The Market Today
12-Month Deficit Hits $3T; Cases Continue to Rise; Small Businesses Optimistic About Re-Opening
by Craig Dismuke, Dudley Carter
Vining Sparks 3Q Economic Outlook Webinar Today (CPE Eligible, CLICK HERE TO REGISTER)
Vining Sparks will host our 3Q Economic Outlook Webinar this morning at 10:00 a.m. CT. We will highlight the historic economic destruction caused by the coronavirus, discuss how we expect the virus will change consumer behaviors and economic growth in the future, and detail our projections for interest rates.
Monitoring the Virus Headlines: Monday’s major virus headline was initially news that Pfizer and BioNTech had received FDA fast-track approval for a couple of its experimental vaccine candidates. However, it was later displaced by California’s announcement of some of the largest rollbacks to date in response to weeks of rising cases and a new record for hospitalizations. The state’s governor said indoor dining at restaurants, bars, theaters, and zoos must close statewide. Counties on the state’s monitoring list must also shut gyms, salons, and churches. Rollbacks in several states have led to worries about the sustainability of economic recovery. Elsewhere, Arizona reported the fewest new cases in two weeks while Florida’s 4.7% increase exceeded the 7-day average. Miami reported a new record for hospitalizations.
Monitoring the Other Headlines: Hong Kong reimposed social distancing restrictions in response to an uptick in infections and the WHO said statistics show too many countries are moving in the wrong direction. Tracking stimulus efforts, leaders from Italy and Germany acknowledged that upcoming negotiations on a joint package for the EU will prove to be difficult with several factions still positioned far apart on the acceptable details. In the U.S., Senate Majority Leader McConnell said he expects a draft of the next aid bill will be ready next week. Just before McConnell’s remarks, the Treasury announced a record $864B monthly deficit for June that raised the trailing 12-month deficit to just shy of $3 trillion. Relative to the size of the economy, the 13.8% deficit-to-GDP ratio represents one of the largest ever recorded.
Small Business Confidence Rebounds More Than Expected as Businesses Re-Open: The June report from NFIB on small business sentiment showed stark improvement from the situation in April and May. Headline confidence gained 6.2 points to 100.6, almost doubling the expected increase. The index tracking the outlook for sales jumped 37 points from it’s lowest level on record as small businesses attempt to re-open. According to NFIB Chief Economist Bill Dunkelberg, “Small businesses are navigating the various federal and state policies in order to reopen their business… We’re starting to see positive signs of increased consumer spending, but there is still much work to be done to get back to pre-crisis levels.”
Recovery in Gas Prices Pushes Consumer Prices up in June the Most Since 2012: Consumer prices rose 0.6% in June at the headline level and 0.2% when excluding food and energy prices. The 0.6% MoM gain in headline inflation was the largest monthly increase since 2012 and came as gasoline prices began to “normalize” after an unthinkable decline in previous months. The 12.3% increase in gas accounted for over half of the overall increase in consumer prices. With disruptions to demand expected to persist for many months, and spare capacity expected to exist in both the broad economy and labor market, inflation concerns have largely been put on the back-burner for now. On a year-over-year basis, headline CPI increased from +0.1% to +0.6% while core CPI held steady at +1.2%.
Fedspeak: There are four Fed officials speaking today: Gov. Brainard (1:00 p.m. CT), Atlanta’s Bostic (1:00 p.m.), St. Louis’s Bullard (1:30 p.m.), and Philadelphia’s Harker (2:30 p.m.).
Monday’s Market Moves Highlight Risks Investors Face as the Economy Reopens Amid the Pandemic: Stocks ripped higher early Monday but ended generally weaker on the day in a session showing the complexities investors may face for months to come. The early optimism seemed to ignore weekend developments showing record global infections and a level of new cases in Florida that topped any single-day increase for a U.S. state so far in the pandemic. The move up was further supported by pre-market reports that a couple of vaccine candidates from the joint efforts of Pfizer and BioNTech had received fast track designation from the FDA to begin late-stage trials. The mood, however, turned sharply lower in the final hour of trading after California announced one of the most significant rollbacks of a reopening to date.
Treasury Yields Dropped Back on Virus Uncertainty: Many states have registered marked acceleration in case counts in recent weeks with several, including the Golden State, reporting concerning increases in hospitalizations. An above-average case increase for California and a new record for hospitalizations roughly aligned with the beginning of the end of Monday’s gains for the major U.S. indexes. The headlines describing the restrictions that would be put back in place in California sent the S&P 500 sliding even faster from its highs. The index, which had gained as much as 1.6% early in the afternoon, plummeted to end the day down 0.9%. The volatility emphasizes the delicate environment investors face as the country attempts to reopen more fully at the risk of reinvigorating the virus. Treasury yields, which hardly responded to the early equity strength moved down to close near the lows of the day. The 2-year yield was essentially unchanged while the 10-year yield dropped 2.6 bps to 0.62%.
JPMorgan Beats Expectations Despite Big Build in its Allowance for Bad Loans: U.S. equity futures pointed to a rebound Tuesday ahead of bank earnings despite global stocks sliding after Wall Street’s sharp downside reversal on Monday. JPMorgan reported a larger-than-expected profit-per-share result, helped out by record trading results, that lifted its shares in pre-market trading. However, the severe negative effects of the virus were clear in the release. The bank’s profits fell 51% from a year ago as the company set aside more than $10 billion to cover potential loan losses, the largest quarterly provision in the company’s history according to Bloomberg. Despite some positive consumer indicators in higher auto and mortgage originations, total loans fell roughly 2% and more than half of the loan loss provision was related to consumer loans. JPMorgan’s CEO said there is still “much uncertainty regarding the future path of the economy.”
Treasury Yields Steady: Citigroup and Wells Fargo also released earnings ahead of the market open which reflected similar dynamics of profit weakness driven by pandemic-related provision increases and significant outlook uncertainty. Wells Fargo, however, posted a loss for the quarter, its first since 2008, and said it was cutting its dividend. Equities have risen sharply from the lows set in March as investors hope for a swift recovery from the deep recession. Singapore’s 41.2% contraction in the second quarter reflects the severity of the global downturn while China’s unexpected gain for exports in June shows signs of the pick-up in activity before the virus began to accelerate again. While equities slipped 0.9% in Asia and were 1% lower across Europe, S&P 500 futures were 0.3% higher at 7:30 a.m. CT. Treasury yields were little changed across the curve with the 10-year at 0.61%.
Kaplan Cautions About the Recovery Slowing as Infections Rise: Dallas Bank President Kaplan became the latest Fed official to point out that the recovery appears to be slowing as the rate of infection picks up across the country. The Fed may need to do more but additional fiscal action, possibly an extension of the enhanced unemployment benefits, will be necessary to mitigate the risk of large permanent job losses. He estimates that unemployment will only decline to between 7% and 8% by the end of next year. Addressing what some see as an elephant in the room, he said he believes the market and economic trends will eventually occur.