Daily Market Color

Treasury Yields Whipsaw Following April Jobs Report

Disappointing payroll gains sparks rates rally
Following the April jobs report, Treasury yields and swap rates immediately fell ~10 bps to three-month lows but later erased much of the decline – the 10-year Treasury yield fell as low as 1.48% before closing the week near 1.57%.  Major US equity indices closed at record highs after a tech rally – the S&P 500 and DJIA rose 0.7%, while the Nasdaq added 0.9%.
April nonfarm payrolls fell short of expectations
Nonfarm payrolls only grew by 266k last month, falling well below the 1 million forecasted gain.  The unemployment rate also rose for the first time in over a year from 6% to 6.1%, while the labor participation rate also increased by 0.1%.  Overall employment is still 8 million short of its pre-pandemic levels.  Data breakdown:Notable employment cuts were in temporary help services and transportationPrivate payrolls rose by +218k vs +708k in MarchManufacturing payrolls fell by -18k vs +54k in March
Minneapolis Fed President Neel Kashkari says labor market will “take time” to recover
In a conference following the employment report, Kashkari compared the current job market to 2009’s and commented, “It’s going to take time. I don’t want it to take 10 years. Hopefully, we can put this back together in a year or two. But I just don’t want to declare victory prematurely.”  He remains in support of the Fed’s current policy approach, as it will “allow the labor market to recover” and “not just forecast that it’s going to recover.” 
Happy Mother’s Day to all the mothers out there, have a great weekend!

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Equities Rise to Record Highs After Jobless Claims Hit a Pandemic Low

DJIA closes at a record high for the second day in a row
Spurring the risk-on sentiment, earlier today the Labor Department reported jobless claims dipped below the 500,000 threshold for the first time since the pandemic began.  US equity indices celebrated the improvement – the S&P 500, DJIA, and Nasdaq rose 0.8%, 0.9%, and 0.4%, respectively.  Treasury yields and swap rates held within a tight range – the 10-year UST yield closed flat at 1.57%.
Jobless claims totaled 498,000 last week, a pandemic low
Initial claims declined by nearly 100,000 last week, beating the Bloomberg estimate of 538,000.  The decline comes a day before the Labor Department’s April jobs report, which is expected to show a 1,000,000 gain in nonfarm payrolls and an unemployment rate of 5.8%.
Robust deposit growth and muted loan growth for small banks in 2Q
The one trend that has become apparent this year is borrowings continue to decrease as banks are using some of their excess liquidity to pay down borrowings. The influx of liquidity doesn’t seem to be ceasing either, with cash growth growing at a faster annualized pace this quarter compared to YTD annualized. On the loan level, large banks are seeing slightly better loan trends compared to small banks (could this be an early sign of the tide turning for loan growth in the industry?). Both C&I and CRE QTD annualized growth is positive for large banks thus far in 2Q at 6.0% and 2.1%, respectively. This is compared to negative C&I and CRE growth YTD annualized for large banks. C&I at small banks has taken a hit in 2Q, and could be attributed to the slowdown in PPP lending post 1Q with negative 24.1% QTD annualized growth. CRE 2Q growth for small banks is currently lagging YTD annualized growth of 1.9% with QTD annualized growth only at 0.29% three weeks into 2Q.
USD/CAD falls to new lows
USD/CAD broke 1.2200 today and is testing 1.2160 lows. Moving forward, keep a close eye on 1.2100 key support levels we highlighted last week, as they could determine if the Canadian currency continues to strengthen against USD.

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Daily Market Color

Rates Fall as Markets Weigh Price Pressures

Rates turn lower despite rising inflation expectations
Treasury yields/swap rates closed 1-3 bps lower across the curve – the 10-year UST yield near 1.56% (-3bps). The rally came despite the 5-year breakeven rate, which is a gauge of the market’s inflation expectations, rising to the highest level since 2008.  While newly released economic data continues to support a path to rising inflation, Fed officials have done their best thus far to label the recent uptick as transitory. In US equity markets, major indices hovered near throughout the trading session – the S&P 500 and DJIA rising 0.1% and 0.3%, respectively, while the Nasdaq lost 0.4%
US private payrolls rose by 742,000 in April, the largest gain since September
Hiring was distributed across all sectors, with notable gains seen in leisure and hospitality (+237k), manufacturing (+55k), and construction (+41k).  The report serves as a preview of Friday’s unemployment report, which is expected to show a 995,000 gain in nonfarm payrolls and a 5.8% unemployment rate.
ISM services index fell from 63.7 to 62.7 last month
While US service providers increased their pace of hiring in April to meet demand driven by businesses reopening and the vaccine effort, rising input costs and falling inventories limited activity.
Boston Fed President Eric Rosengren believes price pressures are “likely to prove temporary”
He commented, “Toilet paper and Clorox were in short supply at the outset of the pandemic, but manufacturers eventually increased supply, and those items are no longer scarce. Many of the factors raising prices this spring are also likely to be similarly short-lived.”  While he still believes the economy still requires “substantial improvement” before tapering conditions are met, Rosengren added, “It’s quite possible that we’ll see those conditions as we get to the latter half of the year.” 

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Daily Market Color

Rates Steady Following Yellen’s Comments

Yellen inflation remark and clarification whip rates around
Treasury Secretary Janet Yellen kicked off a spell of volatility when she said in an interview that the Fed would need to raise rates to “make sure our economy doesn’t overheat.” Swap rates climbed on the news and ultimately reversed a portion of the rally following Yellen’s later clarification that she wasn’t “predicting or recommending” higher rates. US equities also sold off on the news, the tech-heavy Nasdaq falling 1.9% while the S&P 500 declined 0.7% on the day.
US trade deficit rose to -$74.4 billion, a new record
The March deficit widened by an additional $3.9 billion after exports and imports rose by $12.4 billion and $16.4 billion, respectively.  According to the report, “Year-to-date, the goods and services deficit increased $83.2 billion, or 64.2 percent, from the same period in 2020.”
Pace of US vaccination declines by 32%
Daily vaccinations have fallen from a peak of 3.38 million to 2.29 million doses per day on average.  President Biden aims at vaccinating 70% of the US by July 4th, adding “most people will be convinced by the fact that their failure to get the vaccine may cause other people to get sick and maybe die.”  In India, the COVID crisis continues to worsen, as the country’s total reported infections passes the 20 million threshold.  Prime Minister Narendra Modi has not yet announced a national lockdown.

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Daily Market Color

Unexpected Decline in Manufacturing Growth Pulls Rates Lower

Rates turn lower following unexpected ISM manufacturing index decline
Treasury yields and swap rates turned lower after economic data showed manufacturing growth declined in April – the 10-year Treasury yield closing ~3 bps lower at 1.59%.  Major US equity indices closed higher on the day – the S&P 500 and DJIA rising a modest 0.3% and 0.7% on the day.
ISM manufacturing index falls to 60.7 in April
The figure fell from the all-time high of 64.7 set in March due to rising input costs and record backlogs.  Factory stockpiles fell at the fastest pace since August as demand continues to rise.  Despite the decline, a reading above 50 indicates growth in the manufacturing sector.
Fed Chair Jerome Powell believes the US economy is “not out of the woods yet”
In his speech earlier today, Powell commented that from a “high-level perspective” job creation and economic activity have shown significant signs of recovery, though from a “street level” perspective the pandemic has disproportionately affected certain groups of people.  In response, the Fed “is focused on these longstanding disparities” and will continue “to prioritize “maximum employment as a broad and inclusive goal.”
New York Fed President John Williams believes economy is far from Fed’s target inflation and employment levels
Though he believes the economy is on track to grow at the fastest pace since the 1980s, Williams made clear that “ the data and conditions we are seeing now are not nearly enough for the FOMC to shift its monetary policy stance.”  Williams estimates the Fed’s employment goals will be met in the coming months and inflation goals by the end of the year.

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Daily Market Color

Equities Search for New Catalyst

Equities end week in the red
US stocks fell from all-time highs to end the month of April with all three major indices closing down on the day; the tech-heavy Nasdaq led the decline (-0.85%). Although equities ended the day in the red, April saw the broadest rally on record during the month, with approximately 95% of members above their 200-day moving average. Investors are searching for another catalyst to push equities higher, as fiscal stimulus, vaccinations, corporate earnings, and opening economies become further priced into equities. The month of April also saw a rally in rates as the 10y closed 12bps lower than its March finish. For the day, yields and swap rates declined along the belly of the curve with the 10y UST yield closing flat at 1.63%.
Personal income and spending soar
Personal income had the highest monthly increase on record, driven by the most recent pandemic fiscal stimulus. Personal incomes increased 21.1% (+20.3% exp) during March, while spending jumping 4.2% — the steepest rise since last summer.
USD/CAD price falls below support level
Trading around 1.2280 today, USD/CAD this week broke through key levels, with the rate now firmly below the 1.2400/1.2500 support range. Moving forward, keep a close eye on 1.2100 levels which have not been seen since 2017. 

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Daily Market Color

Equities and Yields Rise on Positive Economic Data

S&P closes on a record high as yields increase
The reflation trade was in full force on the day as continued impressive corporate earnings and strong economic data fueled both equities and yields. The annualized 1Q GDP print of 6.4% and jobless claims hitting a pandemic low of 553,000 led all three major equity indices into the green with the S&P closing on a record high, increasing 0.68% on the day. Yields and swap rates were up across the curve with the 10y UST yield increasing 3bps to close at 1.63%. The 10y is now up 8bps since finishing the previous week at 1.55%.
Consumer spending drives 1Q GDP
1Q GDP printed at 6.4% driven by household spending. Rising vaccinations, accelerating job growth, and two rounds of federal stimulus all attributed to the increased spending in 1Q. The GDP report also revealed the price index for personal consumption expenditures, excluding food and energy, increased to an annualized 2.3% compared to 1.3% in 4Q 2020.
Jobless claims hit another pandemic low
U.S. jobless claims fell to another pandemic low last week with 553,000 initial claims. Jobless claims have continued to improve in recent weeks due to vaccination progress and economies opening up across the nation.

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Fed Reiterates Transitory Inflation

Fed maintains accommodative policy
The FOMC concluded its two-day meeting today with the unanimous decision to leave its benchmark borrowing rate unchanged near zero and maintain current levels of asset purchases. “The sectors most adversely affected by the pandemic remain weak but have shown improvement. Inflation has risen, largely reflecting transitory factors,” their statement explained. The Fed also doubled down on the necessity for “substantial further progress” in the labor market and continued inflation near 2% to even consider reducing its bond purchases. A full comparison of today’s FOMC statement vs. that of the prior meeting can be found here.
 
After trading higher for much of the session, swap rates/UST yields reversed course during Powell’s presser following the announcement. A belly-led rally left rates 1-3 bps lower across the curve, the 10yr UST yield closing near 1.61% (-1bp). In equity markets, major US indices finished the day modestly lower, extending yesterday’s decline from record highs.
U.S. trade deficit widens
The U.S. trade deficit increased to $90.6 billion in March, representing the widest margin on record. The value of imports also soared to a new record high during the month.
President Biden unveils American Families Plan
President Biden unveiled his third spending package in his early Presidency today with the American Families Plan. The $1.8 trillion plan is focused on educational opportunities and child care support for families. Currently, the plan calls for universally free pre-Kindergarten and community college throughout the U.S. The President will make his first address to Congress tonight with more details on his American Families Plan and previous infrastructure plan expected.

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Commodities Index Hits Three Year High

Commodities hit three year high as yields increase
As investors sift through more corporate earnings, both the S&P and Nasdaq closed below recent record highs decreasing 0.21% and 0.34%, respectively. The continuation of strong corporate earnings and expanding vaccinations in the U.S. increased yields across the curve with the 10y closing 1bp higher to 1.58%. Investors growing optimism of economic growth prospects also drove commodities to a three-year high during trading driven by increases in copper and oil.
Housing prices hit 15-year high
In February, tight inventory and low interest rates drove U.S. housing prices to their highest level in 15 years. The S&P CoreLogic Case-Shiller index increased 12% year over year in February, the largest jump in prices since 2006.
Manufacturing prices continue to soar
U.S. manufacturers continue to see soaring material costs in the month of April. Data from the Federal Reserve banks in New York, Kansas City, and Dallas have all reported record high prices in April with a diverse selection of commodities seeing the pricing pressures. The Institute of Supply Management’s March survey revealed that 72% of manufacturers have reported paying higher prices.

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Daily Market Color

S&P Riding High on Corporate Earnings

S&P 500 and Nasdaq post record-high closes
The S&P and Nasdaq rallied to start the week, increasing 0.2% and 0.9%, respectively, to close at record highs. Equities continue to be driven by strong corporate earnings, with more than three-quarters of the S&P companies beating Wall Street earnings estimates thus far. Rates were quiet on the day, increasing slightly on flattening curve as the 10y UST yield closed 1bp higher to 1.56%. The two-day FOMC meeting starts tomorrow — investors are confident the Fed will stick to its accommodative approach but will be on the lookout for any changes to the Committee’s outlook on policy tightening.
Large bank loan growth breaks free to start Q2
After lackluster loan growth in Q1, large banks (top 25 in asset size within the U.S.) are seeing early signs of growth to start Q2. During the first two weeks of the second quarter, large banks have seen QTD annualized growth in C&I and CRE of 20.9% and 5.1%, respectively. Small banks (those outside the top 25 in asset size) showed similar growth in C&I with 17.7% in QTD annualized growth to start Q2. However, small banks have seen a contraction in their CRE portfolios to start the second quarter.
Durable good orders miss estimates
U.S. durable goods orders, items expected to last at least three years, increased less than estimates driven by lower bookings for commercial aircraft. Orders increased 0.5% month over month in March, after declining 0.9% in February. Median economists’ estimates called for an increase of 2.3%.

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