Labor Market Barely Improves, Plus Fed Meeting Review

Decent Jobless Claims Report

All things considered, this was an ok jobless claims report. Continued claims fell more than PEUCs plus extended benefits rose and non-seasonally adjusted initial claims fell. That sounds great but continued claims didn’t fall that much more than those benefits programs. 

Seasonally adjusted initial claims in the week of October 31^st fell from 758,000 to 751,000. However, the reading before the revision was 751,000 which means claims were the same as what we thought they were last week. Non-seasonally adjusted claims fell slightly. They were down from 738,709 to 738,166. The cycle low is still the week of October 3^rd which was 731,249.

States with the largest increases were Illinois with an increase of 6,190; Michigan with an increase of 5,442; and Massachusetts with an increase of 2,483. It’s worth noting that Illinois and Michigan have bad COVID-19 outbreaks. States with the biggest declines in claims were Texas with a decline of 10,113; California with a decline of 7,700; and Florida with a decline of 6,528. And states with the largest declines aren’t in the Midwest which is dealing with the worst of the 3^rd wave.

A combination of initial claims and PUAs stayed the same as PUAs were up 4,000 to 363,000. PUA data makes no sense because Nevada had a major increase in the prior reading and only fell 7,085 this week. How could Nevada possibly have 14% of PUAs when it only has less than 1% of the country's population? 

That state’s unemployment rate is 12.6% which is high because it relies on tourism. However, it’s not 14 times as bad as the rest of the country. There are many faulty readings within states’ PUA data, making it unreliable.

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As you can see from the chart above, there was a 277,564 increase in PEUC claims and a 172,123 increase in the number of people on extended benefits. However, there was a 601,929 decline in continued claims which means the labor market improved again in spite of people’s normal benefits expiring. We wouldn’t need to worry that much if the virus was going away. But it’s getting worse in November which means we could see another wave of layoffs. 

We didn’t see a wave of layoffs in the summer COVID-19 spike. But we might not be so lucky this winter if the virus gets worse. Obviously, shutdowns hurt activity. However, we can’t expect the economy to maintain any semblance of a recovery if the virus gets worse even if there aren’t shutdowns.

On an adjusted basis, continued claims fell 538,000 in the week of October 24^th which was less than the 649,000 decline in the prior week. This is the lowest decline since September 12^th when there was no change even though we are seeing millions of people’s benefits expire each month. This is the 4^th straight week of declines in the rate of improvement in the labor market. There are now 7.285 million continued claims. 

Peak last cycle was 6.635 million. We should get below that level in November. However, there is no prize for getting to the starting line. We need to see COVID-19 go away before the labor market has any semblance of normalcy. If there is a vaccine released by the end of the year, we will see hundreds of thousands of people in the leisure and hospitality industry go back to work within a few months. Labor participation rate will explode higher.

Fed Holds Rates At Zero

Fed kept rates the same again because we are still in the throes of the COVID-19 pandemic. We are at least 1 year away from the Fed talking about rates hikes. Many are almost 100% sure the Fed won’t hike in 2021. With the prospects of a fiscal stimulus at least a couple months away, the Fed needed to assure the market it would do whatever it could to keep the recovery going.

Powell stated, “Is monetary policy out of power or out of ammunition? The answer to that is no, I don’t think that. I think that we’re strongly committed to using these powerful tools that we have to support the economy during this difficult time for as long as needed and no one should have any doubt about that.” 

Investors are curious if elected, that Biden sticks with Powell or if chooses his own Fed chair. For now, we have Powell who is willing to do what is needed. That was a powerful statement. The market didn’t react to it on Thursday because it was already flying high. However, Powell will remind the market in the next downturn.

There were virtually no changes to the Fed statement itself which signals the Fed is on pause. It is aggressively supporting the market and has no desire to change that. Even if there was a fiscal stimulus, the Fed wouldn’t change its tone. It’s just that because we don’t have a stimulus, we are focusing more on the Fed. 

Remember back in March and April when the bears said because the Fed couldn’t stop the virus, you should sell stocks. No one thinks the Fed can stop the virus when they invest in the market. They just think the Fed can keep capital markets calm from now until we get a solution to this virus. Long bond overreacted to there not being a blue wave. We will still get a stimulus early next year which will help the Fed stabilize the economy.

Conclusion

Jobless claims report was mediocre. Best thing we can say is it doesn’t indicate an end to the recovery. It’s just a slowdown in the rate of improvement. The market thinks this will be like the summer slowdown where cases spiked, but the recovery continued. 

That will change if hospitalizations get above 60,000. There might be a sharper downturn in December than in July. The Fed didn’t hike rates and Powell was dovish. Fed isn’t going to hike until 2022 at the earliest.