Pandemic Continues to Have Stronghold On Employment

Consumer inflation remains tame while unemployment remains elevated. Small businesses are certainly feeling the pressure as well, which has had an impact on confidence. The National Federation of Independent Business (NFIB) Small Business Optimism Index dropped 0.9 points in December to 95, which is a 9-month low. The Index is now at the lowest level since May, right in the heart of the pandemic.

And two important auctions also made headlines.

Jobless Claims Still Staggeringly High

The number of people filing for unemployment benefits for the first time fell by 19,000 in the latest week, as Initial Jobless Claims totaled 793,000. However, there were revisions to the prior week's data, which added 33,000 claims.

Continuing Claims, which measure people continuing to receive benefits, decreased by 145,000 to 4.5 million.

Pandemic Unemployment Assistance Claims, which provide benefits to people who would not usually qualify, and Pandemic Emergency Claims, which extend claims by 13 weeks after regular benefits expire, increased by 1.5 million and 1.2 million respectively.

The total number of continued benefits in all programs for the week ending January 23 was 20 million, an increase of 2.6 million from the previous week. By comparison, there were 2.2 million weekly claims filed for benefits in all programs in the comparable week in 2020.

The bottom line is the unemployment situation remains dire and this was reiterated in remarks by Fed Chair Jerome Powell last week. Powell cited the misclassification errors that have plagued the Labor Department's reporting since the pandemic began last March and noted that without these errors the unemployment rate would be closer to 10%. Powell also made it clear that the Fed is willing to sacrifice increasing debt to help the economy and that now is not the time to stop their purchases of Mortgage Backed Securities and Treasuries, which have helped stabilize the economy.

Consumer Inflation Remains Tame

Consumer inflation rose by 0.3% in January per the latest Consumer Price Index (CPI) report. The year over year reading remained stable at 1.4%, which was less than the 1.5% expected.

Core CPI, which strips out volatile food and energy prices, was flat in January and fell from 1.6% to 1.4% year over year. Both the monthly and yearly figures were 0.2% beneath expectations and show that inflation is really nowhere to be seen.

Why is tame inflation noteworthy?

Remember inflation erodes a Bond's fixed rate of return. In other words, rising inflation can cause Bonds to worsen or lose value. This includes Mortgage Bonds, to which home loan rates are inversely tied. When Mortgage Bonds move lower, be it due to rising inflation or other reasons, home loan rates move higher. Though many factors influence the markets, keeping an eye on inflation is always important.

Also of note, the CPI report showed that rents are rising 2.1% across the US, which is down from 2.3% in the previous report. However, the slowdown is really only happening in big cities like New York, San Francisco and Boston where, according to RealPage, rents are down 16%, 22% and 9% respectively. Of the 150 large metro areas they study, rent gains were seen in 119 markets, including Phoenix, Memphis, Detroit, and Cleveland.

All Eyes on Auctions

Investors were closely watching the 10-year Treasury and 30-year Bond Auctions that were held last week on Wednesday and Thursday, respectively. With 10-year yields near their highest level since March and 30-year yields at the highest level since February, investors were looking to see if there would be more demand for Treasuries and Bonds at auction.

Why is this significant?

Demand, which is reflected in the purchasing of Bonds and Treasuries, can push prices higher and yields or rates lower. Weak demand can signal that investors think yields will continue to move higher, which can have a negative effect on rates.

While the 10-year Note Auction had below average demand, there was strong foreign demand (which is shown by direct and indirect bidders taking down 80% of the auction vs the 12-month average of 75%). As a result, it did not have much of an impact on Mortgage Bond prices, but yields did move a little lower on the 10-year after the release.

The 30-year Bond Auction was also met with below average demand, which caused Mortgage Bonds to move a bit lower afterwards.