The Market Today
by Craig Dismuke, Dudley Carter
CORONAVIRUS UPDATE (VS Coronavirus Chartbook – PDF)
Monitoring the Virus Headlines: The U.K.’s weekend announcement that it plans to implement a partial lockdown later this week continued to be key topic of discussion on the virus message boards. The decision follows similar moves last week in Germany and France. On Monday, France reported another record for new infections and another rise in COVID-19 patients occupying ICU beds. German Chancellor Merkel pointed to a tripling of ICU patients in Germany as she acknowledged the country will face a tough winter. She reiterated that the lockdown decision, while a tough call, was the right one. She cautioned that the “light at the end of the tunnel” is still not visible from here. Elsewhere in Europe, Hungary is expected to announce new restrictions later this week. In the U.S., the top medical official in New Jersey said the second wave will likely peak in the first quarter and Massachusetts announced moves to address the state’s rising cases. Massachusetts’s governor issued a stay-at-home advisory requiring residents to be home by 10 p.m. and stay there until 5 a.m. Additionally, no more than 10 people can gather indoor in private homes and residents must mask up while in both indoor and outdoor public spaces. Businesses must close by 9:30 p.m.
2020 Elections: The 2020 elections are finally here. The polling data continue to point to Democrats retaining the House, Biden winning the White House, and the Senate leaning in favor of Democrats. However, the polling data have been wrong in previous elections, specifically with accuracy in predicting turnout. In Democrats’ favor this year, the margins are slightly larger in key states than they were in 2016 and the early vote was substantial, reportedly over 90 million votes cast early. In Republicans’ favor, some of the polling data have moved in their favor in the last few days and the President’s approval rating is now near its highest of his term (see Chart of the Day). In the Presidential race, key states are likely to be Wisconsin, Michigan, Pennsylvania, North Carolina, Florida, and Arizona. Key to the Senate race are expected to be races in Montana, Minnesota, Iowa, Michigan, Maine, North Carolina, South Carolina, Georgia, and Arizona.
The Senate race is likely to have the biggest impact on the economy in the short- to medium-term. There is an excess of speculation about what different outcomes will mean for the economy and markets. The most logical expectation is that a Democratic sweep would result in a larger stimulus package than if the outcome is a divided Congress. According to Politico, Speaker Pelosi said yesterday that if Democrats sweep, they will use reconciliation next year to pass a stimulus package and enhance the Affordable Care Act, among other priorities.
Factory Orders and Auto Sales: Today’s economic calendar will bring the September Factory Orders report and final revisions to September business investment in equipment figures. The initial data, including the 3Q GDP report, have pointed to a stronger-than-expected recovery in this component of investment. Also released today, the October auto sales figures which are expected to inch up from 16.34 to 16.50 million units (annualized).
PMI Data Gives Markets Reason to Recover as Wild Week Began: Despite the U.K.’s weekend announcement of new restrictions and the impending U.S. election, U.S. stocks rebounded nicely Monday following their worst weekly performance since March. The upbeat global market tone began during Asian trading after a pair of manufacturing PMIs showed activity expanded in China for a six month in October. Adding to the daily optimism, the Eurozone’s manufacturing PMI for October was revised up in a sign that activity had more momentum heading into the latest round of lockdowns. In addition to the U.K., Germany and France last week joined the long list of European countries announcing restrictions as the continent struggles with exponential case growth.
Stocks Gains, Treasury Yields Fell on the Eve of the Election: After a positive open, U.S. indices added to gains following a positive PMI revision and stronger-than-expected ISM manufacturing index (more below). While stocks ended off their highs, they still managed solid daily gains. On the eve of the election, the S&P 500 rose 1.2% after sliding 5.6% last week. All eleven sectors gained, led higher by energy and cyclical sectors such as materials and industrials. Oil prices rose nearly 3% on reports that OPEC+ could postpone their plans to remove production curbs in January. Despite the firmer footing for equities, Treasury yields slipped. The 10-year yield fell 3.0 bps to 0.84% after a surprising rise last week to the top end of the pandemic range, despite equities slump.
Equities Rise as U.S. Election Arrives: Global markets have continued to recover on Tuesday as election day finally arrives in the U.S. Stocks rose 1.3% in Asia and Europe’s Stoxx 600 was 1.7% higher at 7 a.m. CT. Futures on the S&P 500 were up nearly 1.2%, splitting solid gains for both the Dow and Nasdaq. The cheerful market tone returned the Treasury curve higher on Tuesday after yields slipped to start the week. The 10-year yield was back close to the top end of its trading range since March, earlier up 2.5 bps to 0.87%. Echoing the better risk sentiment, U.S. crude prices were stronger by 2.8% and the U.S. Dollar and Japanese yen declined. In other currency moves, the Australian dollar was notably stronger despite the Reserve Bank of Australia cutting its overnight rate from 0.25% to 0.10% and announcing a 100 billion Aussie dollar purchase program of 5-year to 10-year government bonds over the next six months. With the foreign economic calendar empty and the U.S. schedule sparsely populated, investors will be entirely focused on coverage of the election throughout the day.
ISM Manufacturing Index Beats at Two-Year High as Industrial Resilience Continues: The ISM’s Manufacturing Index was notably stronger than expected in October as all five of the key underlying indices made positive contributions to the headline. The overall index rose 3.9 points to 59.3 last month, matching its best level since August 2018. New orders led the way higher with a 7.7-point gain to the strongest level since 2004. Production picked up 2 points, inventories (51.9) grew for the first time in four months, and supplier deliveries slowed in a sign of more brisk activity. Encouragingly, employment improved for a sixth month and expanded for the first time since July 2019. Throughout the economic data, the manufacturing sector has been more resilient considering the nature of the recession has weighed more heavily on the services sector of the economy. Separately, the Markit Manufacturing PMI was revised up from 53.3 to 53.4, keeping it at the highest level since January 2019.
Strong Housing Activity Keeps Construction Spending Propped Up: Likely to weigh marginally on last week’s initial 3Q GDP estimate, construction spending rose 0.3% in September, weaker than the 1.0% gain economists expected, and the 1.4% rise initially estimated for August was revised down to 0.8%. As was the case with other housing data for 3Q, residential investment remained a bright spot in an otherwise dreary sector of the economy. Total private residential spending rose 2.8% while non-residential spending declined 1.5%, echoing the weakness for business investment in structures highlighted in last week’s GDP report. Public sector construction spending declined 1.7%, dragged down by a 6.7% drop at the federal level and a 1.2% slide in state and local outlays.