• Greg Richardson

Economic conflict steepening as Wall Street and unemployment soar

February’s breakneck pace on Wall Street slowed down just slightly this week with all three major averages hitting record levels. The Dow rose by 0.9% this week, hitting a record on Thursday. The Nasdaq and S&P 500 have gained 0.8% and 1.2% this week, respectively, both hitting record closes on Thursday.


Wall Street is starting to price in more positive economic data along with reaction to President Biden’s statement that he has secured another 200 million doses of the COVID-19 vaccine.


However, the Labor Department’s unemployment report this week was worse than expected. There are 793,000 initial unemployment claims according to the recent report, against the forecast of 760,000. While higher than expected, the number was an improvement from the upwardly revised 812,000 for the previous week. Continuing claims were also higher than expected, coming in at 4.545 million.


The unemployment data was part of what caused bond yields to move lower. Demand was much softer for the 30-year Treasury. The 10-year Treasury note yield dipped a hair but has been holding fairly steady and sitting at 1.152% early Friday morning.


Consumer prices rose by just 0.3% in January, boosted mainly by an 7.2% increase in gasoline prices. The core CPI, which excludes the volatile products like energy and food, remained unchanged from December, pulled down mainly by a large 3.2% drop in airline prices. Many analysts are expecting for inflation to start pushing prices up this spring. However, the initial thought is that the effect will be transitory.


POWELL REINFORCES MONETARY POLICY SUPPORT


Federal Reserve Chairman Jerome Powell continues to double-down on his stance of continued monetary policy support to help the United States economy recover from the COVID-10 pandemic. In prepared remarks, Powell said the matter would require “patiently accommodative monetary policy that embraces the lessons of the past.”


Last week’s jobs report from the Labor Department showed the unemployment rate dropping to 6.3%. Powell contends that number does not paint a full picture of what’s happened to the U.S. labor force and says we are still a “long way” from where we need to be with the employment situation. Powell believes the 6.3% figure to be dramatically off, instead saying the unemployment rate is much closer to 10%. Currently, about 10 million Americans are without a job. That is about 4.4 million more people than this time last year.


Typically, a drop in the unemployment rate would lead to the Fed increasing overnight lending rates to deal with inflation. However, the Fed is keeping rates around 0% and continuing to purchase about $120 billion worth of bonds every month. Powell added that beyond fiscal support, recovery will require a broader social effort. “Given the number of people who have lost their jobs and the likelihood that some will struggle to find work in the post-pandemic economy, achieving and sustaining maximum employment will require more than supportive monetary policy,” said Powell. “It will require a society-wide commitment, with contributions from across government and the private sector.”


PURCHASES STAY HOT, AND PRICEY


Purchase applications for mortgages are up 17% from one year ago, despite being down weekly. The data from the Mortgage Bankers Association also shows that the average purchase price. Refinances also fell on a weekly basis but remained 46% higher annually.


Mortgage rates remained flat for a second week, according to Freddie Mac. The average interest rate on a 30-year fixed-rate mortgage is still a historically low 2.73%.



Sam Khater, Freddie Mac’s Chief Economist, says this is a great example of how we are looking at a very dichotomous economic situation. “The services economy remains in the doldrums, but the production side of the economy remains strong. New COVID-19 cases are receding, which is encouraging and that has led to a rise in Treasury rates. But, the run-up in Treasury rates has not impacted mortgage rates yet, which have held firm. The residential real estate market remains solid given healthy purchase demand while implied real-time home price growth is high, due to the inventory shortage that is plaguing the housing market.”


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