The Market Today

Eurozone Inflation Lowest on Record; Global PMIs Improve

by Craig Dismuke, Dudley Carter

CORONAVIRUS UPDATE (VS Coronavirus Chartbook – PDF)

Monitoring the Virus Headlines: While the total tally of U.S. cases crossed 6 million on Monday, the pace of new infections printed 0.4% to start the week, below the past week’s 0.7% average increase. There continued to be improvement in some of the states which have received extra scrutiny in recent months. Arizona reported just 174 new infections, the lowest daily count since May 17. Florida recorded an increase of 1,885 new cases, the fewest since June 15. California announced total new infections of 4,176, below its most recent 14-day average of 5,432. New Jersey announced some restrictions were being loosened after a long battle against the virus. Restaurants can open for indoor dining on Friday with a patron cap of 25% of capacity. Movie theaters and churches can also open up at 25% capacity. On the medical front, AstraZeneca began its phase 3 human trial in the U.S. In addition to the positive signs in the U.S., there were also positive reports out of Europe. New cases in France, Italy, and Spain declined in the latest updates.



Manufacturing Indices, Construction Spending, and Auto Sales: Today’s calendar brings some important economic data.  Markit will release its final August manufacturing index at 8:45 a.m. CT.  The ISM Manufacturing index is projected to continue further into positive territory, up from 54.2 to 54.8, at 9:00 a.m.  Also at 9:00 a.m., economists expect the construction spending report to show a partial rebounded in July after contracting for four consecutive months. Also today August’s auto sales will be released and are expected to show a slowing pace of recovery.

Important Fed Clarification Possibly from Brainard: After recent Fed speak has pushed the timeline for further easing beyond the September 15-16 FOMC meeting and Vice Chair Clarida’s implication yesterday that the window could be through year-end (more below), Governor Brainard’s comments today at 12:00 noon CT will be particularly important.  Brainard has been a fairly reliable bellwether for policy steps in recent years.


Stocks Ended a Solid August on a Sour Note and Longer Treasury Yields Edged Lower After Last Week’s Rise: The S&P 500 fell for the first time in eight trading sessions, ending an unusually strong August performance on somewhat of a sour note. While tech shares gained and lifted the Nasdaq to another record, the Dow and S&P both declined. The Dow, which completed its first session with an updated list of component companies, fared the worst, falling 0.8%. The S&P 500 slipped 0.2% after an uninterrupted seven-day climb that added a 3.9% in total market cap and included six new record highs. With August now in the books, the 7% monthly gain marked the best August performance since 1986 and brought the index up more than 56% from its March low. Treasury yields had risen overnight, continuing an updraft that gained steam last Thursday after the Fed shifted to a policy framework that takes a more relaxed view of inflation moving moderately above 2%. However, the rise was erased by the softer tone for equities during the U.S. session. The 10-year yield closed 1.6 bps lower at 0.71% after reaching as high as 0.75% early in the European trading.


Global PMIs Pick Up Ahead of U.S. Manufacturing Surveys: While there have been some downside outliers, most major global equity indices held their ground to start September after closing out another strong monthly performance in August. Chinese equities rose around 0.5% following a stronger-than-expected Caixin PMI which showed manufacturing activity picked up at small- and medium-sized firms. The index rose unexpectedly from 52.8 to 53.1, the broadest expansionary signal since January 2011. Manufacturing surveys from other smaller Asian economies were mixed. A similar story played out in Europe where the bloc-wide PMI was an unrevised 51.7, near its strongest level since late 2018, after mixed results and revisions across individual countries. The Stoxx Europe 600 was little changed after fluctuating within positive territory since the open.

U.S. Futures Mostly Rise While Treasury Yields Remain Quiet: U.S. futures were mixed at 7:20 a.m. CT with tech outperforming for a second day this week. Nasdaq contracts were up 0.9%, the S&P 500 had gained 0.2%, and the Dow continued to lag, edging just below breakeven before the open. Treasury yields were little changed again on Tuesday after bigger swings last week. The 2-year yield was flat at 7:30 a.m. CT while the 10-year yield had added 1.0 bp to 0.72%. That represented a slight divergence from trends in Europe where yields had declined after a concerning CPI report to move lower on the day. Headline CPI declined 0.4% for a second month in August, dragging the core YoY rate down from 1.2% to 0.4%, below the 0.8% expected and the lowest level on record.


Clarida Expects SEP Changes This Year, but Won’t Commit to September Meeting: Summarizing one of the main reasons the Fed shifted to average inflation targeting, Fed Vice Chair Clarida said Monday the “change conveys our judgment that a low unemployment rate by itself, in the absence of evidence that price inflation is running or is likely to run persistently above mandate-consistent levels or pressing financial stability concerns, will not, under our new framework, be a sufficient trigger for policy action.” On the major questions of how and when the Fed will take action to support its new aim for inflation that averages 2% over time, Clarida didn’t give much. He believes forward guidance and asset purchases remain effective tools, continued to dismiss negative rates, and said yield caps should remain an option even though they aren’t currently appropriate. As to when we may know more, he said “I imagine we’ll be returning to a discussion of potentially refining guidance and our balance-sheet communication,” but he didn’t want “prejudge where we are going to end up on that.” Carrying on he said, “Now that we have ratified our new statement, the committee can assess possible refinements to our SEP with the aim of reaching a decision on any potential changes by the end of this year.”

Dallas Fed Manufacturing Index Improved More than Expected in August: The Dallas Fed’s manufacturing index rose more than expected in August from -3.0 to 8.0, signaling an unexpected expansion of economic activity last month. With this gain, the index, which measured the breadth of recovery not the depth of recovery, has reclaimed all of its decline during the pandemic and settled at its best level since February 2019. Except for a small decline in the current activity index, most of the other details for solid. Indexes tracking current new orders, shipments, and employment and expectations for those same metrics in six months improved from July. Additionally, a measure of the outlook uncertainty at businesses in the District continued to normalize, falling to its lowest level since January.

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