Daily Market Color October 1, 2020Rates Rise as Congress Attempts to Compromise on a Stimulus Package Treasury yields and swap rates climb higher as stimulus negotiations move forward. Both rates and risk assets rose sharply yesterday on hopes of a grand bargain between House Speaker Nancy Pelosi and Treasury Secretary Steve Mnuchin. The two are in negotiations over a ~$2.2T stimulus package- significantly higher than the “skinny” stimulus bill proposed several weeks ago. The bill is still not finalized and is still likely to meet opposition among deficit hawks, but news of progress alone was enough to push the S&P 500 and DJIA up 0.80% and 1.2% respectively. Rates also moved sharply higher on the news, the 10-year Treasury yield rising 5 basis points to close at 0.68%. This morning risk assets and rates are higher once more following a drop in initial jobless claims. Initial jobless claims for the week ending September 26th fell to 837,000. The level fell below last week’s figure of 870,000 claims, dragging the four-week moving average down to 867,250. Economists use these figures to predict numbers on Friday’s jobs report, which is forecasted to show nonfarm payrolls rising by 894,000 and the unemployment rate falling to 8.2%. Economists forecast the payroll gains to be a result of businesses continuing to recall workers that had been temporarily laid off. The current 8.4% unemployment rate is hovering about 5% above last year’s record low, with the US 11M jobs away from February’s level. Fed officials continue to push for more fiscal aid. In comments yesterday, San Francisco Fed President Mary Daly highlighted the need for added stimulus, commenting, “Whether it happens next week or next month is important to those American households, but also really important to shoring up the economy so that we can fully reengage and get the coronavirus behind us.” Fed Governor Michelle Bowman echoed Daly’s comments, repeating the need for “targeted monetary support.” Richmond Fed President Thomas Barkin suggests that the added support could help the labor market rebound, as “the real challenge now is getting the last 5% of Americans back into the workforce.” To achieve its dual mandate, the Fed has shifted to accommodative monetary policy for the next few years and is targeting inflation levels above 2%. For the year ending July, core PCE, the Fed’s preferred inflation benchmark, only rose a mere 1%, falling well below its target. This morning’s August Personal Consumption report revealed that personal income fell by 2.7% while personal consumption rose by 1.0%. Core PCE rose to 1.6%, a sign that inflation levels could continue to rise in the future with increased consumer demand.