The Market Today

Election Uncertainty, Fed Quiet, Jobs Improve

by Craig Dismuke, Dudley Carter


Election Remains Uncertain: The election uncertainty remains palpable in the markets, as discussed below.  The race for the White House remains uncertain with several races tightening and the Senate outcome has a new twist.  It now appears the balance of power in the Senate will be 50 (R) to 48 (D+I) with both seats from Georgia appearing to be headed for run-offs.  Based on the most recent data release, incumbent Senator Perdue (R – GA1) vote count has now dropped to 49.885%, below the 50% threshold to avoid a January 5 runoff, with votes still being counted.  The GA2 seat is already headed to a runoff between Loeffler (R) and Warnock (D). It continues to be the case that any outcome is possible in both the Senate and Presidential races. However, even with a 50-50 split in the Senate, a rarity in U.S., history, the expected outcome would remain an environment requiring bipartisan deal-making to pass legislation.



Pace of Recovery in Labor Market Accelerates in October Data: The U.S. economy added 906k private nonfarm payrolls in October, well above the expected increase of 680k, and the first month in four to not show a slowing pace of improvement. However, the public sector did not fare as well, losing 268k payrolls including 159k jobs lost in state and local education.  The October drop comes one month after the sector shed 288k jobs.  The expected exodus of 147k temporary census workers also dragged the monthly change in government jobs down temporarily. Almost every sector showed strong results: leisure +271k, business services +208k, retail +104k, construction +84k, and manufacturing +38k, to mention a few.  However, almost every sector remains below its pre-virus employment levels and there remain 10.1 million fewer payrolls in October than there were in February.

Unemployment Rate Drops Sharply as Participation Increases: In the household report, the unemployment rate fell sharply and more than expected, down from 7.86% to 6.88%.  The drop came as 724k more people entered the labor force bringing the participation rate up 3/10ths to 61.7%.  In a small disappointment, the prime-age participation rate fell 5/10ths to 81.2%.  The number of employed persons rose 2.24 million while those unemployed dropped 1.52 million.  Also a positive, the number of permanent jobs losers fell 72k but remains elevated at 3.68 million. However, while jobs were not being lost, those trying to move back into the labor market did face some challenges.  The number of people reporting as unemployed long-term increased 1.15 million to 3.56 million.

Inventories and Consumer Credit: At 9:00 a.m. CT, the September wholesale inventories data is expected to show a slight decline in inventories.  Also released today is the September consumer credit data (2:00 p.m.).

CORONAVIRUS UPDATE (VS Coronavirus Chartbook – PDF)

Monitoring the Virus Headlines: Italy, France, and Greece were among the European countries to announce new records for daily infections as restrictions continued to tighten across the continent. Denmark will prohibit the use of public transport in certain areas, Slovenia extended its lockdown by another week, and Romania’s president said the country needs to tighten restrictions to slow the virus. The U.K. will ban evictions until at least after the latest restrictions lapse and require visitors from Germany and Sweden to quarantine. In the U.S., the virus situation in Illinois continued to worsen with record cases and the most hospitalizations since June, stirring reports that statewide or local restrictions could be recommended. The state’s governor, however, said he wasn’t considering a stay-at-home order.


Stock Rally Remains Full Speed Ahead: Stocks’ stellar week continued Thursday with the Dow and S&P 500 gaining just under 2% as the Nasdaq outperformed again with a 2.6% jump. Equities stumbled last week as global cases surged and Europe’s largest economies moved back under partial lockdowns in the lead up to the U.S. election. Stocks, however, have been on a tear this week on speculation that Congress will remain divided in the new session. There was a growing sense that Democrats could make the clean sweep on Tuesday, an outcome that would significantly increase the possibility of another massive stimulus package that could boost the recovery, but which would also require significantly larger Treasury issuance. Stocks benefited some from those expectations but Treasury yields were the biggest movers, surging to their highest levels since March as investors priced for more supply. Although nothing has been officially settled, Republicans are now predicted to keep the Senate, making a smaller fiscal package more likely and major policy changes less plausible. The result has been a decline in Treasury yields that has helped offset some of stimulus disappointment for equity investors. Almost an aside, the Fed’s meeting came and went with little fanfare as officials attempted to make as few waves as possible (more below). For the day, the 10-year yield ended flat at 0.76%.


With Election Results Still Not Finalized, Equity Rally Pauses before Jobs Data After Strong Four-Day Push: U.S. equity futures finally broke lower overnight after rallying sharply for four days, as investors continued to monitor vote tallies in the U.S. ahead of October’s nonfarm payroll report. Most stock indices across Asia gained to lift the MSCI Asia Pacific Index 0.5% by Friday’s close. The tide turned weaker during European trading, however, with the Stoxx Europe 600 dropping 0.6% and U.S. futures falling between 0.8% and 1.1% before this morning’s jobs report. The S&P 500 gained 7.4% in the first four days of the week. Former Vice President Biden is still favored to win the presidency and Republicans are still expected to keep control of the Senate, however both races remain tight and too close to call.

Treasury Yields and Equities Tick Higher After Stronger-than-Expected Jobs Data: While the major focus this week has been on the U.S. election, virus cases have continued to surge around the globe, including in the U.S., leading to new restrictions in many places and creating worries about the economic recovery. Before this morning’s update on the status of the U.S. labor market’s recovery, Treasury yields had inched higher following a sharp slide since Tuesday. After peaking at 0.94% on election night, the 10-year yield was trading at 0.78% at 7:30 a.m., a 1.9-bp daily increase. Following the release of the stronger-than-expected jobs figures, the 10-year yield moved to up 3.0 bps on the day and equity index futures initially trimmed their overnight declines.


Unlike the Election, the Fed’s November Meeting was Highly Unexciting: Relative to the host of Fed meetings already in the books for 2020, this week’s two-day meeting was notably unexciting. As expected, the FOMC voted unanimously to keep monetary policy unchanged, making only perfunctory alterations to its official communications as they stay beneath the radar.  The overnight target rate range was unchanged at 0.00-0.25% and there were no shifts in the pace or mix of asset purchases announced in the Implementation Note. The Statement continued to highlight that, “The path of the economy will depend significantly on the course of the virus,” which it expects “will continue to weigh on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term.” Fed Chair Powell kept a cautious tone in his post-meeting press conference, saying the recovery had moderated after its initial snap back and calling the rise in cases a concern. Worth nothing, he acknowledged that officials had discussed options for altering the current asset purchase plan’s size, duration, or composition if it became necessary based on changes to the outlook. For now, however, he said the Committee feels like the program is well calibrated to the current economic situation. He continued to stress the need for more fiscal stimulus but dodged specific questions about the election.

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