The Market Today
Executive Order Gives U.S. Consumer a Boost; EU Economy Rebounds before Returning to Lockdown
by Craig Dismuke, Dudley Carter
CORONAVIRUS UPDATE (VS Coronavirus Chartbook – PDF)
Monitoring the Virus Headlines: Europe’s lockdown remained a key focus Thursday as the ECB said it plans to increase stimulus to aid a recovery that is slowing more rapidly than expected and governments in Germany and France detailed plans to provide stimulus to businesses that will be negatively affected by the partial nationwide lockdowns announced earlier this week. Cases continued to climb across Europe with Italy, Austria, Belgium, and Portugal among the countries to report a record for new infections. The Austrian government said it will announce new restrictions on Saturday and Scotland’s first minister said the country could be looking soon at nationwide restrictions. In the U.S., the outbreak across the Midwest continued to worsen with record cases reported in Illinois, Kansas, Iowa, and South Dakota, and the situation in the northeast continued to trend in the wrong direction. New York reported 2,499 cases Thursday, the most since May.
Monitoring the Political Posturing on the Economy Before the Election: Politicians continued to blame the other side for the lack of an additional aid agreement. Treasury Secretary Mnuchin said Speaker Pelosi’s “political stunt” indicates she has “no intention of compromising on key issues.” Pelosi responded that, “I hoped we could at least have an agreement before the election, but [the White House has] not ever responded.” President Trump again said he wants a deal that is even bigger than the Democrats’ plan and lauded the 3Q GDP number as the “Biggest and Best in the History of our Country,” saying next year will be “FANTASTIC!!!!” His opponent for president, former Vice President Biden, said the “recovery is slowing if not stalling” and highlighted the significant shortfall of the mathematically impressive growth figure to fully return the economy to its pre-pandemic level.
Personal Income and Spending Beat Expectations as Executive Order Boosts Transfer Payments: Personal income and spending rose more than expected in September, up 0.9% and 1.4%, respectively. After dropping 2.5% in August, income recommenced its recovery as another uptick in employment income and a big jump in ‘other government transfers” offset an substantial decline in unemployment insurance transfers. Employment income increased $86b brining it to within 2.6% of its February peak despite 22 million people continuing to file for some form of unemployment. Unemployment insurance transfers continued to fall, down $267b after the expiration of the temporary UI bump from the CARES Act. However, that decline was almost completely offset by a $248b increase in “other transfers.” According to the BEA release, the increase came from FEMA’s Lost Wages Supplemental Payments program, a “program that provides wage assistance to individuals impacted by the pandemic.” This appears to be the increase in UI payments ordered by President Trump after the CARES Act increase expired. Personal spending rose $202b or 1.4% versus expectations for a 1.0% increase. Spending is now down just 2.0% from its January peak. With the continued supplementation of personal income restrained spending, the savings rate remained very high at 14.3%.
Inflation Softer Than Expected: PCE inflation for the month of September rose 0.2% at both the headline and core levels. While the September results were in-line with expectations, August’s figures were revised lower leaving the year-over-year rates of consumer inflation below expectations. Headline inflation held at 1.4% year-over-year while core fell from 1.6% to 1.4%. Going forward, weakness in rent prices are likely to continue weighing on the overall run rate for CPI and PCE inflation.
Consumer Confidence: At 9:00 a.m. CT, the University of Michigan’s Consumer Confidence index is expected to hold flat in its final October revision.
Friday Before the 2020 Election: Heading into next week’s election, the polling and betting market data continue to point to a Democratic sweep, although these polls have been inaccurate in the past. Nonetheless, Politico reports that the three key states to watch in relation to who controls the Senate are Iowa, North Carolina, and Maine. Also reported by Politico yesterday evening, “Elizabeth Warren wants to be Joe Biden’s Treasury Secretary and will make her case for it if he wins next week.”
U.S. Markets Diverge With Europe: U.S. assets diverged from their European counterparts following a solid morning of U.S. economic data that stood in contrast to the dour tone struck by ECB officials and the continued record-break rise of infections across Europe. A day after France and Germany both announced partial lockdowns amid a virus surge, the ECB held policy unchanged but indicated plans to provide more stimulus before the end of the year. ECB President Lagarde warned that, “The euro-area economic recovery is losing momentum more rapidly than expected,” and therefore officials, “agreed that it was necessary to take action and…recalibrate our instruments at our next Governing Council meeting.” Shortly after her comments, the German government detailed its plan to provide a “massive” package of 10 billion euros in aid to businesses affected by its latest lockdown. Germany’s DAX rose 0.3% but was the only major European index to improve, with the broader weakness dragging the Stoxx Europe 600 down 0.1%.
Risk Appetite Recovered After Better U.S. Data: While the U.S. is by no means inoculated against similar risks, with new infections hitting a record in recent weeks and stimulus talks failing before the election, the morning’s economic data was upbeat. The 3Q recovery was even stronger than expected at 33.1%, although much work remains to recover the 3.5% economic hole that remains relative to December 2019’s peak. While surely a concern, the uptick in U.S. infections has yet to derail the labor market’s recovery according to the weekly jobless claims figures, with initial and continuing claims both beating expectations. After those reports but before the major tech names reported, the S&P 500 rose 1.2%, cutting its weekly loss to 4.4%. With stocks moving up, Treasury yields jumped to leave the curve notably steeper by the close. While Germany’s 10-year yield fell 1.1 bps to -0.64%, a new low since March, the 10-year Treasury yield shot 5.2 bps higher to 0.82%, back near the top of its post-March range.
U.S. Tech Earnings Weigh on Markets Friday: Tech stocks dragged Asian equity indices sharply lower Friday following after-market earnings from the industry’s biggest U.S. names on Thursday. Apple (shares -4.4% pre-market) beat estimates for revenue and earnings but reported disappointing iPhone sales and a decline in revenue from China. Continued online shopping during the pandemic sent Amazon’s (-1.4% pre-market) revenue and earnings well above estimates but is also expected to drive a $4 billion increase in quarterly costs that will weigh on operating income. Facebook (-1.6% pre-market) beat analysts’ expectations for revenue and earnings but signaled cost increases in 2021 and user declines in Canada and the U.S. Twitter’s (-16.8% pre-market) operating metrics outpaced estimates but daily users fell short. Alphabet (+6.8%), or Google, was the only company to see its shares rise after a solid report. Tech-heavy Nasdaq was leading U.S. futures lower with a 1.2% drop, although the Dow and S&P 500 were also both around 1% lower.
Eurozone’s Economy Stormed Back Before Latest Lockdowns: Similar to yesterday’s U.S. results, the Eurozone economy recovered sharply in 3Q as countries across the bloc reopened from lockdowns after the first virus wave earlier in the year. After collapsing 11.8% in the second quarter, economic activity stormed back 12.7%, leaving the total size of the economy 4.3% smaller than at December’s peak. The strong quarter, however, will provide little solace for investors as most of the region has returned to partial lockdowns to deal with an exponential second wave of infections. Even before this week’s new restrictions were announced in France and Germany, consumer spending fell more than expected in September according to data released on Friday. The Stoxx Europe 600 was 0.1% lower. At 7:43 a.m., Treasury yields were little changed with the 10-year yield down 0.3 bps to 0.82%.
Pending Sales Slip for the First Time Since April: Pending home sales fell unexpectedly in September, becoming the second housing report this week to disappoint expectations with the first decline since April. After new home sales were reported down 3.5% on Monday, the pending home sales index slipped 2.2% last month. Economists had expected another monthly gain of 2.7% to push the index to a new all-time high in records since 2001. Sales in the northeast, the smallest region by volume, increase while the other three geographic regions saw activity cool. Despite the disappointing September decline, indicating existing home sales should level off in the months ahead, the index still remains 16.7% higher than February after the torrid pace of activity since April. The National Association of Realtors’ Chief Economist wasn’t discouraged by the monthly drop, saying, “The demand for home buying remains super strong, …With persistent low mortgage rates and some degree of a continuing jobs recovery, more contract signings are expected in the near future.”