The Market Today

Moderna Trial Sparks Vaccine Optimism; Data Continues Rebounding

by Craig Dismuke, Dudley Carter


VS Coronavirus Chartbook (PDF) (Link)

Monitoring the Virus Headlines: U.S. cases rose 1.8% Tuesday compared to the past week’s average of 2% as key states reported mixed daily updates. Arizona added the largest number of cases in 11 days and infections jumped by a record 10,745. Florida and California registered below-average daily increases. Florida, however, saw an increase in positivity and a record for deaths, as Dr. Fauci called the outbreak a “perfect storm” that could rival the virus pandemic of 1918. New York added four more states to its quarantine list and Philadelphia banned large public gatherings until February. A peer-review study of Moderna’s vaccine, which will move to a stage three trial on July 27, showed the shot produced notable antibodies in all 45 patients in an earlier trial.



Mortgage Rates Drop to New Record Low: Mortgage applications for the week ending July 10 rose 5.1% as mortgage rates fell to new, record lows pushing refi apps up 11.9%.  The 30-year mortgage rate dropped to 3.19%.  Applications for refinance are now up 117% from their 2019 average.  Purchase apps, however, fell 6.1% during the reference week but remained 18% above their 2019-average level.

Empire Fed Beats Expectations, Future Expectations Come Back to Earth: The New York Fed’s report on regional manufacturing conditions in its district jumped from -0.2 to +17.2 on sharp increases in new orders and shipments.  While the labor metrics do not show notable improvement yet, they do show stabilization of the lost employees and work hours.  The regional Fed indices were stronger-than-expected across the board in June, boosting sentiment about the potential for a more v-shaped recovery.  As discussed then, the metrics are limited in application.  They merely reflect the number of respondents reporting improvement in conditions versus those reporting deterioration.  As such, they do not take into account real levels of improvement or deterioration.  Taking some steam from the July report, the six-month forward reading on new orders and general business activity pulled down rather sharply from very high levels.  They remain positive, but the question today is how positive activity will be once the initial rebound has occurred.

Industrial Production and Beige Book: The June Industrial Production and Capacity Utilization data (8:15 a.m. CT) is expected to show another positive month for real manufacturing activity.  The index is expected to show a 5.7% gain for manufacturing.  The Fed will release its Beige Book report at 1:00 p.m. in anticipation of their July 29 FOMC meeting.


Equities Clawed Back Monday’s Decline Despite Banks Building Up Reserves for Expected Loan Losses Caused by the Pandemic: U.S. equities climbed steadily throughout Tuesday’s session to close near the highs of the day, recovering from Monday’s losses that developed late in the session after California announced it was rolling back some of the steps it had taken to reopen its economy. Energy, Materials, and Industrials all gained more than 3% as improvements across all 11 sectors lifted the S&P 500 by 1.3% to its highest level since early June and third highest level since February. The Dow outpaced the broader index with a 2.1% jump while the Nasdaq lagged behind, held back by losses for Amazon and relative weakness in other tech names. Financials finished near the back of the pack after JPMorgan, Citi, and Wells Fargo kicked off earnings season by announcing significant loss provisions to address potential credit issues that arise in the months and quarters ahead. Treasury yields initially gave up overnight gains, but staged a late-day climb alongside equities that left the yield curve marginally higher on the day. The 2-year yield rose 0.6 bps to 0.16% while the 10-year yield added 0.5 bps to 0.62%.


Vaccine Hopes Set a Positive Tone for Global Risk Assets: In addition to incredible stimulus efforts from world governments and central banks, hopes for quick progress on a medical treatment has helped drive global equities higher, despite the infection rate picking up in several regions around the world and in the U.S. Yesterday’s report of Moderna’s vaccine candidate producing “robust” antibodies set a positive tone for risk markets on Wednesday. Additionally, the Bank of Japan maintained its policy stance and kept its pledge to “not hesitate to take additional easing measures if necessary.” Governor Kuroda acknowledged some improvement in the data but cautioned that “it’s a deep trough so while the speed of rebound is fast for now, I’m not optimistic that the pace will continue, …I believe the recovery following that will be gradual.” The decision follows a day of Fedspeak showing no inclination to unwind emergency policies or consider moving rates from zero for some time (more below).

Longer Treasury Yields Rise: As a result, stocks rose in most regions and Treasury yields moved higher. China and Hong Kong were left out of the move up across most of Asia. Yesterday, President Trump signed a couple of bills sanctioning China for their national security move in Hong Kong and removing the special preferences that its previous autonomy had earned the former British colony. Leveraging similarly sharp gains across national indexes, Europe’s Stoxx 600 was up nearly 2% midway through its trading day. U.S. futures were also notably higher signaling another day of gains for the major indexes. Futures on the S&P 500 had risen 1.4% at 7:30 a.m. CT while gains for a couple of key components helped lift Dow contracts by more than 2%. Shares of Goldman and Apple were up in pre-market trading after the bank beat earnings estimates and the tech company received a favorable ruling from an EU court negating a $14.9 billion fine. The 2-year Treasury yield was 0.2 bps higher while the 10-year yield had added 3.3 bps to 0.66%.


Fed Presidents Discuss the Outlook: St. Louis Fed President Bullard said Tuesday the outlook remains highly unclear but noted that he sees a path for a significant decline in unemployment soon. However, he reiterated that the policy stance will “stay largely where it is” for the time being and said the Fed will keep interest rates near their current levels for the foreseeable future. Philadelphia Fed President Harker said the U.S. is experiencing what will be a “stubbornly long-lasting” economic downturn. Fed Governor Brainard again said negative rates aren’t an attractive policy option in the U.S., noted yield-curve targeting may be necessary later but currently needs additional study, and stressed that forward guidance will be important moving forward. She said a “thick fog of uncertainty” overhangs an outlook that faces significant downside risks and will need additional fiscal stimulus in order to prevent a prolonged recession.

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