The Market Today

Equities Pull Back from Records as Retail Sales Confirm Signals from Faster Data of Slowing Recovery


by Craig Dismuke, Dudley Carter

CORONAVIRUS UPDATE (VS Coronavirus Chartbook – PDF)

Monitoring the Virus Health Headlines: Moderna was the focus of the virus headlines Monday as a second vaccine showed promising results in phase three trials. After encouraging news last week from Pfizer and BioNTech, Moderna said early analysis of phase 3 trial results showed its vaccine to be safe, effective at blocking the coronavirus in more than 94% of instances, and able to prevent severe cases in the instances where participants did become ill. The health developments have become more critical as the latest surge of the virus has led to widespread restrictions across Europe and more measures being taken in the U.S.

Monitoring the Virus Headlines from Europe: The Czech government set a limit for the number of people that could be in a store at the same time and the Swedish government capped public gatherings at 8 people. Early signs from France showed the recent return of restrictions in Europe has begun to have positive health effects, as the continent’s second largest economy saw the 7-day average for new cases fall for a ninth day. Germany has also seen some improvement, however the government said it is not yet enough. Chancellor Merkel recommended Germans keep social contact to a minimum and avoid public gatherings.

Monitoring the Virus Headlines from the U.S.: With the U.S. outbreak deteriorating further last week with cases and hospitalizations hitting new records, more states have announced measures to restrict activity and slow the spread. New Jersey’s Governor lowered the indoor gathering limit from 25 people to 10 people. In California, the governor ordered most of the state, roughly 94% according to news reports, back to the most restrictive tier of the virus protocol which will affect in-store shopping and announced that masks would be required to be worn outside. Philadelphia said it will close indoor dining, museums, gyms, libraries, high schools, and colleges and lower the limits on gathering sizes within other venues. Michigan announced similar measures on Sunday (starts Wednesday) that will last for three weeks.

 

TODAY’S CALENDAR

Retail Sales Show More Signs of Slowing Activity in October: October’s retail sales report shows more evidence of a slowing pace of economic activity amid a resurgence in the COVID-19 outbreak.  Headline sales rose 0.3%, disappointing expectations for a 0.5% gain.  Only two of fourteen categories showed better month-over-month sales than their 12-month run-rates, gasoline sales and non-store retailers (online sales). Building material sales rose a good-enough 0.9% MoM while autos sales inched up another 0.4%.  However, core retail sales rose a paltry 0.1% with particular weakness in sporting goods/hobby/books (-4.2%), clothing and accessories (-4.2%), and home furnishings (-0.4%). There are numerous indicators that consumer activities have been reined in as the COVID-19 outbreak has accelerated exponentially.

Manufacturing, Business Inventories, and Homebuilder Confidence: At 8:15 a.m. CT, the October Industrial Production report is expected to show a 1.0% gain in overall output, including another 1.0% recovery of lost manufacturing activity.  Also at 9:00 a.m. will be the September Business Inventories report and the NAHB Homebuilder Confidence Index.  Inventories are expected to begin rebounding in coming months while homebuilder confidence currently sits at its highest level on record.

Fedspeak: Fed Chair Powell will speak today at 12:00 noon CT.  Atlanta’s Bostic, San Francisco’s Daly, Minneapolis’ Kashkari, and Boston’s Rosengren will all speak today via a virtual conference on racism and the economy.


YESTERDAY’S TRADING

Equities Gain for a Second Monday as Moderna Joins Pfizer/BioNTech with Positive Vaccine Results: For a second week in a row, positive news on the vaccine front whetted investors’ appetite for equities and other risk assets on Monday and nudged longer Treasury yields higher. Moderna disclosed ahead of the U.S. market open that preliminary analysis of phase three trial results showed its vaccine appeared to be safe, more than 94% effective at preventing coronavirus infections, and significantly reduced severe infections in those that had the shot but did become ill. A week ago, Pfizer and BioNTech reported similarly encouraging news related to their joint vaccine. Equity futures shot higher in pre-market trading following the Moderna news release, foreshadowing the solid day of gains registered by the major indices. The Dow rose 1.6% to a record close, its first since before the pandemic in mid-February. The S&P 500 rose 1.2% to a second consecutive record finish. The Nasdaq gained 0.8% but closed below its record from early September.

Treasury Yields Less Responsive to Second Vaccine Report as Case Increases Lead to More Restrictions: Positive medical news has become more important in recent weeks to keep markets propped up as evidence that the recovery is slowing has appeared amid a resurgence of the virus around the globe. Those neutralizing forces helped keep Treasury yields from responding as sharply to the Moderna news as they did last week to the disclosure from Pfizer and BioNTech. The 10-year yield inched up 1.0 bp to 0.91% Monday, well below levels closer to 1.00% reached early last week.


OVERNIGHT TRADING

Equities Pull Back from Records as Retail Sales Miss Confirms Concerns about Slowing Recovery amid Surge in Cases: U.S. equities ran into some resistance overnight following record closes for the Dow and S&P 500 to start the week and ahead of the latest U.S. retail sales report for October. Futures contracts for the S&P 500 and Dow were down just more than 0.6% before U.S. trading began while the Nasdaq appeared positioned for a small opening gain, a reversal of fortunes from Monday. Global equities also paused Tuesday with stocks in Asia inching 0.2% higher while Europe’s Stoxx 600 turned back 0.5% from its strongest level since February. Tension between the optimism resulting from positive vaccine news and concern created by a surging global outbreak and new restrictions has created a volatile landscape for global trading in recent days but pushed equities back up to frothy levels. With equities taking a breather, sovereign yields dipped lower in overnight trading. European 10-year yields were down between 1.2 bps and 1.8 bps even as investors absorbed auctions of new government debt. Just before the retail sales report was released, the 10-year Treasury yield was 2.8 bps lower at 0.88%. The disappointing results intensified the decline, pushing the benchmark yield down as much as 4.1 bps in the minutes after the retail sales report’s release.


NOTEWORTHY NEWS

Fed’s Clarida More Convicted About 2021 Baseline Recovery After Positive Vaccine News: On the heels of the positive news from Moderna about the efficacy of its vaccine candidate in a large late-stage trial, Fed Vice Chair Clarida said a vaccine would create a “very, very attractive economic scenario.” Pointing to significant amount of savings the U.S. consumer, in the aggregate, has stowed away, Clarida said the rolling out of an effective vaccine could give the economy a potent shot in the arm. Nonetheless, the Fed and fiscal authorities may be required to do more to extend the bridge for the economy until a more sustainable organic recovery can begin. While the initial recovery was robust, he warned that the next several months could be difficult amid the latest wave. If needed, the Fed has tools to add to its accommodation, including altering its asset purchases by potentially lengthening the duration.


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