A week of modest gains but the volatility certainly picked up in the hot sectors such as the FANGs and precious metals. And we finally saw interest rates tick higher as the Treasury market wrestled with a surge of new issuance.
On the economic front, the data was generally decent.
Weekly Unemployment Claims
New applications for US unemployment benefits fell below 1m for the first time since mid-March. Initial jobless claims totaled 963,000, compared with 1.2m a week earlier.
The total number of people filing for benefits dipped to 15.5m from 16.1m a week ago. Continuing claims equal 10.6% of the workforce, down from 11% last week. Not great numbers but at least they are moving in the right direction.
Retail sales increased 1.2% between June and July, slightly better than expectations. Sales were up 2.7% year-over-year. As you can see below, the absolute level of retail sales is now at new highs. Pretty amazing actually.
Of course, it doesn’t take a rocket scientist to figure out why. Incomes have surged during this crisis due to government transfer payments, as you can see below. I still can’t quite get my head around this statistic.
The jobless claims number combined with the retail sales data points towards a better than expected GDP growth number this quarter. The Atlanta Fed estimate is now pointing towards +26% annualized growth in 3Q, up from +20% a few weeks ago.
Of course, all this could change if we see a massive spike in infections, but the improved growth backdrop goes a long ways towards explaining how the market seems to be shaking off gridlock in Washington about renewed fiscal support.
Inflation Acts a Little Perky
The other main report of the week was the monthly inflation number. The consumer price index increased +0.6% in July and is up +1.0 year-over-year. If you take out food and energy, prices were up +1.6% year over year.
This got some attention from the inflation hawks and hit bond prices a bit (yields increased – as you can see below).
However, for all the breathless talk about a resurgence in inflation, it is hard to see it in the chart above. We are sort of getting back to normal if anything.
Market based inflation expectations are telling us something similar. The estimate for inflation five years from now for the subsequent five years has moved higher of late, but we’ve really just gone from pricing in deflation to pricing in a more normal level of inflation. And it is important to note that this measure is still way below the Fed’s 2% target.
There were some technical reasons for the pop higher in rates. For example, the Treasury department announced it would sell a record $112bn in notes and bonds next week, $16bn larger than the package sold last quarter. This supply is almost certainly weighing on prices.
Goldman was out this week making the bigger picture case for why inflation is unlikely to come roaring back this year or next:
‘The US unemployment rate remains in double digits despite a fairly rapid decline over the last few months, and broader measures of labor market slack are even more elevated. We expect a decline to 9% by the end of this year and a further large decline to 6.5% in 2021 as a vaccine enables some sectors to bounce back, as shown in Exhibit 5. But recovery will likely be a more gradual process after that, and we do not expect the economy to reach full employment until around 2025. At a high level, this is the key reason that we expect inflation to remain soft in coming years.’
Charts We Found Interesting
1. Case growth continues to slow in the U.S.
2. Although the same can’t be said for Contra Costa County (the data has been screwy of late though).
3. One of these things is not like the other. The mass exodus from San Francisco continues.
4. Every day we see the disconnect between small businesses in our local community and what the stock market is doing. There are lots of reasons for the divergence, but a key one is access to capital to weather the storm. If you can tap the corporate bond market you have access to very cheap capital. If you rely on banks or other direct lenders, lending standards are getting tougher, as you can see below.
5. And which small businesses are suffering the most? As you would expect, and as you can see below, restaurants are suffering the most.
6. Eternal truth from an 1858 issue of The Economist.
7. We will do anything to avoid using the metric system.
Have a good weekend.
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