The Market Today
Emerging from Lockdowns Proving Difficult
by Craig Dismuke, Dudley Carter
VS Coronavirus Chartbook (PDF) (Link) (Updated by 9:00 a.m. CT)
Monitoring the Virus Headlines: Similar to the pattern from recent weeks, several of the well-known U.S. hotspots for the coronavirus posted below-average daily increases for new infections. Florida’s 3.2% increase in cases was much slower than the 5.1% average from the previous seven days, and Arizona’s 3.4% rise fell below its average of 4.1%. Texas cases increased 2.7% versus its recent average of 4.0%. However, New Jersey said the state’s reproduction rate, or how fast the virus transmits through a population, rose to 1.03, the highest mark in 10 weeks. The governor called the uptick “an early warning sign.” New York’s governor said movie theaters and casinos will remain closed and California added more counties to its virus watch list. At the county level, Miami-Dade’s mayor said a number of business types will be closed down again on Wednesday, including restaurants and gyms.
Monitoring the Stimulus Headlines: The SBA’s Paycheck Protection Program (PPP), which expired June 30 before being extended on July 1 by Congress through August 8, began accepting applications again on Monday morning. The program expired with roughly $130 billion of its allocated funds still available. Also grabbing some headlines, details of certain borrowers who sought funds from the PPP program were released after a long wait. President Trump’s chief of staff said the President is ready to provide more stimulus if needed and the Senate Majority Leader said “I think the country needs one last boost” of stimulus. A top Republican from the House said “smart adjustments” will be needed in the next stimulus bill.
Fedspeak and Lagged Job Openings Data: Today’s economic calendar is fairly quiet with a few Fed officials on the tape and the May Job Openings and Labor Turnover report. While the JOLTs report typically gives good insight into the flows within the labor market, the one-month lag in reporting makes it even less impactful in today’s environment, in which timeliness demands a premium. Job openings are expected to slip from 5.05 to 4.50 million, the weakest monthly reading since 2014. Atlanta Fed Bank President Bostic (non-voter) is scheduled to speak at 8:00 a.m. CT, San Francisco ‘s Daly (non-voter) and Richmond’s Barkin (non-voter) at 1:00 p.m., and Fed Vice for Supervision Chair Quarles (voter) at 12:00 p.m.
Positive Momentum for Equities Remained in Place: U.S. equities recorded solid gains to start the week, extending positive momentum from the overnight session that sent shares in China surging nearly 6% and lifting the Stoxx Europe 600 by 1.6%. U.S. futures were up nicely heading into the session as optimism about a pick-up in global economic activity overshadowed persistent concerns about the pace of infections in the U.S. The recovery story received another boost after a surprisingly strong ISM report showed activity across the important U.S. services sector bounced back more than expected in June (more below). The S&P 500 rose 1.6% to close near its high mark for the day, actually lagging an even larger gain for the Dow and another record close for the Nasdaq, its third consecutive all-time high.
Treasury Yields Extended Languid Range-Bound Ride: Following a rapid recovery in April in May, stocks leveled off in June as cases began to creep higher. However, upward pressure has been building despite risks to the outlook as more and more economic data point to some recovery in June. Additionally, global policymakers, both fiscal and monetary, have made strong pledges to do what it takes to support economies through the pandemic. The open-ended pledges have largely suppressed volatility in the Treasury market, which saw another quiet day notwithstanding the excitement that drove equities higher. Maturities between two and ten years all inched up by less than 1 bp, with the 2-year closing at 0.16% and the 10-year yield finishing at 0.68%.
Equities’ Hot Streak Stutters: The declines recorded by most major global equity indexes overnight are not too surprising considering the unshakeable rally in recent days has occurred in the face of rising infections that pose risk to further economic improvement. After another small gain for stocks in China, the rest of Asia inched lower and U.S. futures fell back alongside a retreat in Europe. At 7:15 a.m. CT, the Stoxx Europe 600 had declined by 0.9% with weakness spread across the national indexes. Although there was no precise correlation based on a review of the intraday chart, the timing of the sharpest decline for the European index occurred shortly after the European Commission released its latest forecast. The group estimates an 8.3% contraction of the EU economy this year, worse than the 7.5% decline from the spring forecast, followed by a partial 5.8% rebound in 2021, less than the 6.1% recovery previously penciled in. Despite the weaker equities, sovereign yields held within their tight daily trading bands and were little changed ahead of U.S. trading. At 7:30 a.m. CT, the Treasury curve was less than 1 bp changed between the 2-year and 10-year notes as S&P 500 futures leaked 0.7% lower.
ISM Soars Back into Expansion: The ISM’s Non-manufacturing PMI roared back into expansionary territory in June as new orders and production picked up sharply and the decline in employment slowed. The headline PMI jumped 11.7 points to 57.2, more than doubling the 4.8-point gain expected and nearly matching February’s level which was the strongest since early in 2019. The business activity index surged 25 points, the biggest monthly gain in two decades of records, to its best level since January 2004. New orders also posted a record rebound, jumping 19.7 points and nearly recovering all of its decline since February. In the softest reading from the report, employment remained below 50 at 43.1, although the 11.3-point gain showed the pace of the jobs decline slowed. Most every other underlying index also posted a solid recovery, echoing the broad messaging from other macro data already released for June. The economy began to pick-up as additional lockdowns were eased, but a complete recovery of the labor market will take some time, especially if more states roll back reopening plans in response to second wave of infections.