There was quite a spike in interest rates the last week of February with the 10-Year T-Note spiking from a 1.36% level as of the close on Wednesday to as high as 1.60% intraday with a close of 1.55% on Thursday. Friday’s close was 1.45%. But, a lot of damage was done.
It is naïve to think this spike was caused by the inflation narrative, i.e., that rates would spike because of inflation expectations. The latest inflation expectations from official Fed forecasts show that those expectations are coming down, not going up. In addition, at this stage of the cycle, equities would welcome higher inflation. But, no! Equity prices reacted poorly to the interest rate spike.
Immediate Cause
The immediate cause of the rate spike was the worst 7-year Treasury auction on record (i.e., the lowest bid to cover ratio). Notable was the lack of any Japanese participation, likely Chinese too. And with the upcoming massive “stimulus” package that passed the House of Representatives early Saturday morning (February 27), markets are seeing massive new debt that is likely to cause indigestion unless the Fed steps in with new rounds of QE. In addition, on Sunday (February 28), several significant Fed programs are due to end. Do you think Powell (and Yellen) will let those expire? We don’t, and we sense that the Fed will make some pronouncements before the end of the first week of March. If they don’t, they risk significant damage to the nascent recovery.
Labor Markets
At first blush, the weekly Department of Labor Initial Unemployment Claims (ICs) for the week of February 22 looked like good news, as there was a large down-spike in state ICs. The aggregated state numbers (not seasonally adjusted) fell to 710K from 842K (revised down from 862K) the prior week. Part of the apparent improvement in ICs may have been due to weather in Texas and/or to audits in Ohio ferreting out fraudulent claims. California also had a very large down-spike (re-openings?). Ohio, California and Texas accounted for 79% of the -132K improvement.
There was also some improvement (-61K) in the Pandemic Unemployment Assistance (PUA) programs which saw ICs drop to 451K (week of February 22) from 513K. Together, the state and PUA programs had 1.16 million net new claims (a proxy for weekly layoffs). This takes us back to levels not seen since October, and is a positive sign that the easing of restrictions on businesses is having a positive impact.
The next chart and table show Continuing Unemployment Claims (CCs) (those claiming benefits for more than one week). The latest data is for the week of February 6. In this series, there was a rise back to more than 19 million. With the rollout of the vaccines and more widespread business re-openings, the IC numbers should continue to improve, and, hopefully, we will also see a turnaround in the CC data. The real question here is how much damage to the economy has been done and how many of those 19 million lost jobs are permanent.
Inflation is a Process
As seen from the above, the labor markets, while showing…
Read More: The Rate Spike Will Damage The Recovery: Fed Intervention Needed