Uneven Unemployment Claims Delta Variant Hits Yields

(MENAFN- ValueWalk) Q2 2021 hedge fund letters, conferences and more

The Labor Department announced on Thursday that weekly unemployment claims in the latest week rose to 419,000, up sharply from 368,000 in the previous week. This was a big surprise, since economists were expecting weekly unemployment claims to decline to 350,000. Continuing unemployment claims in the latest week declined to 3.236 million down from 3.365 million in the previous week, which represents the lowest level for continuing claims since March 2020. The best way to describe the latest weekly unemployment claims is "uneven."

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The Fed now has more“excuses” to remain accommodative due to the uneven progress in the labor market, so next week's FOMC statement will be closely scrutinized for any significant policy change. Since the ECB was dovish with its statement on Thursday and boosted its quantitative easing , I expect that the Fed will also have a dovish FOMC statement. This means that“Goldilocks” is expected to continue, which is an accommodative Fed and strong economic growth.

The biggest beneficiary of the Covid-19 Delta variant fear are bond yields , since the 10-year Treasury bond decisively“cracked” the 1.2% level this week and actually hit a low of 1.133% on Tuesday. This means that either inflation fears are ebbing or there is a flight to quality as the Covid-19 Delta fears spread. Frankly, I believe that although energy prices are moderating, the Covid-19 Delta fear of the global economy slowing is the biggest culprit behind falling Treasury bond yields. The next big test for Treasury bonds will be the“bid to cover ratio” at upcoming Treasury auctions to ensure that there is sufficient institutional demand at current ultra-low yields.

In the wake of the Monday sell-off on Covid-19 fears, I have been getting a lot of questions about what is potentially the next big tipping point that could trigger a market correction? Since positive second quarter earnings seem to be working and helping to shore up stock prices, the biggest risk that I foresee is merely market mechanics; specifically, ETF spreads . On Monday, had you sold an ETF, you would likely be fleeced 1% to 2% by selling your ETF at a discount. On Tuesday, if you bought an ETF, you could have been fleeced up to another 1% premium.

I have been checking the ETF spreads and they started to subside on Tuesday. However, if we get into any extended, multi-day sell off, ETF spreads all too often spin out of control. As a reminder, when trading ETFs, just go to Morningstar.com and check the“Intraday Indicative Value,” which tells you any premium/discount compared to the ETF price.

The Commerce Department on Tuesday announced that housing starts rose 6.3% to an annual pace of 1.643 million in June. May's housing starts were revised down to an annual 1.546 million pace in May, down from a 1.572 million pace previously reported. I should add that building permits declined 5.1% to an annual rate of 1.598 million in June. Lumber prices have declined 70% since June after surging 125.3% in the first five months of 2021, so oscillating lumber prices may have adversely impacted building permits .

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