June payroll report tops expectations
- July 6, 2021
Balance Sheet Risk Management
Financial Institutions | Kennett Square, PA
Prior week summary
The major U.S. equity indices continued their march higher last week with the S&P 500 and Nasdaq Composite Indices ending the week at all-time highs as generally favorable economic data outweighed concerns of a new surge of COVID-19 delta variant cases in the U.S. After rising five basis points the Friday prior on the back of higher-than-expected inflation readings, the 10-year Treasury yield relinquished those gains last week falling roughly 10 basis points over the week to 1.44%. In turn, inflation expectations turned lower, albeit smaller in magnitude, with the 10-year breakeven inflation rate falling to 2.34% to finish the week. Market participants were the beneficiaries of several key economic data releases last week that largely pointed to a strengthening U.S. economy. The Conference Board Consumer Confidence Index increased to 127.3 in June, marking a pandemic-era high and smashing the consensus estimate calling for a modest decline from May’s 120.0 reading. Notably, the share of participants characterizing jobs as “plentiful” increased to 54.4% from 48.5% in May, while households viewing jobs as “hard to get” fell to 10.9% from 11.6% the month prior. Thursday’s release of the ISM Manufacturing Index pointed to continued strength in the manufacturing industry. The June reading fell slightly below both the May reading and the consensus estimate but remained well within expansionary territory. Supply chain bottlenecks have plagued the industry and the latest release highlighted a continuation of those supply chain woes with order backlogs remaining elevated. Additionally, the “prices paid” component of the report pushed higher to 92.1, the highest reading since 1979. While market participants were gearing up for the long weekend, all eyes turned to the June non-farm payroll report on Friday. According to the Labor Department release, the U.S. economy added 850,000 jobs in June, crushing expectations for a 720,000 increase and notching the biggest monthly gain since August 2020. Unexpectedly, the unemployment rate defied calls for a decline and increased to 5.9% from 5.8%. Lastly, jobless claims moved lower last week to 364,000 claims, a pandemic-era low.
After the White House and a bipartisan group of Senators agreed in principle to a $1.2 trillion infrastructure bill the week prior, negotiations continued last week in the lead-up to the holiday. On Thursday, the House of Representatives passed a $715 billion infrastructure proposal, titled the INVEST in America Act, setting a key line in the sand for negotiations with the Senate on the bipartisan proposal. The INVEST in America Act allocates $343 billion to roads, bridges, and safety, and $109 billion for mass transit. Political wrangling is set to continue in the coming weeks on Capitol Hill with House Speaker Nancy Pelosi indicating a September 30 deadline for the completion of negotiations. While the bipartisan deal brought renewed optimism to infrastructure negotiations, the bill’s prospects remain very unclear as Pelosi indicated that a Democrat-passed reconciliation bill must accompany the infrastructure bill before the House would vote on it saying, “Let me be really clear on this: we will not take up a bill in the House until the Senate passes the bipartisan bill and a reconciliation bill. If there is no bipartisan bill, then we'll just go when the Senate passes a reconciliation bill”, but noted, “I'm hopeful that we would have a bipartisan bill. I think it would be really important to demonstrate the bipartisanship that has always been a hallmark of our infrastructure legislation.”
As the regulator-mandated end to new LIBOR contracts looms near, several alternative reference rates have surfaced in recent months with no clear winner emerging. While the Alternative Reference Rates Committee-endorsed SOFR rate has been in the pole position for years, credit-sensitive alternatives have also jockeyed for position in the post-LIBOR landscape recently. Last week, market participants heard from some of the biggest players in the transition space. In a LIBOR transition panel hosted by Bloomberg on Tuesday, Thomas Pluta, global head of linear rates trading at JP Morgan, predicted a multi-rate environment post-LIBOR arguing that, “It’s appropriate to have a compounded-in-arrears SOFR for the majority of the market, and then the credit-sensitive rates will also have their proponents. I think we’ll be in a multi-rate world with SOFR in multiple forms and some credit-sensitive rates existing alongside SOFR.”
The look forward
In a holiday-shortened week, market participants are gearing up for updated figures on the ISM Services Index, wholesale inventories, and jobless claims, among others. The Minutes of the FOMC’s June meeting are released on Wednesday.
Market implied policy path (Overnight indexed swap rates)
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