Higher consumer prices, improved jobless claims data, record levels of Treasury debt auctions, and retail sales returning to pre-pandemic levels all helped to raise Treasury and interest rate swap yields throughout the week.
Shorter and intermediate-dated Treasury and interest rate swap yields rose by as much as 9 bps (or, 0.09%), while longer-dated yields rose by over 17 bps (or, 0.17%) on this week’s news and price action.
Consumer prices rose significantly in July
Consumer prices rose in July to long-dated highs in it’s two most common measurements, the Labor Department reported Wednesday.
The overall Consumer Price Index (“CPI”) rose 0.6% in July as well as in June, the highest monthly increases since a similar 0.6% increase in August 2012.
The CPI less volatile fuel and fuel costs, or “core CPI” which is generally considered as a more reliable measurement of price changes, also rose 0.6% in July, matching the last such level of increase in this core index since January 1991, or in almost 30 years:
Despite all the televisions ads for rebates, 0% financing, and 72-month terms, most things auto-related saw steady price climbs in July. Used car prices rose 2.3%, the most since early 2010. New vehicle prices also increased 0.8%, the biggest gain in nine years. Car insurance costs posted a record monthly increase of 9.3% following company rebates in prior months that accounted for less driving. Airfares also posted the biggest monthly gain in 21 years, though prices remained 23.7% below year-earlier levels with passenger counts still depressed.
Gasoline prices jumped 5.6% and accounted for about one quarter of the gain in the overall CPI. Still, pump prices were down 20.3% from July 2019.
The gain in consumer prices reflects the rebound in demand for goods and services from the depths of the pandemic-induced lockdowns earlier this year, suggesting inflation is closer than thought to returning to the pre-crisis pace. Federal Reserve policy makers have seen little threat of inflation and expect to hold interest rates near zero for the foreseeable future, however investors in Treasuries have signaled they expect price gains to pick up amid extended monetary stimulus.
These readings bear watching for further acceleration even though the trend remains subdued against a backdrop of weak demand and excess capacity.
Jobless claims finally break the 1 million mark
After being above 1 million for 20 straight weeks, the number of Americans applying for jobless benefits dropped below this level, suggesting the economic recovery is taking hold.
Initial unemployment claims totaled 963,000 for the week ended August 8th, a Labor Department report showed Thursday, beating the median forecast of economists:
The decline was broad-based across states. Continuing claims, which lag initial and measure the overall pool of recipients in state programs, also declined more than forecast to 15.5 million, their lowest level since early April.
In terms of the political implications, the positive data may reduce pressure on the Republican and Democratic negotiators to reach a deal on a coronavirus relief package, despite initial claims remaining extremely high, underscoring how important controlling the virus is to the economic recovery.
The 30-year Treasury auction was a flop
Tension in the bond market dominated Thursday’s U.S. trading. The 30-year Treasury auction disappointed investors, sending market yields to their highest levels in more than a month as the yield curve steepened. Recent better-than-expected economic data, including higher consumer prices and improved jobless claims, has also added pressure on Treasuries.
This was the biggest-ever auction of 30-year bonds at an amount of $26 billion. The bond auction drew weak demand with a bid-to-cover ratio (a common measurement of bond demand) of only 2.14. Primary dealers were left with 28.3% of the bond inventory, their highest share at a new-issue auction since May 2019.
Part of the dip in demand by fixed income investors was due to Apple’s $5.5 billion, four-part offering that included five, ten, 30, and 40-year tranches, with more weighting on the longer dated securities. This bond offering competed with long-dated U.S. Treasury demand. Borrowing costs are so cheap right now that not even Apple Inc. could resist, becoming the latest to join a boom in issuance from the world’s biggest technology companies. Like almost all of Apple’s bond sales, it will use the money to buy back stock and pay dividends, among other general corporate purposes. Cash-rich companies like Amazon.com Inc. and Google’s parent Alphabet Inc. are getting in on the action, as well.
Unlike the rest of the economy, big tech has thrived in the pandemic, with consumers largely still at home and more reliant on their gadgets and connectivity. Even with cash piles near record highs, these companies are borrowing for next to nothing in a credit boom that has favored corporate America’s biggest companies and left the smaller ones somewhat behind.
Continued rebound in retail sales
The monthly rebound in U.S. retail sales continued in July, albeit at a slower pace, increasing 1.2% after an upwardly revised 8.4% gain in June, according to data released Friday from the Commerce Department. The median estimate in a survey of economists called for a 2.1% increase in July. This was the third straight monthly gain here and the total value of retail sales at nearly $536 billion is now above pre-pandemic levels, with July purchases also up 2.7% from a year earlier:
This indicates one major part of the economy has returned to near its previous trend, though the mix of spending now is more concentrated in categories like online sales and groceries, while restaurants and apparel stores remain well below typical levels.
Although sales moderated for the month, the July data in total suggests the economy still has momentum. The open question is whether we are going to have enough momentum to carry that through into September and October, particularly before Election Day.
The so-called “control group” subset of sales, which excludes food services, car dealers, building-materials stores, and gasoline stations – and is sometimes seen as a better gauge of underlying trends – rose 1.4% from the prior month, more than analysts projected.
Home sweet home
Home building and home improvement companies may be getting a double jolt of new business if consumers accelerate their purchases and refinancings before costs increase. Mortgage rates rose for the first time in three weeks to 2.96% from a 50-year low of 2.88%. Meanwhile, mortgage applications remained strong, up 39% annually in July, the second consecutive month of gains.
The activity of consumers contradicts the notion that real estate prices are plummeting due to the coronavirus. With housing inventory levels down 36% as of August 8th, prices continue to move higher. The median cost of a single-family home was $291,000 in the second quarter, up 4.2% from a year ago, according to the National Association of Realtors.
An additional incentive for homeowners looking to refinance their conforming mortgages will be a 0.5% fee imposed by Fannie Mae and Freddie Mac that goes into effect on September 1.
This new fee is meant to mitigate their risk in light of the COVID-19 pandemic. It would apply to most refinances. Fannie and Freddie requested the additional fee based on their projected pandemic-related losses.
Lenders could absorb some of the costs themselves rather than pass them on to consumers – but don’t bet on it.
The Mortgage Bankers Association, a trade group for lenders, said in a statement that this additional 0.5% fee “flies in the face of the administration’s recent executive actions urging federal agencies to take all measures within their authorities to support struggling homeowners.”