U.S. Unemployment Insurance Claims Continue to Fall

Initial claims for unemployment insurance fell 38,000 in the week ended May 22 to 406,000 from an unrevised 444,000 in the previous week. The Action Economics Forecast Survey panel expected 436,000 new claims. The latest week’s figure represents still another new low since the start of the pandemic in March 2020. While the most recent reading for claims remains well above levels reached immediately before the pandemic, the level of claims is approaching the 300,000-400,000 range in which claims have fluctuated during previous economic expansions. The 4-week moving average was 458,750 in the week ended May 22, down from 504,750 in the previous and also a pandemic low.

Initial claims for the federal Pandemic Unemployment Assistance (PUA) program fell to 93,546 in the week ended May 22 from 95,142 the previous week. The most recent figure is the lowest since just after the program began in April 2020. The PUA program provides benefits to individuals, such as the self-employed, who are not eligible for regular state unemployment insurance benefits. Given the brief history of this program, these and other COVID-related series are not seasonally adjusted.

Continuing claims for regular state unemployment insurance edged down to 3.642 million in the week ended May 15 from 3.738 in the previous week. The state insured rate of unemployment ticked down 0.1%-point to 2.6%. It reached 15.9% in May 2020, while the average rate in 2018 and 2019 was 1.2%.

Continuing PUA claims were 6.516 million in the week ended May 8, down from 6.606 million in the previous week. By contrast, in the May 8 week, the number receiving Pandemic Emergency Unemployment Compensation (PEUC) edged up 49,000 to 5.192 million. This program covers people who have exhausted their state benefits.

The total number of all state, federal, and PUA and PEUC continuing claims was 15.802 million in the May 8 week, a 175,255 decline from the previous week. This was the lowest reading since just after the pandemic-related programs began in early April 2020. This grand total is not seasonally adjusted.

  

(Bespoke)

• U.S. labour market is tighter than it appears, Fed’s Robert Kaplan says

(…) The factors crimping labour market supply “may not be particularly susceptible to monetary policy,” he and several of his economists wrote in a blog on the Dallas Fed’s website.

Though those factors may fade as the year progresses, labour supply may ultimately increase less than expected. “It is our view that this possibility should be kept in mind as policy-makers assess the appropriate stance of monetary policy,” they wrote. (…)

The blog noted “resilient” wage growth and “relatively abundant” jobs, indicating the labour market has less slack than suggested by the fact that the U.S. economy now employs 8.5 million fewer people than before the pandemic.

It’s unclear how many sidelined workers will return. Many have retired. Others are caring for family members, or are worried about their health, the authors said. The extra $300 weekly in unemployment benefits, part of the federal government’s pandemic aid package, may also be playing a role. (…)U.S. Pending Home Sales in April Reverse March Gain

Pending home sales fell 4.4% (+51.7% y/y) during April following a 1.7% March rise, revised from 1.9%. Sales volume fell to the lowest level since May of last year. Weakness continues to reflect a record low number of homes on the market.

Sales in the Northeast declined 12.9% (+96.5% y/y) in April following a 6.1% gain. Sales in the South fell 6.1% (+45.3% y/y) after a 3.0% March rise. In the West, sales also were off 2.6% (+57.3% y/y) and reversed their increase in March. Moving 3.5% higher (39.4% y/y) were sales in the Midwest following five straight months of decline.

  

U.S. Durable Goods Orders Fell in April

Manufacturers’ orders for durable goods declined 1.3% in April (+60.1% y/y) after rising 1.3% during March, revised from the previously reported 0.8% on May 4. This was the first monthly decline since April of 2020. A 0.8% rise had been expected in the Action Economics Forecast Survey.

Last month’s decline was driven by a 6.7% (+335.2% y/y) fall in transportation equipment orders, notably a decline of 6.2% in vehicle and parts orders. Excluding transportation, orders were up 1.0% (+29.9% y/y), following a 3.2% (+17.2% y/y) rise in March.

Orders for nondefense capital goods orders excluding aircraft, “core capital goods” orders, rose a strong 2.3% (+27.1% y/y) in April, following a 1.6% (+14.8% y/y) rise in March.

In the major categories of the report, orders for primary metals rose 3.0% (+46.6% y/y), orders for fabricated metal products rose 0.9% (+46.9% y/y), orders for machinery rose 1.4% (+29.3% y/y), and for computers 0.4% (+9.5% y/y). Orders for electric equipment and appliances declined 0.9% over the month (+25.2% y/y).

Shipments of durable goods rose 0.6% in April (+37.4% y/y) following a 2.7% (+12.3% y/y) rise in March. Shipments of core capital goods rose 0.9% (+23.5% y/y). Shipments of transportation products dropped 0.4% over the month (+90% y/y), while shipments excluding transportation products rose 1.0% (+23.7% y/y).

Unfilled orders for durable goods rose 0.2% in April (-2.5% y/y), following a 0.5% rise in March (-4.4% y/y). Unfilled orders excluding transportation rose 1.6% (+10.1% y/y).

Inventories of durable goods rose 0.5% (+2.3% y/y) in April, following a 1.0% (+2.1% y/y) rise in March. Excluding transportation, inventories rose 0.4% (+1.1% y/y) and 0.8% (+0.8% y/y) in March.

Core cap-goods orders are 15% above their pre-pandemic level and 9% above their previous peak. Their unfilled orders are 6.6% above their Feb. 2020 level and rising.

Biden Expected to Propose $6 Trillion Budget The budget is set to lay the foundation for the president’s plans to modernize the nation’s infrastructure and expand the government’s role in providing healthcare, education and other social services.

The Biden administration’s first budget, for the fiscal year beginning Oct. 1, would put the nation on a path to spend $8.2 trillion annually by the end of 2031, the people said. Under the plan, debt would exceed the record level seen at the end of World War II within a few years and reach 117% of economic output by the end of 2031, up from about 100% this year.

The government was on track to spend $5.7 trillion in fiscal year 2021, according to Congressional Budget Office projections released in February, before Congress enacted Mr. Biden’s $1.9 trillion Covid-19 relief package. The Biden budget plan would boost federal spending by $300 billion, or 5%, above the 2021 projected level. (…)

Officials have said those plans, which envision sharply higher taxes on corporations and the wealthy, will generate enough revenue to offset higher spending within 15 years, but will add to deficits in the meantime. (…)

For the White House, the budget proposal reflects a broader shift in economic thinking that focuses on keeping interest payments on government debt in check rather than eliminating deficits. (…)

Officials now believe they can borrow more over the next few years to pay for spending programs—such as investments in roads, bridges and broadband—that they say will raise the productive capacity of the economy, allowing faster growth without triggering unwelcome increases in inflation or interest rates.

The crux of their argument: Higher deficits in the short term would help foster stronger growth and lower debt over the long term.

While overall debt would rise to the highest level ever, the administration expects net interest costs to hover around 2% of GDP for the next decade, which it sees as a prudent threshold. (…)

“It is very dangerous to base your economic plan on the hope that interest rates will stay low forever,” said Brian Riedl, a senior fellow at the Manhattan Institute and a former Senate Republican budget aide. (…)

• Capital-Gains Plan Assumes April Tax Rise

President Biden’s expected $6 trillion budget assumes that his proposed capital-gains tax rate increase took effect in late April, meaning that it would already be too late for high-income investors to realize gains at the lower tax rates if Congress agrees, according to two people familiar with the proposal.

Mr. Biden’s plan would raise the top tax rate on capital gains to 43.4% from 23.8% for households with income over $1 million. He would also change the tax rules for unrealized capital gains held until death. (…)

Currently, people who die with unrealized gains don’t pay any income taxes. Their heirs pay only when they sell assets and only on any gains since the prior owner’s death. That gives people an incentive to hold on to appreciated assets and, without the proposed change to the tax rules at death, the higher tax rate would prompt more people to hold assets until death.

The Biden proposal would apply income taxes to those unrealized gains at death. It would have a $1 million per-person exemption, plus existing exclusions for gains on principal residences. Family-owned farms and businesses would get special rules that would defer their taxes as long as they own and operate the businesses.

Taxing capital gains at death is different from the estate tax, which is based on net worth and currently has an exemption of $11.7 million per person. The administration hasn’t proposed any changes to that tax.

• To Prevent the Supply Problems Ailing Chips, Plane Makers Are Boosting Demand

On Thursday, the European plane maker said it has asked suppliers of parts for its powerhouse Airbus A320 narrow-body jet family to prepare for a firm monthly production rate of 64 by the second quarter of 2023, which is close to the 67 figure it was targeting before the pandemic. The company also wants to be ready to ramp up to 70 by the first quarter of 2024, and is even considering a rate of 75 by 2025.

Likewise, a recent report by Reuters suggested that, in the U.S., Boeing is aiming to lift output of its 737 MAX to 42 jets a month in the fall of 2022.

Investors shouldn’t let their enthusiasm run wild. While consumers are hungry for chip-filled cars and electronics, airlines probably don’t want many planes in the near term, beyond opportunistic purchases at discounted prices. Indeed, 2021 output targets for the A320, which is the most popular aircraft family in the world, haven’t changed and remain set at 45 a month by the final quarter. This is lower than Airbus expected only seven months ago. (…)

Still, the new schedule implies a marked improvement relative to the production rates priced in by brokers. More important, it gives Airbus’s suppliers a clear signal that future sales will be higher, now that vaccination rates imply an end date for the Covid-19 crisis. This is essential for them to be able to increase capacity without gambling on their survival, and offers a lesson on the role that managing demand can play in easing bottlenecks. (…)

Even if demand for jets ultimately falls short of Airbus’s plans, the company’s priority in announcing them is to avoid the supply constraints that were prevalent in aviation before Covid-19. Walking back on Thursday’s commitments would be a last resort, given how hard it is to manage and resize production at each link in the long chain of smaller suppliers.

The large and complex aviation ecosystem needs greater visibility almost as much as it needs higher sales. Finally, it is getting some.

• Carmakers Forced by Chip Crisis to Rethink Just-In-Time Ordering

Shell’s climate defeat: an omen for all corporate polluters? Dutch court’s ruling that oil major must speed up decarbonisation could spur further lawsuits

• Hedge fund that beat ExxonMobil says it will have to cut oil output Engine No 1 won at least two seats on supermajor’s board while raising climate alarms
• ExxonMobil shareholders hand board seats to activist nominees Historic vote reflecting climate concerns comes on bruising day for international oil companies

China’s Vaccination Surge Could Accelerate Asian Recovery From Covid Faster Chinese vaccination could accelerate the return of sorely needed tourism to the battered economies of Southeast Asia

About 20 million vaccines were distributed on Thursday alone and over the past week, vaccinations have proceeded at a pace faster than the U.S., European Union or U.K. have registered at any point during their rollout.

UBS economists note that it’s worth watching for any pinch in supply of Chinese vaccines to countries currently deploying them: notably Chile, Indonesia, Turkey, Mexico and Brazil. (…)

Canadian Banks Signal Covid All-Clear Earlier Than Expected

After a year of stockpiling record amounts of capital to protect against a wave of loan defaults, Royal Bank of Canada and Toronto-Dominion Bank — the country’s two largest banks — reversed course last quarter. Toronto-Dominion on Thursday reported a surprise C$377 million ($312 million) release of provisions for credit losses for its fiscal second quarter, while Royal Bank released C$96 million. Analysts had projected both lenders would continue setting aside capital to absorb potentially soured loans.

With vaccination campaigns putting economic reopenings in reach in Canada and the U.S., strong housing markets fueling mortgage lending, and surging equity markets supporting capital-markets and wealth-management businesses, Toronto-Dominion and Royal Bank are asserting they have more than enough capital to handle any bumps along the road to recovery. (…)

Those rising measures may put pressure on Canada’s bank regulator, the Office of the Superintendent of Financial Institutions, to allow the country’s banks to resume share buybacks and dividend increases. The U.S. Federal Reserve allowed American banks to resume buybacks last year. (…)

BACK TO THE FUTURE

• The Last Time This Happened? March 2000 (SentimenTrader)

(…) Until recently, one of the main arguments for stocks was that even though they weren’t yielding much, at least they were earning more than Treasuries, even after accounting for inflation.

Now that there has been a spike in inflation gauges, the earnings yield on the S&P 500 has turned negative. This is not a condition that investors have had to tackle much over the past 70 years.

When an investor in the S&P adds up her dividend check and share of earnings, then subtracts the loss of purchasing power from inflation, she’s barely coming out even. This is a record low, dating back to 1970, just eclipsing the prior low from March 2000.

Like all valuation measures/tools, this offers little help in timing. But it warns that if and when the time comes, there is little “value/income backstop”. WE sure need rising inflation to be transitory.

• Dow Industrials Separate From S&P 500 (Dave Wilson)

The Dow Jones Industrial Average reached its 125th anniversary Wednesday after displaying more independence than usual from the S&P 500 Index. The correlation between the U.S. stock benchmarks over 60 trading days, or about three months, shows as much. Typically the indexes move in lockstep, as the average correlation has been 0.96 since 2000, according to data compiled by Bloomberg. Yet this month’s readings have been as low as 0.81, the lowest since November 2000.

• More reminiscences from Dave Wilson:

The rise and fall of Ark Investment Management’s flagship exchange-traded fund echoes the dot-com stock crash of the early 2000s, according to Michael Hartnett, Bank of America Corp.’s chief global investment strategist. Hartnett raised the issue in a May 7 report that highlighted a ratio between the ARK Innovation ETF and Warren Buffett’s Berkshire Hathaway Inc. — the “new economy” versus the “old economy,” as he put it. For historical perspective, he tracked the ratio between Invesco Ltd. and Berkshire in the late 1990s and beyond. Invesco was then one of the largest U.S. stock-fund managers.

History rhymes…

  Delivery Apps Have Never Been Hotter. They’re Still Not Making Money. The pandemic sent business through the roof for DoorDash and Uber Eats, but they’re still trying to cook up secret sauce for profitability. Grubhub calls restaurant delivery a ‘crummy business’

THE BIG DEBATE

• Fed’s Quarles Joins Other Officials in Moving Toward Taper Debate The Federal Reserve’s point man on financial regulation, Randal Quarles, said that if the U.S. economy turns in the strong performance he now expects, the door will soon open to a debate about slowing the pace of the central bank’s bond-buying stimulus.
• Reopening Is Inflation’s Cure, Not Cause Expect prices to moderate as demand shifts to travel and other experiences from consumer goods.

This is from Jason M. Thomas is head of global research at the Carlyle Group.

The rise in inflation doesn’t stem from booming demand associated with the reopening of bars, restaurants, concert venues and stadiums, as many have claimed. It reflects the extent to which manufacturers were caught off balance by the pandemic last year. That’s good news, because the problem is temporary. As more consumer spending gets rerouted in the months ahead from durable goods such as camping gear and hot tubs to experiences like travel and live events, inflation is likely to moderate.

(…) rather than aggressively scale up production schedules once factories were reopened and health and safety protocols were in place, manufacturers remained understandably cautious. For many companies, orders ran ahead of production. Employment remained well below pre-pandemic averages. Many firms kept inventories of finished goods and necessary inputs to a minimum. (…)

Deprived of concerts, vacations, sporting events, fine dining and other experiences, consumers splurged on new and used cars, furniture, computers, phones, games, toys and bikes. Spending on these recreational items was up by 25% or more, on average, during the pandemic. Housing demand reached levels last seen in 2006, as low interest rates, social distancing and remote work spurred households to seek new homes or renovate existing residences. (…)

Shortages of these inputs exacerbate the problem by inhibiting new production, leading to larger backlogs and even greater price pressure. (…)

A shortage of semiconductors has curtailed auto production. With fewer new cars on dealers’ lots, used-car prices rose by 10% in April, while car-rental rates jumped 16%. Furniture backlogs grow as the requisite plastics and resins remain in short supply. Lumber prices have tripled since last June as demand for residential construction outstrips sawmill capacity. February weather in Texas and the Suez Canal blockage compounded many of these issues.

In this context, booming demand for dining out, traveling and tickets to concerts and baseball games isn’t the problem—it’s the solution. (…)

As spending normalizes, travel, concerts and lodging will consume a larger share of household expenditures, leading to a slowdown—or outright decline—in durable-goods consumption that will finally provide some breathing room for manufacturers to scale up production and close the supply-demand gap.

What Mr. Thomas omits to consider is the humongous increase in the pandemic-rescue money that boosted disposable income and personal savings. People may not need to shift from durables to services since they have more than enough savings to spend broadly.

Since December 2020, real spending on services has grown 2.6% but spending on durable goods kept rising (+17.2%). In dollar terms, real spending on services rose $205B in Q1’21 from Q4’20 but spending on durables increased $338B. No substitution just yet through March (we get April data on Friday).

Chase card spending data also show no substitution whatsoever as spending on Travel and Entertainment strongly recovered in recent months. Total and Discretionary spending rose at similar beats.

No question that there is a supply problem. But the demand side is very much present and potentially persistent. The next chart plots total dollar expenditures and personal savings. From February 2020, expenditures rose from $14.9T to $15.4T but savings jumped from $1.4T to $6.0T. Even a half-way retreat in savings would boost expenditures 15%. With savings rates where they are, people have little incentive to hoard money, even less so if inflation accelerates.

GameStop, AMC Shares Soar as Meme Stock Rally Returns Analysts say jump has likely been driven by a crosscurrent of factors that have prompted individual traders to pile in

(…) This week’s rally—though tamer by comparison—has similarly lighted up Reddit forums, Discord chat rooms and Twitter feeds. (…)

With cryptocurrencies having lost much of their steam this month, many nonprofessional traders have re-entered the stock market on the hunt for gains. Platforms such as Reddit’s WallStreetBets forum have provided a source of continued enthusiasm for meme stocks in particular. (…)

Data from VandaTrack show that individual investors poured more than a net $22 million into AMC on Tuesday, more than double the stock’s average 2021 daily net inflow of about $9 million. Excitement about the stock didn’t slow Wednesday. The company’s share price finished the day at $19.56, a 19% daily gain that pushed the stock to its second-highest close this year.

The movie-theater chain ranked as the second-most-traded stock in the U.S. market Wednesday and posted its largest single-day trading volume since late February, according to Dow Jones Market Data. Another individual-investor favorite, Express, also ranked among the most-traded. The fashion retailer finished with a 26% gain Wednesday. (…)

Individual investors on social media are hoping to catch institutional investors on the wrong side of the trade again. Short interest in AMC currently stands at nearly 21% of the stock’s free float, according to data from S3 Partners, up from a 2021 low of nearly 11% in March, but down from the 28% reached earlier this year. GameStop’s short interest stands at about 20%, an increase from about 18% in March but much lower compared with more than 140% in January. (…)

Another force behind GameStop’s rise could also be speculation about the videogame retailer’s foray into another area of booming online speculation—the market for the digital collectibles known as nonfungible tokens, or NFTs.

A subdomain for “GameStop NFT” recently appeared on the company’s website, fueling speculation that GameStop may offer its own suite of digital assets that users can buy and sell. (…)

  

THE OTHER BIG DEBATE

• The Virus Lab Theory’s New Credibility The evidence catches up to Fauci and other Wuhan Covid deniers.
• Who were the first coronavirus cases? China should help solve the mystery.

I will not speculate on the end game here but I can easily say that this has the potential of getting very, very messy. Particularly if China continues to not cooperate.

• What a Wuhan lab leak would really mean

Meanwhile, will history rhyme?

Data: CSSE Johns Hopkins University. Chart: Andrew Witherspoon/Axios

U.S. Initiates Trade Dispute Against Canadian Dairy Industry The Biden administration initiated a dispute process against the Canadian dairy industry, triggering the formal dispute mechanism of the new U.S.-Mexico-Canada Agreement for the first time.

Keystone XL on day one, lumber, Enbridge’s Line 5 and now dairy. Friendly Joe!