The Market Today
Election Results Remain Elusive; No Wave, Divided Government
by Craig Dismuke, Dudley Carter
2020 ELECTION RESULTS
One Key Certainty Amidst Many Election Uncertainties: The outcomes of the Presidential races in Wisconsin, Michigan, Pennsylvania, North Carolina, Georgia, Nevada, and Maine remain unknown this morning and the final result may take days to reach, weeks if the results become litigated. With a number of results still outstanding, Republicans appear to have performed better than the pollsters predicted in both Congressional chambers. It now appears Republicans will retain control in the Senate and may cut into the Democratic majority in the House. From an economic standpoint, there are only limited takeaways from the results until there is more clarity. Divided Congress has historically been positive. In the short-term, a $750 billion virus stimulus deal now appears more plausible than a $3.5 trillion deal, although some stimulus deal remains in our baseline outlook. As the results continue to emerge, we will be specifically watching the Presidential tallies and for confirmation that Republicans have retained control of the Senate.
Monitoring the Virus Headlines: Following the spike in cases in recent weeks, France reported the largest number of COVID-19 fatalities since April 15 and Italy announced its largest number of deaths since early May. Hungary and the Netherlands became the latest European countries to tighten restrictions to try and slow the virus. Hungary will move back under a state of emergency today, limiting public gathering sizes and imposing a curfew from midnight to 5 a.m. The Dutch government said it will close museums and theaters for two weeks and allow only two people to gather outdoors. Leaders from the EU agreed to hold a video summit on the virus situation on November 19. With Turkey already suffering a currency crisis, the country’s government will now close restaurants and theaters starting at 10 p.m.
ADP Shows Slowing Jobs Recovery: The ADP Employment report showed 365k private payrolls added in October, just over half of the expected gain. The number bodes less optimistically for Friday’s BLS payrolls data which is currently expected to show 700k new private payrolls. The pace of job recovery has definitively slowed with more than 10 million private sector jobs still lost since February.
Trade Deficit Declines for a Change: The September Trade Balance data was unsurprising, for a change. The monthly deficit narrowed $3.1 billion to $63.9 billion, but the overall trajectory of the trade balance continues to be a drag on U.S. GDP.
Services PMIs to Show How U.S. Economy Handling Recent Increase in COVID-19 Cases: At 8:45 a.m. CT, the Markit Services and Composite PMIs will be released. At 9:00 a.m., the ISM Service Index for October is expected to inch lower amid re-escalation in positive virus cases and the disproportionate impact to service sector activity.
Stock Rally Continued and Treasury Yields Hit a New High Since March as Investors Awaited Election Indications: U.S. stocks rallied sharply Tuesday as those that didn’t vote early headed to the polls to choose who they would like to be the next president of the United States and represent them in Congress. Despite the nerves and uncertainty related to the pending results, the S&P 500 rose 1.8%, trailing gains of 2.1% for the Dow and 1.9% for the Nasdaq. Analysts provided differing explanations for the election-day strength, ranging from expectations for a Democratic sweep and more stimulus to a technical rebound following last week’s drop which was the steepest since March. Eleven of the S&P 500’s 12 sectors rose, as shares of energy companies declined despite more strength in the price of crude. As stocks climbed, the Treasury curve moved higher and steeper. The 2-year yield rose 1.2 bps to 0.17%, its highest level since late June, while the 10-year yield added 5.6 bps to 0.90%, a new high back to March 19.
Tight and Undecided Election Keeps Investors On Edge: As expected, market volatility picked up early in the overnight session as polling places closed and the tallying of votes for the presidency and Congressional lawmakers began. Equity futures opened notably higher before the close of voting in most states and Treasury yields rose on speculation pollsters’ predictions of a Democratic sweep could play out. As the actual state results began to come into focus and show an easy victory for former Vice President Biden and Democrats in Congress was unlikely, however, equities dipped and Treasury yields reversed sharply lower. Stock futures have been choppy since but were positive heading into U.S. trading, led by a sharp 3.0% gain for the Nasdaq. While Biden has an electoral lead according to most news outlets tracking the results, the key states that will determine the outcome are still counting votes and remain too close to call. Additionally, Republicans could hold the Senate and keep Congress divided. Expectations that a final answer may not be quickly provided and the declining probability of a larger stimulus package being quickly passed through a Democratic government kept the downward pressure on Treasury yields. After jumping 4.4 bps to 0.94%, the highest since March, the 10-year yield was 10.8 bps lower to 0.79% at 7:10 a.m. CT.
Services PMIs Better than Expected in China and Europe: Foreign equities were also generally stronger and European sovereign yields declined alongside Treasurys, although the moves were miniscule by comparison. Drowned out by the U.S. election, PMI data overnight showed China’s services sector improved more than expected in October with the broadest gains since June. The Eurozone’s services PMI was revised up from 46.2 to 46.9.
Business Investment Holds Up After Revisions but Inventory Miss Could Trim 3Q Recovery Estimate: The Factory Orders report was close to expectations, excluding a bit of a disappointment related to inventories, and did little to change the narrative that business investment in equipment has held up well during the recent return of uncertainty related to the virus. Total factory orders rose 1.1% in September, a tenth better than expected, but August’s 0.7% gain was revised down to 0.6%. Core orders, which exclude transportation activity, rose 0.5%, a bit short of the 0.6% gain expected. Core capital goods orders were unrevised at 1.0% while shipments were notched up from 0.3% to 0.5%. While those metrics shouldn’t move the needle on 3Q GDP in the next estimate, a shortfall for inventories relative to expectations poses some downside risk.