The Market Today
EU PMIs Disappoint Before U.S. Update and Brexit Makes Concerning Comeback in the Headlines
by Craig Dismuke, Dudley Carter
VS Coronavirus Chartbook (PDF) (Link) *Updated by 10 a.m. CT
Monitoring the Virus Headlines: Another quiet day for virus headlines, although the messaging was consistent with recent trends; the virus situation in the U.S. continues to improve as cases continue to climb across Europe. U.S. cases rose at an 0.8% rate for a fourth consecutive 24-hour period, a slowing of the absolute level of cases considering an ever-increasing denominator. France, however, posted one of its largest daily increases since earlier in the pandemic and Italy’s tally of 845 new infections was the biggest for a single day since May 16. The recent trend of rising infections across the European continent has caught the attention of leaders there, although both Germany’s Merkel and France’s Macron signaled they were strongly against implementing another round of nationwide lockdowns.
Today’s economic calendar kicks off later this morning, with Markit’s preliminary August PMIs scheduled to be released at 8:45 a.m. CT and the latest figures for existing home sales following fifteen minutes later.
Markit PMIs: While a couple of regional Fed reports released this week have pointed to the recovery slowing in August, the PMI data from Markit, which has shown a more measured and steady recovery since April, is expected to show further improvement in August. Both the manufacturing (52.0) and services PMI (51.0) are expected to signal activity expanded for the first time since at least February.
Existing Home Sales: Following a strong trend in the leading pending sales data, the latest report from the National Association of Realtors is expected to show a sizable 14.6% jump in the pace of existing home sales in July after a 20.7% gain in June. An as-expected gain would push the pace to 5.41 million annualized units, below February’s cycle-high rate of 5.76 million units but above 2019’s average pace of 5.33 million.
Equities Gain, Although Sector Rotations Reflects Uncertainty That Dragged Yields Lower: U.S. equities eked out gains Thursday, although a rotation into tech and other stay-at-home stocks reflected the caution that kept Treasury yields lower for the duration of U.S. trading. Before U.S. trading opened, initial jobless claims disappointed with an unexpected rise back above 1 million, tarnishing a large decline in the lagged continuing claims figures to the lowest level since early April. Market sentiment was already fragile as global markets had retreated overnight in response to the Fed’s July Minutes, which showed clear concern about a slowing recovery and perilous outlook but were less descriptive about how officials plan to further support the economy. The S&P 500 rose 0.3% as tech gained more than 1%, while cyclically-sensitive sectors such as energy, financials, and industrials declined. The Nasdaq climbed more than 1% to another record high. While equities recovered some ground lost Wednesday afternoon, Treasury yields pulled back after pushing higher Wednesday afternoon on the lack of sufficiently dovish forward indications in the Minutes. The 2-year yield closed essentially flat at 0.14%, the 5-year yield settled back 1.1 bps at 0.27%, and the 10-year yield slipped 2.9 bps to 0.65%.
Stocks Weaken after EU PMIs Add to Worries About Rising Infections: Stocks in Asia rose after U.S. equities gained Thursday despite a surprise increase in new jobless claims. The positivity initially pushed European indices higher and kept U.S. futures in the black. The constructive tone, however, began to crack after unexpectedly dour August PMIs from Europe. France’s manufacturing index contracted unexpectedly and activity in the services sector slowed sharply, dragging the composite PMI from 57.3 to 51.7, well below the expected reading of 57.0. Germany’s manufacturing index picked up while services slowed notably, knocking the composite index down from 55.3 to 53.7, a miss relative to the 55.0 economists expected. As a result, the Eurozone composite dropped unexpectedly from 55.3 to 53.7. The disappointing results add to worries created by an increase in the rate of infection in those two countries and in others across Europe.
Contentious Brexit Update Intensifies Daily Risk-Off Tone: Europe’s Stoxx 600 downshifted after the reports and U.S. futures pared earlier gains. Treasury yields began to drift lower as sovereign yields in Europe diverged in risk-off fashion, with Germany’s 10-year yield moving down while Italy and Spain’s climbed. Those moves intensified shortly after 5 a.m. CT after an update on a nearly-forgotten geopolitical risk. The U.K.’s chief negotiator said there was “little progress” this week in Brexit discussions with the EU. His counterpart from the EU said reaching a deal with the U.K., based on the current status, is “unlikely.” Before this morning’s update on U.S. PMIs, S&P 500 futures were off 0.4% and the 10-year Treasury yield was down 2.4 bps to 0.627%, its fifth decline in six days.