The Market Today
Business Investment in Equipment Makes V-Shaped Recovery
by Craig Dismuke, Dudley Carter
CORONAVIRUS UPDATE (VS Coronavirus Chartbook – PDF)
Monitoring the Virus Headlines: The daily updates from European countries continued to fuel concerns about the outbreak there that has forced officials in recent days to reimpose some social restrictions. Ireland’s prime minister said the country’s virus situation has continued to deteriorate over the past week and Norway extended its advice to citizens against non-essential travel until January 15. However, record case increases in the U.K. (6,634) and France (16,096) were the bigger news. Both countries have taken steps in recent days to increase social restrictions to slow the second wave. France’s prime minister said not taking targeted steps now poses the risk of another generalized lockdown later.
Business Investment in Equipment Makes V-Shaped Recovery: Durable goods orders for the month of August disappointed expectations by rising just 0.4% (exp. +1.5%). Motor vehicle and motor vehicle parts orders were particularly weak in August, down 4.0%. However, even excluding the volatile transportation categories, orders also rose just 0.4%. Core capital goods shipments (excluding defense and aircraft), a proxy for business investment in equipment, rose a stronger-than-expected 1.5% completing the recovery of lost activity earlier in the year. Likewise, core capital goods orders, a proxy for future business investment in equipment, rose a stronger-than-expected 1.8%. Shipments are now 0.9% above their January level and orders are 1.3% above. After contracting 35.9% in 2Q, business fixed investment in equipment now appears poised to recoup all of that lost activity in the 3Q GDP report.
Two More Fedspeakers to End Busy Week: The run of Fedspeakers finally slows today with only New York Bank President Williams (8:00 a.m. CT and 2:10 p.m.) and Kansas City Bank President George (11:15 a.m.) on the calendar.
Treasury Yields Continued to Edge Lower as Stocks Staged Partial Recovery: U.S. stocks recovered modestly Thursday after large declines on Wednesday, while Treasury yields continued to leak lower amid an uncertain outlook. The juxtaposition of a strong housing market despite millions of Americans still receiving unemployment assistance was on full display in the daily data. Initial jobless claims rose unexpectedly and, despite a drop in continuing claims, show the labor market recovery has continued to level off. Looking at all available unemployment programs, 26 million Americans were receiving assistance in recent weeks. However, new home sales rose unexpectedly in August to a 14-year high (more below) as sales in the South remained strong. The S&P 500 rose 0.3%, closing near the midpoint of its daily trading range. Both sides indicated they were ready to resume stimulus negotiations, but the latest bill being prepared by House Democrats totals around $2.4 trillion, much more than Republicans and the White House have indicated they will support. Treasury yields continued to move very little despite the stock swings, with the 2-year yield closing down 0.6 bps at 0.13% while the 10-year yield dipped 0.7 bps to 0.67%.
Wall Street Set for Fourth Weekly Decline for First Time in More than a Year: Wall Street is on pace for its fourth weekly decline for the first time since August 2019 based on another 0.5% decline overnight for S&P 500 futures. Investors continue to be anxious about the outlook, as stimulus talks remain stalled at a time when U.S. cases have increased and the economy faces risks from a second wave of the virus across Europe. A day after France and the U.K. posted a record for new infections, equity indices in those two countries were down more than 1% and among the worst performers in another broad sell-off across the continent. Governments across Europe, including in those two countries, have begun reintroducing targeted restrictions to slow the virus. With every national index moving lower, the Stoxx Europe 600 was down 0.7% just after 7 a.m. CT. The recent resurgence of the virus across the Atlantic has weighed on the euro, with the currency hitting a new two-month low against the Dollar on Friday. While smaller in size, Treasury yields’ decline was directionally consistent with movements in European sovereigns. Before and after this morning’s durable goods data, the 10-year yield was down 1.3 bps at its session low.
The Housing Data Remains Surprisingly Strong: New home sales were surprisingly strong in August as another surge in sales in the South offset declines in the Midwest and West regions. Total sales rose 4.8% last month to 1.01mm annualized units, beating expectations for a 1.2% decline to an 890k-unit pace. August’s pace was the strongest since 2006 and while the monthly gain was the slowest of the last four months, it extended an astounding rebound that has seen sales soar an unannualized 77% from April’s lows; sales in August were up 43% from a year ago. Sales in the South rose 13.4%, nearly matching the strong July gain, while activity in the Midwest pulled back 21.4% after a 59.5% spike the month before. The recent burst of activity has put pressure on inventories as evidenced by the drop in months’ supply to 3.3, an historic low for the series back to 1963. On an absolute basis, the 282k homes for sale represented the lowest level of inventory in three years.
Bullard Believes the Economy is On the Right Track: St. Louis Fed President Bullard, who has become one of the most optimistic Fed officials in assessing the outlook, said that while “downside risk remains substantial,” there is a possible path for the economy to come close to a full recovery by the end of this year. He also believes that inflation could move above the Fed’s 2% target as soon as 2021. However, even if those projections prove correct, a positive scenario he credits largely to “exceptionally effective” actions by the Fed and Congress and Americans adapting to living with the virus, it wouldn’t lead him to support a change in the fed funds rate. He said Fed policy is in “great shape” and doesn’t currently see a need for more fiscal aid, a contrarian view relative to the perspective of almost every other Fed official.
Evans Expects Negative Outcomes if Congress Doesn’t Renew Fiscal Aid: Speaking for a third consecutive day, Chicago Fed President Evans reiterated his belief that fiscal policymakers need to do more, and that they are taking a “serious and unnecessary risk” if they don’t, one that “will test the true resiliency of the economy.”
Powell Pushes Again for More Fiscal Support: In another joint appearance before lawmakers, Treasury Secretary Mnuchin and Fed Chair Powell both showed support for another round of aid from Washington. Fed Chair Powell said unused funds allocated to the Fed’s liquidity and lending programs could be repurposed for use as additional PPP funds or extended jobless benefits. Calling out one particular area of concern, Powell said that there will clearly be some significant and lasting implications for the commercial real estate market as a result of the pandemic.
Kaplan Keeps More Stimulus in His Forecast Despite Ongoing Stalemate: Fed’s Kaplan said he expects the economy will grow 30% in the third quarter and follow that with another strong quarter to close out 2020. He expects unemployment to fall from 8.4% in August to 7.5% by December. In discussing those projections, he said his outlook does consider another round of fiscal stimulus, including state and local aid and a boost to unemployment assistance, but is not based on the quick identification of a vaccine.
Barkin Blesses Inflation Above 2%: Richmond Fed President Barkin was less precise about acceptable inflation overshoots than his colleagues from Chicago and St. Louis, who both have said that a year-over-year rate of 2.5% would not be a concern. However, he did show general support for the newly adopted framework and forward guidance by noting that, “When inflation nears or slightly exceeds 2%, I hope to celebrate it and not be too hasty to quash it.”