The Market Today
ADP Shows More Job Recovery, Long Way to Go
by Craig Dismuke, Dudley Carter
CORONAVIRUS UPDATE (VS Coronavirus Chartbook – PDF)
Monitoring the Virus Headlines: Not surprisingly, there was no breakthrough in stimulus negotiations Tuesday, a day after House Democrats unveiled a $2.2 trillion aid proposal. However, White House Chief of Staff Meadows said he’s hopeful the two sides can make progress towards a deal and Treasury Secretary Mnuchin and House Speaker Pelosi are scheduled to talk again on Wednesday. Referencing the House bill, Senator Schumer said the proposal shows Democrats are willing to negotiate. As expected, Germany’s Merkel announced new restrictions to limit the size of private gatherings as she acknowledged that more difficult times are ahead. Elsewhere, Finland announced restrictive measures and reports indicated Spain would take further steps soon. In addition to the daily Fed commentary (more below), Bank of England Governor Bailey said he expects the recovery to slow and reiterated that the Committee hadn’t yet reached a judgement on the desirability of negative rates. Tracking developments in the U.S. labor market, Disney announced after markets closed that it would lay off 28,000 workers who have been furloughed since April, most of whom were part-time workers at amusement parks.
ADP Employment Report Beats Expectations in September, Remains Well Below Pre-Virus Levels: The September ADP Employment report showed 749k private payrolls added to the economy, better than the expected growth of 649k. August’s figures were revised up from +428k to +481k. Goods-producing industries added 196k payrolls in another strong result while the service sector added 552k. Within the service sector, leisure and hospitality added another 92k payrolls. The leisure sector continues to significantly struggle to recover all of its lost jobs. Yesterday’s announcement from Disney that they are planning 28k layoffs only added to the angst in the sector. The ADP report reflects a trend also seen in the BLS data, a slowing in the pace of recovery while a big hole in employment remains. There remain 10.4 million lost private payrolls, according to the ADP data, since the February peak.
Large Revisions to 2Q GDP But Near-Same Result – 31.4% Contraction: The final revision to the 2Q GDP report showed overall growth fractionally adjusted but some significant revisions beneath the surface. The economy is now shown to have contracted 31.4% in 2Q, up slightly from -31.7%. The details show a $40 billion smaller decline in personal consumption, a $10 billion larger decline in business investment, a $5 billion smaller decline in residential investment (housing), and a $14 billion smaller trade deficit. These revisions, alone, near the levels of total growth for some quarters. Nonetheless, the headline GDP figure was negligibly changed. It is already evident that the economy is recovering more quickly than expected in 3Q. The main focus now is how much lost activity will remain by the end of the year.
New Record-Low for Mortgage Rates: The 30-year mortgage rate fell to a new record low in the week ending September 25 according to the weekly MBA report. Despite the 5 bps decline to 3.05%, new applications fell 4.8% on a 1.9% drop in purchase apps and a 6.5% drop in refis. Purchase apps continue to point to positive gains in housing while refi apps have, over the past four months, settled into a range approximately double their 2019 levels.
Pending Home Sales, Fedspeak: At 9:00 a.m. CT, the August pending home sales report is expected to show a 3.1% gain and further housing strength. Minneapolis Fed Bank President Kashkari will speak at 10:00 a.m. CT and St. Louis Bank President Bullard at 3:00 p.m. The only Fed official who did not speak last week, Governor Bowman, is scheduled to speak on the strength of community banks at 12:40 p.m.
Equities Fell for the First Time in Four Days Ahead of Tuesday Night’s Presidential Debate: U.S. equities never found their footing Tuesday and Treasury yields muddled around unchanged with investors anxious to take in the first presidential debate. The S&P 500 briefly turned positive within the first hour of trading after consumer confidence jumped more than expected in September (more below), but fell back into negative territory and closed down 0.5%. Energy companies posted the largest decline as oil prices slid more than 3% to a two-week low, but ten of eleven sectors saw losses amid the widespread declines. The White House and Democrats are talking again about the potential for more stimulus after the Democrats proposed a package worth $2.2 trillion on Monday. However, the gap between the two sides remains wide and striking a compromise is expected to difficult if not undoable. Treasury yields fell for most of the session but pared their declines in the afternoon. The 2-year yield dipped 0.2 bps to 0.123%, the lowest since early August. The 10-year yield fell 0.3 bps to 0.65% after falling as many as 1.3 bps earlier.
Equities Weaken and Yields Inch Lower as Markets Reflect on Debate, Respond to Jobs Data: U.S. equity futures were lower and Treasury yields were little changed as investors continued to reflect on last night’s spectacle of a presidential debate as they awaited ADP’s private payroll estimate for September. Social media was hyperactive throughout the debate which several times bordered on chaotic. Equity futures initially gained during the back and forth between the two candidates but turned lower near the end. While the implications of the debate on voter preferences has yet to be determined, the pace of the recovery in China in recent weeks is more clear. The official manufacturing PMI rose from 51.0 to 51.5 while the Caixin survey of smaller firms edged down from 53.1 to 53.0, both signaling continued recovery in the world’s second largest economy. Still, risk markets remained cautious with Asian equities down 0.6% and Europe’s Stoxx 600 0.3% lower. Before the ADP report, S&P 500 futures were down 0.7% and the 10-year yield had declined 0.5 bps. After the ADP data, equity futures pared their declines to around 0.5% while Treasury yields remained steady.
Consumer Confidence Recovers More than Expected but Remains Depressed from Pre-Virus Levels: Consumer confidence recovered more than expected in September and August’s decline was less severe after revisions. The headline index rose 15.5 pts for the current month, the biggest monthly gain since 2003, to 101.8, representing a 16.1-point net gain from April’s low. The index, however, remains notably depressed from February’s reading of 132.6 and the 2019 average of 128.3, reflecting a continued caution among consumers. In the details of the report, both the current assessment and future expectations saw solid gains, benefiting from more optimism about business conditions, employment, and income.
Daily Fed Developments: New York Fed President Williams is “optimistic that we’ll be able to continue to see a pretty strong recovery for the rest of this year and into next year.” However, a lack of additional fiscal aid would be a significant risk to the ongoing recovery and higher debt levels shouldn’t be an impediment for further stimulus. Dallas Fed President Kaplan, who dissented at the most recent meeting in favor of more flexible forward guidance, said keeping rates too low for too long could lead to financial market imbalances. Kaplan joined Williams in cautioning that a lack of more fiscal support will weigh on the recovery. Philadelphia Fed President Harker expects a “bumpy” recovery will keep the labor market from fully healing until 2023 and joined his colleagues in calling for more “critical” fiscal support “soon.” Related to the Fed’s Main Street Lending Program, which has been criticized for a lack of uptake, a special survey of bank lending officers showed “overly restrictive terms” for borrowers and “unattractive terms” for lenders were contributing factors to the lack of demand. Uncertainty related to the loss sharing arrangements was also cited as a concern.