Not that economic results have been driving markets much since the pandemic hit it’s even less likely as we get closer to the elections and investors start to enter that event into the trading calculus. It will still be the direction of the pandemic that will be calling most of the shots but as the election nears, and polling starts to solidify expect trading around that to gather in intensity. Goldman was out yesterday with a forecast that a Biden win would lead to a 30-40bp increase in long-term rates on the assumption more spending would be forthcoming. We will only add we saw $2 trillion added to spending via the CARES Act and rates fell, so the connection between spending and rate direction may not be that straight forward. Anyway, we’ll have more to say about all that in the weeks ahead. Closing out this week, we did get August Durable Goods Orders for August with orders rising 0.4% well off the 1.5% forecast and the 11.7% pop in July. Ex-transportation sales also rose 0.4% versus 1.0% expectations and 3.2% in July. The results speak to slowing economic momentum, outside of housing, which could make for a tough day in risk assets and a good one in Treasuries.
Speaking of housing, we’ve been on about the red-hot performance of the housing sector throughout the summer and it didn’t let up in August. On Wednesday, existing home sales posted the highest pace of sales since 2006 and yesterday sales of new homes rose for a fourth straight month to the highest level in almost 14 years. Purchases increased 4.8% to a 1 million annualized pace when a drop of –1.2% to 890 thousand was expected. The selling was led by surging demand in the South, the largest region, and July figures were upwardly revised from 13.9% to 14.7%. Meanwhile, the supply of new homes continues to fall. At the current sales pace, it would take 3.3 months to exhaust supply, the shortest time frame in records dating to 1963.
While demand remained strong for both new and existing home sales in August, it’s difficult to say how long such demand will last given the scale of layoffs and the potential for future job cuts with CARES Act stimulus expiring and seemingly little appetite in Congress to advance a timely replacement. Obviously, historically-low mortgage rates are driving much of the activity but can that withstand a dip in consumer confidence if the fading fiscal stimulus starts to bite more forcefully?
Jobless Claims Improvement is Stalling
The best high frequency, real-time data point on the economy continues to be weekly jobless claims and for the week ended September 19, applications for unemployment benefits were little changed at 870,000 versus 866,000 the prior week and ahead of the 840,000 forecast. The results highlight an economic recovery that continues to look like it will be a slow grinding affair. Continuing claims fell 167,000 to 12.6 million in the week ended September 12, which coincides with the survey period for the BLS’s monthly jobs report. Continuing claims ran ahead of expectations as well indicating the recovery for the jobless will be a fitful one. The insured unemployment rate was nearly unchanged at 8.6% compared to 8.7% the prior week. A year ago it was 1.2%.
The Dollar Stages a Rebound
There had been a lot made of increasing TIPs breakeven rates since the lockdown-induced panic of March and April, and a lot of the that upward movement was attributed to the weakening US dollar as shown in the graph. The downtrend was clear from the peak in mid-March into early September, but you can see as enter the tail end of September the dollar has been staging a rebound. A combination of questions surrounding additional stimulus, and increasing virus cases in Europe has the dollar looking more attractive to investors. That has stymied the move higher in TIPs breakeven rates and lessened concerns about weakening dollar-induced inflation. That will work to keep long-end rates within the well-worn range of the last six months.
|Treasury Curve||Today||Chg Last Wk.||LIBOR Rates||Today||Chg Last Wk.||FF/Prime||Rate||Swap Rates||Rate|
|3 Month||0.09%||-0.01%||1 Mo LIBOR||0.15%||UNCH||FF Target Rate||0.00%-0.25%||3 Year||0.235%|
|6 Month||0.10%||-0.01%||3 Mo LIBOR||0.23%||-0.01%||Prime Rate||3.25%||5 Year||0.334%|
|2 Year||0.13%||-0.01%||6 Mo LIBOR||0.27%||-0.01%||IOER||0.10%||10 Year||0.683%|
|10 Year||0.66%||-0.01%||12 Mo LIBOR||0.37%||UNCH||SOFR||0.07%|