10-year U.S. Treasury yields in four months and nearly knocked world shares by 10%. Eight years ago, the Fed did indeed signal a tapering of its monthly bond purchases, in place since the 2008 banking crash. This year, there is little chance of the Fed moving, if any move is made, they might double down on easing. The bond market sees that as the pandemic ends, the trillions of dollars of government spending might spark inflation to track over 2%. Until this week markets shrugged off the stimulus and the inflation spin as low in probability.

U.S. equity markets ended Friday mixed as the 10-year yield pulled back from its highest level in a year. The Dow Jones Industrial Average Index closed down 475 points, or 1.51%, while the S&P 500 slid 0.48% and the Nasdaq Composite rose 0.56%, clawing back from Thursday’s beating that was the worst since October. The mixed session came as the 10-year yield fell 5.4 basis points to 1.459%. The recent rise in bond yields to a one-year high of 1.61% had caused investors to panic worried about a return of inflation. Analysts have suggested the 10-year yield above the 1.5% level, equates to the dividend yield of the S&P 500 and that would place more pressure on equities. This change in financial conditions will likely affect markets in coming weeks.

Most of the economic data released last week beat consensus expectations, suggesting that the economic recovery is regaining momentum after slowing in the final quarter of 2020. Personal spending increased at a strong rate of 2.4%. This was supported by a 10% increase in personal income, which was largely driven by the economic stimulus program passed late last year. The savings rate shot up to 20.5%, up from 13.4%, which will help support spending in coming weeks. The PCE deflator, the Fed’s favorite measure of inflation, rose 0.3% in January, slightly ahead of expectations. Both the PCE index and the core index were up 1.5%. This is somewhat ahead of expectations but still well below the Fed’s 2% target.

Fed chair Powell appeared in front of the Senate Banking Committee and House Financial Services Committee and emphasized that “the economy is a long way from our employment and inflation goals, and it will likely take some time for substantial further progress to be achieved.” Powell’s statements arrived against the backdrop of rising long-term rates and inflation expectations. This seems to suggest the Fed is not likely to speed up interest rate increases or alter its asset purchases in the foreseeable future. Powell also commented on the red-hot housing market. Over the last few months, low mortgage rates have led to strong home sales. With, a tight supply on the market, home prices have increased significantly. In December, the S&P CoreLogic National Home Price Index accelerated to a 10.4% year-over-year pace, the fastest since 2014. Mortgage rates have moved up slightly in recent weeks. Meantime, mortgage applications declined 11.6% in the week ending February 19, the third weekly decline. Pending home sales dropped 2.8% in January but new home sales surged 4.3%. All this seems to be pointing to a slightly cooler rate for housing in coming weeks. Still, rates are historically low and the economy is improving, supports for housing demand. Housing is still projected to be robust for all of 2021.

Manufacturing and business spending on equipment is off to a strong start to 2021. Durable goods jumped 3.4% in January and nondefense capital goods shipments rose 3.5%. Orders for civilian aircraft lifted both orders and shipments, as Boeing resumed deliveries of the 737-Max. The strength in durable goods orders does extend beyond aircraft, with solid gains in primary and fabricated metals, computers and related products and other transportation equipment. The near-term outlook for the industrial sector is decent for the year. However, there are still supply chain bottlenecks and shortages of key parts that are slowing production, such as semiconductors. Business investment on equipment looks favorable.

U.S. initial claims for unemployment insurance are signaling volatility again. U.S. initial claims for unemployment insurance benefits increased from a revised 841,000 to 730,000 in the week ending February 20. Continuing claims declined from 4.52 million to 4.419 million in the week ending February 13. Those claiming Pandemic Unemployment Assistance decreased by nearly 60,000 in the week ending February 20 to 451,402 in the week ending February 20. Claims remain elevated, back well above a million where they have been since the pandemic began.

Next week we get a look at new home sales, advance durable goods and personal income and outlays.

Latest Data

The U.S. Economy:

The Chicago Fed National Activity Index rose to 0.66 in January from 0.41 in December, thanks to gains personal-consumption indicators. All four broad categories made positive contributions to the index in January. The three-month average came in at 0.47, down from 0.6 in December. Negative values indicate a slowing pace of activity and values below -0.7 historically have been associated with a recession. Production-related indicators contributed 0.28 to the January index, down from 0.37 in December. The contribution of the sales, orders and inventories category added 0.02 in January, down from 0.05 in December. Employment-related indicators contributed 0.01 to the CFNAI in January, down slightly from the 0.05 in December. The contribution of the personal consumption and housing category rose to 0.35 from -0.06 in December. Fifty-three of the 85 indicators made positive contributions to the index, while 32 made negative contributions.

New home sales rose 4.3% in January to an annualized 923,000, much higher than expected. Sales were upwardly revised to 885,000 in December. New home sales surged in the Midwest and to a lesser degree in the West. Sales in the Northeast fell at a striking pace. The months supply of sales dropped from 4.1 in December to 4.0. Compared with a year ago, sales were up 10.3% higher than a year ago. Going forward, expectations are for another strong year. There are concerns about availability and affordability. Lumber prices are high and labor is tight.

Transportation juiced durable goods orders in January. However, the details did show some signs that business equipment spending could be losing some momentum. Durable goods orders increased 3.4% in January after a 1.2% advance in December. Transportation orders were up 7.8%. Excluding transportation, orders advanced 1.4%. New orders have now increased for nine consecutive months and transportation has advanced eight out of the last nine months. Shipments of manufactured goods increased 2.0% in January, up 2.0%. Inventories decreased 0.3%, following a 0.2% decrease in December. New orders for capital goods increased 6.5% in January. The core capital goods segment rose 0.5% for the month. The strength in core capital goods and in shipments bodes well for GDP growth this quarter and a sign of health for manufacturing. However, the total orders increase was the weakest in several months and may signal a sign of caution in the first month of the year.

The latest round of fiscal stimulus lifted nominal personal income, which rose 10% in January. The gain came from the issuance of the $600 stimulus checks that Congress approved for millions of Americans. Real personal spending increased 2%, more than reversing the 0.8% decline in December and 0.6% in November. Durable goods spending jumped 8.3% and nondurable goods spending rose 3.3%. Service spending increased 0.5%. The savings rate surged to 20.0% from 13.4%. Prices don’t seem to be in a hurry, as the PCE deflator rose 0.3% in January, up 1.6% from a year earlier. Excluding food and energy, the deflator was also up 0.3% and also up 1.5% y/y. With Congress poised to pass some form of another stimulus bill, there will be decent support to keep spending alive until the economy gains more strength.

Important Data Releases This Week

The January ISM manufacturing report will be released on Monday, March 1 at 10:00 AM. Manufacturing continues to grow at an impressive pace, supported by the shift in consumer demand for goods and the impact of the pandemic. The production side has struggled to keep up in demand, leading to supply chain bottlenecks. Inventories are low and backlogs are rising, suggest strong near- term production. Prices have increased and many industries are reporting labor shortages. The ISM index should decline modestly from January’s 58.7 reading to a still healthy 58.5.

The January construction spending report will be released on Monday, March 1 at 10:00 AM. Construction spending rose 1.0% in December as strength in the residential sector is outrunning the weakness in nonresidential sector. There has been strength in the single-family residential sector, driving total construction spending. Meantime, weakness in retail and in the travel and accommodation sectors are keeping the nonresidential side at weak levels. The public sector has been slightly positive. Look for construction spending to increase 0.3% for January.

The U.S. February vehicle sales will be released on Tuesday, March 2, time varies. Sales jumped to 16.6 million annualized in January and should backtrack to 16.2 million for February. The advent of colder than normal weather likely hurt sales in February. Sales will float near 17 million for the year.

The February ISM services report will be released on Wednesday, March 3 at 10:00 AM. The services side surprised on the upside in January, rising to 58.7. The rapidly improving public health situation and the relaxation of restrictions is helping the service sector to rebound. Look for the index to remain unchanged.

The January factory orders report will be released on Thursday, March 4 at 10:00 AM. Already released durable goods orders were decent, rising 3.4% in January. Transportation provided most of the lift, but other factory segments were positive. Look for factory orders to rise 3.2% for the month.

The January international trade report will be released on Friday, March 5 at 8:30 AM. Purchasing manager reports in global economies indicated that activity picked up in January. The advance goods report suggests exports rose 1.4% for the month. The global backdrop on the vaccine front suggest overall trade prospects are improving for 2021. Strong domestic demand for retail goods will keep imports growing. Imports likely rose 1% for the month. The deficit likely rose from $66.6 billion to $67.2 billion.

The February employment report will be released on Friday, March 5 at 8:30 AM. The labor market went positive in January, but only 49,000 jobs were created. We expect a jump to 150,000 for February but bad weather likely played a role in slowing employment gains. Employment in service industries are likely to pick up as restrictions are lifted.

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About Steve Graham

Steve is one of the premier analysts in the transportation equipment industry. On a monthly basis Steve tracks and analyzes in detail the trailer and heavy-duty truck industry. Aside from following these two sectors he is also instrumental in helping our customers analyze the economy and its impact on transportation and transportation equipment.