The Market Today
Biden Begins Transition; Yellen Tapped for Treasury; U.S. PMIs Remain Strong
by Craig Dismuke, Dudley Carter
CORONAVIRUS UPDATE (VS Coronavirus Chartbook – PDF)
Monitoring the Virus Headlines: Most of the focus Monday was on the early-morning news that Oxford and AstraZeneca’s vaccine candidate appeared to be 70% effective overall and up to 90% effective in a certain dose regimen. However, there continued to be new restrictions announced around the world. The UK government said it will lift a nationwide lockdown for England on December 2 but replace it with a three-tiered system for the various regions that will determine at what level economic activity can occur. Luxembourg shut down bars and restaurants and Italy’s prime minister said his government would not allow skiing holidays. Ontario reported a new record for infections while France and Ireland recorded their fewest number of new cases since September. In the U.S., Washington D.C. placed a limit on outdoor (25) and indoor (10) gatherings and North Carolina strengthened its restrictive measures. A mask mandate and other measures to limit indoor gathering sizes and business occupancy limits were extended through December 11. Hospitalizations in the U.S. hit their highest level since April.
Home Prices, Consumer Confidence, FedSpeak: Today’s economic calendar will bring two home price reports, from FHFA and S&P CoreLogic, at 8:00 a.m. CT. Price gains are expected to continue pushing higher. At 9:00 a.m., the Conference Board’s report on consumer confidence is expected to pull back after the recent rise in COVID-19 cases. Also at 9:00 a.m., the Richmond Fed Manufacturing index is expected to come back to earth after a sky-high reading in October. Bullard (10:00 a.m.), Williams (11:00 a.m.), and Clarida (11:45 a.m.) are all scheduled to speak. Finally, Dell and Best Buy will report on 3Q earnings later today.
U.S. Equities Got a Boost from Vaccine News and Solid Data: U.S. equities recovered Monday from a prior week decline, helped out by more positive news on the vaccine front and surprisingly strong PMI data showing the recent surge of infections across the country didn’t appear to weigh on the broadest measures of economic activity. Before U.S. trading began, Oxford and AstraZeneca reported that their vaccine was 70% effective, while one dose regimen showed effectiveness around 90%. Previous reports from Pfizer and BioNTech as well as Moderna have helped keep markets propped up in recent weeks even as cases surge and more restrictions are rolled out in response. Data overnight showed the Eurozone economy contracted more than expected in November as partial lockdowns hit activity. However, data showed a surprisingly more encouraging story has unfolded across the U.S. in recent weeks (more below).
Treasury Yields Picked Up After Prior Week Decline: European stocks slowly gave up gains throughout the day, turning negative just before the close after a major investment firm cut European equities to underweight. U.S. equities also dipped around the European close but recovered in the afternoon, getting a midday boost from headlines that former Fed Chair Janet Yellen would be tapped by a Biden administration to be Treasury Secretary. The S&P 500 rose 0.6% with energy companies rising more than 7% as oil prices gained, leading a mixed session for sectors as clear outperformers. Other cyclical sectors such as financials and industrials gained while safer stocks and tech declined. Treasury yields rose in steepening fashion with the 2-year yield ending 0.2 bps higher at 0.16% while the 10-year yield added 2.9 bps to 0.85%.
Market Sentiment Continues to Strengthen as Biden Gains Access to Federal Transition Funds: Monday’s upward trajectory for risk markets carried over seamlessly into Tuesday’s global session following the good news on another vaccine, solid economic data, and a couple of developments that eased key uncertainties that had kept market sentiment in check. After markets closed Monday, news broke that the U.S. General Services Administration, responsible for making resources available for presidential transitions, sent a letter to former Vice President Joe Biden telling him he could now access funds lawfully set aside for his team to begin the transition process. While President Trump said he would continue the legal challenges of the 2020 election results in some states, he also acknowledged he had approved the move. U.S. equity futures were solidly higher at 7:30 a.m. CT with signs the pro-cyclical rotation would continue Tuesday. The Dow and S&P 500 were up around 1% and outpacing a smaller 0.4% gain for the Nasdaq. The MSCI Asia Pacific Index closed earlier with a 1% gain and Europe’s Stoxx was 0.7% stronger. Shorter Treasury yields were flat on the day while the 10-year yield added 2.0 bps to 0.87%.
Markit PMIs Perk Up Unexpectedly Despite Surging Infections: In contrast to a sharper-than-expected contraction of the Eurozone economy in early November, preliminary Markit PMIs signaled a surprise improvement of U.S. activity despite rising infections. Earlier Monday PMI data showed the broadest contraction of the Eurozone economy since May as partial lockdowns across the continent shuttered activity. In the U.S., however, the composite PMI perked up unexpectedly from 56.3 to 57.9, its highest reading since March 2015. Although some states have implemented new restrictions, the measures are less widespread than in Europe. While that has led to U.S. cases continuing to climb while Europe’s outbreak shows some signs of ebbing, it has also allowed economic activity to continue. Somewhat surprisingly, the services PMI rose from 56.9 to 57.7, the highest mark since March 2015, and the manufacturing index gained from 53.4 to 56.7, its strongest reading since September 2014; both were expected to register modest declines. Encouragingly, the composite employment index rose to its highest level in records since 2009. While the ongoing outbreak has weighed on most alternative data metrics in recent weeks, the disappointment failed to appear in the PMI data in the first half of the month.
Barkin Sees Near-Term Risks but Better Days Ahead: Richmond Fed President Barkin said “the next few months could be challenging [for the economy] but with daylight on the horizon,” following the recent surge of the virus and positive developments on the vaccine front. Barkin said expectations for a divided government should reduce the likelihood for a quick and sizeable stimulus package, but that consumer savings from previous aid bills should help absorb some of the blow. Addressing certain specific aspects of the economy, Barkin said he expects more workers to work from home, necessitating smaller corporate office footprints.
Evans Expects Rates at Zero for at least Three Years: As discussed in recent weeks, a lack of compromise in Congress that has kept new stimulus locked up for now will shift more of the burden for additional stimulus onto the shoulders of a Federal Reserve already constrained by the effective lower bound for interest rates. Chicago Fed Bank President Evans acknowledged as much on Monday, saying “interest rates will be lower for longer if fiscal support doesn’t help out.” Attempting to peg when rates could change, he said “We’re not expecting the funds rate to be raised before 2023, probably late, maybe even 2024, in my opinion.” Evans joined Barkin in pointing to likely pain for commercial real estate as a result of the pandemic which has also had significant effects on state and local budgets. “We are still waiting for many sectors to recover — leisure, hospitality, travel,” Evans added.
Yellen Beats Out Brainard for Biden’s Treasury Secretary Nominee: After weeks of speculation, reports indicated former Vice President Biden had selected former Fed Chairwoman Janet Yellen to be his nominee for Treasury Secretary and asked current Fed Governor Brainard to keep her seat on the Fed Board. The two names had been tossed around in recent weeks as top potential picks to lead the Treasury under a Biden administration. Whereas Ms. Yellen was somewhat limited as Fed Chair in measures she could take to spur economic growth, as Treasury Secretary she will have more weapons at her disposal to address more granular economic concerns with more targeted economic policies. In recent remarks, she has advocated for more fiscal stimulus to limit longer-term potential damage to the economy.