August employment report misses expectations
- September 7, 2021
Balance Sheet Risk Management
Financial Institutions | Kennett Square, PA
Prior week summary
In the lead-up to the holiday weekend, the major U.S. equity indices ended the week mixed with the S&P 500 and Nasdaq Composite Index setting new intraday highs as market participants dissected the latest economic data, most notably the August nonfarm payroll report, and comments from Federal Reserve officials. The 10-year Treasury yield traded in a tight range again last week rising a modest two basis points over the week to finish Friday at approximately 1.33%, a notable break from the volatility seen for much of the summer. Market participants were the beneficiaries of a deluge of economic data releases last week that painted a largely mixed picture of the U.S. economic recovery. According to the Conference Board Consumer Confidence Index, consumer confidence received a blow in August, falling to a six-month low and faring far worse than the downwardly revised July figures as consumers grappled with a surge of delta-variant-related COVID-19 cases and higher prices at the pump. While the latest reading saw a significant pull-back from the levels seen in the last several months, the 113.8 August reading sits only modestly lower than the 118.8 reading seen just before the onset of the pandemic in March 2020. The national ISM Manufacturing and Services Indices impressed last week but highlighted the supply chain headwinds that have plagued the reopening of the U.S. economy. The ISM Manufacturing Index unexpectedly rose in August to 59.9, a modest increase from July’s also strong reading. Notably, the new orders component of the report handily beat expectations as demand remains robust, but backlogs rose to the second-highest reading of all time at 68.2 reflecting the supply chain bottlenecks that continue to restrict further growth. Many of the same issues were reported in the ISM Services Index release on Friday. While consumer demand, particularly in the leisure and hospitality sector, pulled back in August likely due to COVID-19 concerns, supply chain issues have largely been to blame for slower growth. Lastly, jobless claims for the week of August 28 fell more than the consensus estimate to a pandemic-era low of 340,000 claims.
Although market participants were not short on high-profile economic data releases last week, the lion’s share of investors’ attention and focus was directed at Friday’s release of the August nonfarm payroll report. The report did little to suggest that “substantial further progress” has been reached in the labor market and decreases the likelihood of an imminent launch of the tapering program. According to the Labor Department, the U.S. economy added 235,000 jobs in August, nearly half of a million short of the consensus expectation. Friday’s miss highlighted the challenges facing hiring firms in recent weeks—the rapid spread of the COVID-19 delta variant and a shortage of individuals looking for work. Notably, leisure and hospitality hiring, which has seen significant job gains in recent months, ground to a halt in August. The latest employment report didn’t bring all bad news, however. The unemployment rate inched down to 5.2%, roughly 1.5% lower than where it began at the start of the year and the July jobs total was revised higher. After a weak report in August, significant attention will be given to the September employment report, released in early October, as investors attempt to determine when the Fed will begin paring back its $120 billion per month asset purchase program.
Much attention has been given to SOFR adoption and the Alternative Reference Rate Committee’s endorsement of the CME Group’s SOFR Term Rate in recent weeks, but SOFR swap volumes have been quietly on the rise in the wake of the late July launch of the SOFR First initiative. In the fifth week of the SOFR First initiative, SOFR swap notional totaled $179.1 billion, a roughly 90% increase in notional since the start of the initiative, while SOFR trade counts are up to 1,665, an increase of over 140% since the launch of the initiative.
The look forward
Market participants are in for a lighter week of economic data releases with updated figures on the Producer Price Index, wholesale inventories, and jobless claims, among others, dotting the economic calendar. Several Federal Reserve officials hold speaking engagements throughout the week. The Federal Reserve’s Beige Book is released on Tuesday.
Market implied policy path (Overnight indexed swap rates)
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