Market Update – 9/14/2020

Unemployment, Inflation, and Housing Bidding Wars — OH MY!

Initial Jobless Claims remained below 1 million during the week ending September 5, as another 884,000 people filed for unemployment benefits for the first time. While on the surface this is a step in the right direction, the headline figure does not account for Pandemic Unemployment Assistance (PUA) Claims, which are an equally significant amount. In addition, Continuing Claims, which measure people who continue to receive benefits, increased by 93,000 to 13.4 million. 

Inflation was also in the news, as both the Consumer Price Index and the Producer Price Index (which measures inflation at the wholesale level) showed that inflation was on the rise in August. Rising inflation is always important to monitor, as it can have an impact on fixed investments like Mortgage Bonds. More about why this is significant below.

Despite the challenges many businesses are facing, optimism among small businesses was also on the rise in August. The National Federation of Independent Business Small Business Optimism Index increased 1.4 points to 100.2, which was higher than expectations of 98.9.

Lastly, evidence of low supply and high demand continues in the housing market. For the fourth consecutive month, over half of home offers from Redfin faced a bidding war, with 54.5% of homes sold in a bidding war in August. This was a slight drop from 57.3% in July, but still a significant amount.

Looking Beneath the Headlines on Jobless Claims

Another 884,000 people filed for unemployment benefits for the first time during the week ending September 5, which was unchanged from the previous week. California (+237K), Texas (+66K) and New York (+65K) reported the largest gains. However, Continuing Claims, which measure people who continue to receive benefits, increased by 93,000 to 13.4 million.

While the media has celebrated the fact that Initial Jobless Claims are under 1 million, it’s important to take a step back and ask: Are things really getting better?

The headline jobless claims figures do not count Pandemic Unemployment Assistance (PUA) Claims. People can apply for PUA benefits when regular unemployment benefits expire. PUA benefits are also for people like gig workers and contractors who usually would not be approved for unemployment benefits.

Initial PUA Claims, which again are separate and in addition to the headline figures, totaled 839,000 in the latest week. Continuing PUA Claims increased by 1 million after increasing by 2.6 million in the previous week.

Given that it’s September, it’s possible many people are applying for PUA benefits because their regular benefits have expired. If this is the case, we’re not really seeing an improvement in unemployment, but rather a transfer of people from regular to PUA benefits.

All in all, the total number of people receiving some type of benefits is around 29 million, which would bring the real-time estimate of the unemployment rate to around 17%.

Inflation Heats Up

Inflation was on the rise in August at both the wholesale and consumer levels. The wholesale-measuring Producer Price Index (PPI) showed that headline PPI increased 0.3% in August from July, which was slightly higher than the 0.2% expected. On a year over year basis, headline PPI increased from -0.4% to -0.2%. Core PPI, which strips out volatile food and energy prices, was up 0.4% in August and increased from 0.3% to 0.6% year over year.

The more closely watched Consumer Price Index (CPI) came in at 0.4% in August, while the year over year reading increased from 1.0% to 1.3%. The Core reading, which again strips out food and energy prices, also increased by 0.4% month over month and the year over year reading increased from 1.6% to 1.7%. Within the report, rents are rising 2.9% across the US, which is down from 3.1%. The medical care index rose 4.5% from last year.

Inflation has been rising sharply, especially on a month over month basis. If we saw 0.4% inflation each month, it would equate to a 5% inflation rate. For now, the year over year Core CPI reading is 1.7%, but it’s the hottest it’s been in 6 months. This rate could continue to rise, especially as the economy opens back up. Demand is likely to come much faster than supply, as we know supply chains have been compromised. If that were to occur, rates can rise.

Remember, inflation is the arch enemy of fixed investments like Mortgage Bonds because it reduces their value. Home loan rates are inversely tied to Mortgage Bonds, and as Bonds worsen or move lower, home loan rates can rise. Though many factors impact the markets, this is why it’s always important to keep an eye on inflation headlines.

Small Business Optimism Rises in August

The National Federation of Independent Business Small Business Optimism Index rose 1.4 points in August to 100.2. Plans to hire, positions not able to fill, and plans to increase inventory all rose, while capital spending plans were unchanged. Current compensation rose 3 points to a 5-month high, but future compensation plans were unchanged.

The NFIB’s chief economist, Bill Dunkelberg, said, “Small businesses are working hard to recover from the state shutdowns and effects of COVID. We are seeing areas

of improvement in the small business economy, as job openings and plans to hire are increasing, but many small businesses are still struggling and are uncertain about what the future will hold.”

Home Hack of the Week

Fall is fast approaching. Tick these easy seasonal maintenance items off your to do list, then sit back and enjoy the season.

Schedule a service call to make sure your furnace, chimney and fireplace are in working order so they’ll be ready when you need them.

Test your smoke and carbon monoxide detector batteries and be sure to always keep extra batteries on hand.

Add weatherstripping and door sweeps to any drafty areas to keep your heating bill low.

Drain all outdoor faucets and disconnect garden hoses from outside spigots to help keep water from freezing and prevent burst pipes.

Seal cracks in your concrete driveway or patio to prevent water from seeping in, which can then freeze, expand and cause the crack to grow. Fixing small cracks before temperatures fall can help prevent more expensive repairs down the road.

What to Look for This Week

We’ll get a double dose of manufacturing news, starting Tuesday with the Empire State Index’s update on September activity in the New York region. The Philadelphia Fed Index follows Thursday.

On Wednesday, the latest Retail Sales figures for August will be reported and we’ll get a read on builder confidence with the National Association of Home Builder’s Housing Market Index for September. Plus, the Statement from the two-day meeting of the Federal Open Market Committee will be released, which always has the power to move the markets.

Finally, Thursday will bring the latest weekly Jobless Claims figures, as well as an update on Housing Starts and Building Permits for August.

Technical Picture

The Fed continues to stabilize the markets with its ongoing purchases of Mortgage Backed Securities. After trading in a narrowing range between the 25 and 50-day Moving Averages, Mortgage Bonds are right at their 25-day Moving Average. If we see a solid break above the 25-day Moving Average, there is significant upside potential. Support is also nearby at the 50-day Moving Average, now that the range has gotten so tight. A breakout is coming one way or the other, so stay tuned.

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.