The Market Today
Democrats and White House Move Closer on Stimulus Divide
by Craig Dismuke, Dudley Carter
CORONAVIRUS UPDATE (VS Coronavirus Chartbook – PDF) (Updated 9:30 a.m. CT)
Monitoring the Virus Headlines: While there continued to be headlines out of Europe about the worrisome trends tracking the continent’s outbreak, investors in the U.S. were more focused on the fluid headlines to ongoing negotiations for more stimulus. The flow started early with Treasury Secretary Mnuchin saying on CNBC that “we’re going to give it one more serious try to get this done and I think we’re hopeful that we can get something done. …I think there is a reasonable compromise here.” White House Chief of Staff Meadows added to the optimism that resulted, noting “I’ve seen substantial movement. And certainly the rhetoric has changed.” Speaker Pelosi had earlier said she too was “hopeful” for a breakthrough. However, the tide turned quickly after Senate Majority Leader McConnell described the Democrats latest $2.2 trillion proposal as “outlandish” and “too high,” adding “We’re very, very far apart on a deal.” Mnuchin and Pelosi both commented after McConnell that progress had been made and talks would continue.
Traditional Initial Jobless Claims Improve But Pandemic-Related Claims Rise: Initial jobless claims for the week ending September 26 dropped 36k to 837k New PUA claims offset the decline in the traditional program, rising 35k to 650k. Combined, new filings for unemployment assistance only declined 2k to 1.487 million. As an important aside, California estimated both initial and continuing claims in this morning’s data and left both unchanged from the previous week.
Continuing Claims Show Improvement Although Pandemic-Related Claims Rise: Continuing jobless claims in the traditional state-level programs fell more convincingly, although another increase in pandemic-related claims took some of the steam from that optimism. Claims dropped 980k to 11.77mm for the week ending September 18. New York accounted for approximately one quarter of the decline, down 243k on a non-seasonally adjusted basis. Continuing PUA claims for the week ending September 11 rose 317k to 11.8mm while the extended PEUC program saw a 197k increase to 1.83mm. For the week ending September 11, the total number of people filing for some form of unemployment rose 485k to 26.5mm.
Personal Income Continues to Normalized as Stimulus Supplements Fade: Personal income fell 2.7% in August, a two-tenths larger decline than expected, on another sharp drop in transfer payments as government stimulus fades. The largest source of the decline came from a 52% decline in unemployment insurance payments as the federal bump in unemployment insurance payments expired. Employment income rose another 1.2% but remains 3.5% below its pre-virus level. Even with the fading of the stimulus payments, total personal income remains 2.0% above pre-virus levels despite the weakness in employment income. On the spending side, personal spending rose 1.0% and July’s spending was revised down from +1.9% to +1.5%. Spending remains 3.4% below its pre-virus level. With still elevated income and weakness in spending, the savings rate remained high at 14.1%, down from 17.7% in July.
PCE Inflation Continues Recovering: Also released this morning, PCE inflation was firmer than anticipated in August due to revisions higher to previous months’ data. Headline and core PCE prices rose 0.3% MoM in August, as expected. However, the year-over-year rates of inflation rose from 1.1% to 1.4% and 1.4% to 1.6%, respectively. Consumer prices are expected to continue firming as the recovery progresses, although the significant amount of spare capacity in the economy is expected to keep a lid on prices over the medium term.
Construction Spending, Manufacturing Index, Auto Sales, Fedspeak: Today’s economic calendar is packed with data including the mixed early-morning reports. At 9:00 a.m. CT, the August Construction Spending report is expected to show a 0.7% monthly gain. The September ISM Manufacturing index is also scheduled for release and is expected to tick higher. Auto sales for the month of September will be released throughout the day. Speaking from the Fed are New York Bank President Williams (10:00 a.m. CT) and Fed Governor Bowman (2:00 p.m.).
U.S. Equities Closed Downbeat Month on Upbeat Note: U.S. equities closed out a weak September on a positive note, although the final positions of the major indices was well below stronger levels seen earlier in the session. Stocks rose strongly in morning trade after Treasury Secretary Mnuchin indicated the he was hopeful that he and Democratic Speaker Pelosi could make progress on another aid deal, the White House struck an optimistic tone, and Speaker Pelosi sounded pleased that talks had resumed. Amid the stimulus remarks, ADP’s private payroll estimate topped expectations and pending home sales surged again to an all-time high (more below). The resultant optimism drove equities higher steadily into early-afternoon trading, lifting the S&P 500 by as much as 1.7%.
McConnell Rains on the Stimulus Parade: The trend quickly reversed, however, just before 1:30 p.m. CT after Senate Majority leader said both sides remain far apart on a final deal. The index nearly gave back all of its earlier gains over the next hour before finding its footing and closing up 0.8%. Treasury yields, which had tracked stocks higher throughout the day, followed them back lower and then up again into the close. The 10-year yield added 3.4 bps to 0.68% after having climbed as high as 0.70%. Later in the afternoon, both Mnuchin and Pelosi signaled some progress had been made and said that talks will continue. For the month of September, the S&P 500 fell 3.9%, its first monthly decline since March, while the 10-year yield added inched down 2.1 bps, sticking within its recent tight range.
Markets Still Hopeful for More Stimulus: Trading was sparse in Asia to start October with several major markets closed for holidays and Japanese exchanges shut down because of technical issues. European indices rose, however, following solid gains on Wall Street and U.S. futures were pointing to further improvement when September’s first trading day begins. Europe’s Stoxx 600 was up 0.7% with the strength evenly spread around the region and S&P 500 futures had risen more than 0.9% at 7 a.m. CT. Ahead of Thursday’s torrent of U.S. economic data, investors remain heavily focused on progress in stimulus negotiations.
White House Ups the Ante: After failing to reach a compromise on Wednesday but pledging to keep negotiating with Democrats, Treasury Secretary Mnuchin said later in the evening, “The president has instructed us to come up significantly, so we have come up from the trillion-dollar deal,” referencing the White House’s previous proposal. He said the new offer was around $1.5 trillion in total spending which Bloomberg reports would be split across another round of direct payments to Americans, a $400 weekly federal bonus for unemployment insurance, and $250 billion for state and local governments. The Wall Street Journal said the deal also includes more money for small business and funds specifically allocated for airlines. Before the first wave of U.S. reports, renewed hopes for pre-election stimulus had pushed the 10-year yield 1.5 bps higher to 0.70%. After the better-than-expected reading for new jobless claims and widespread declines in continued unemployment, yields moved to new highs for the day. The 10-year yield rose to up 3.1 bps to 0.715%, a nearly four-week high.
Pending Home Sales Surge as Housing Recovery Remains Surprisingly Strong: True to form, another housing report easily beat expectations as pending home sales rose sharply again in August to a new all-time high. The 8.8% monthly gain easily cleared the 3.1% improvement economists expected, lifting the index to its highest level ever recorded in data back to 2001. Following back-to-back declines of around 20% in March and April, the pending sales index has since soared with monthly gains of 44.3%, 15.8%, 5.9%, and 8.8%. The impressive recovery has pushed the index up 92% from the April low and portends a continuation of the positive trend for existing sales in the months ahead.