The Market Today

Fed Officials Give Their Takes on Inflation Averaging; New Restrictions in U.K.

by Craig Dismuke, Dudley Carter

CORONAVIRUS UPDATE (VS Coronavirus Chartbook – PDF)

Monitoring the Virus Headlines: U.S. cases inched higher and deaths crossed above 200,000. However, most of the headlines were saved for the early-morning news about new restrictions in the U.K. Later Tuesday, PM Johnson said “there are unquestionably difficult months to come.” After some improvement Monday, most of the European hotspots announced daily increases in newly identified infections. In the U.S., a college football game scheduled for Saturday was scrapped because of the virus. Wake Forest will have to wait to play Notre Dame at a later date after the Fighting Irish announced at least seven players had tested positive. An aide for Speaker Pelosi said she was still talking to the Administration about new stimulus, although it appears those talks are still headed nowhere. White House Press Secretary McEnany said talks will remain at a “stalemate” until Speaker Pelosi gets serious.


Fed Wave: Eight out of seventeen FOMC participants are scheduled to speak today offering a plethora of opportunities for individualized messages about the Fed’s new inflation averaging scheme.  As detailed below, Chicago Bank President Evans highlighted yesterday his perspective that the Fed can hike before inflation averages 2% but that policy would remain accommodative until it does so.  Giving more insight today are Cleveland’s Mester (8:00 a.m. CT), Chair Powell (9:00 a.m.), Chicago’s Evans (10:00 a.m.), Boston’s Rosengren (11:00 a.m.), Minneapolis’ Kashkari (12:00 noon), Atlanta’s Bostic (12:00 noon), Vice Chair Quarles (1:00 p.m.), and San Francisco’s Daly (2:00 p.m.).

Mortgage Applications Show More Traction: Mortgage applications for the week ending September 18 rose 6.8% on a 3.4% increase in purchase apps and a 8.8% jump in refis.  The average 30-year mortgage rate ticked up during the week, up from 3.07% to 3.10%.  For the time being, purchase applications have resumed their post-virus trend higher, easing some of the concern about a slowing housing market bounce.

Home Prices and PMIs: At 8:00 a.m. CT, the FHFA will release its July home price report with prices expected to increase 0.5% MoM.  At 8:45 a.m., Markit will release its manufacturing, services, and composite PMIs.


Stocks Recover Some Ground While Treasury Yields Tarry around Unchanged: The positive momentum for tech stocks that began late on Monday afternoon carried over into Tuesday’s trading, leading the Nasdaq 1.8% higher and helping the S&P 500 recover most of its prior-day decline. However, consumer discretionary stocks led all sectors as shares of Amazon rose more than 5.7% following a ratings upgrade, the third best performer of the 500-company index. While Fed officials continued to call for more stimulus (more below), investors remain suspect of chances for any new aid heading into the election. Despite better-than-expected daily economic data, Treasury yields ended the day little changed amid continued uncertainty and trailed larger increases across Europe, particularly in the U.K. The Bank of England’s Chief attempted to soften the market’s interpretation of discussion around negative rates in last week’s Minutes. His remarks helped offset new restrictions announced by PM Johnson to push the 2-year Gilt yields up 7.0 bps and the 10-year yield 4.7 bps higher. For the day, the 2-year Treasury yield slipped 0.2 bps to 0.14% while the 10-year yield added 0.5 bps to 0.67%.


Equities Recover Despite Data Showing Impact of Second Wave of Infections in Europe: Global equities continued to recover overnight despite data showing the second wave of infections across Europe may already be affecting the trajectory of the continent’s economic recovery. Stocks in Asia inched higher and Europe’s Stoxx 600 maintained a 1.3% gain even after Markit PMI surveys for September disappointed. The Eurozone’s manufacturing PMI rose from 51.7 to 53.7 in the preliminary September survey, much better than the 51.9 expected. However, the services index dropped unexpectedly from 50.5 to 47.6, mimicking trends in both France and Germany and signaling activity contracted after two months of expansion. The slowdown in the services sector dragged the composite index down unexpectedly from 51.9 to 50.1, showing the overall recovery stalling despite continued strength in manufacturing output.

Treasury Yields Remain Stagnant: Governments across Europe have begun to reintroduce targeted social restrictions as they attempt to stave off the new virus wave while avoiding stronger measures that decimated global economies in the spring. The latest data show that even a smaller government response, as well as personal decisions made by consumers, will weigh on the pace of economic recovery during the pandemic. Notwithstanding the sanguine tone for equity markets, sovereign yields remained subdued amid the developments and the Dollar continued to recover ground ceded to the euro in recent weeks. With Europe’s virus situation worsening and data showing its recovery stumbling, the bloc’s currency hit its weakest level against the Dollar since late July. At 7:20 a.m. CT, Treasury yields had inched up by less than 0.5 bps and were little changed across the curve.


Home Sales Hit More-Than 13-Year High and Manufacturing Picks Up Unexpectedly Across the Richmond Fed District: The economic data released after markets opened on Tuesday was solid, as existing home sales continued to improve and the Richmond Fed reported that manufacturing activity across the District strengthened unexpectedly in September. Existing home sales rose 2.4% as expected in August, lifting the annualized pace to 6mm units, the fastest since December 2006. The continued strength in sales pushed the median price up to $310,600, a record for the series and an 11.4% gain from August 2019. After declining 32% from February to May, sales have surged more than 53% and are 10.5% higher than a year ago. Separately, the Richmond Fed’s manufacturing index showed an unexpected improvement in activity in September. The headline index, expected to fall to +12, rose from +18 to +21 instead. Both current conditions and future expectations saw notable improvements.

Fed Officials Discuss the New Framework: Fed Chair Powell didn’t break any news Tuesday before the House Financial Services Committee. He continued to credit the swift (partial) rebound for the economy to fiscal stimulus and Fed actions, adding that more fiscal assistance will likely be needed as the economy could soon start to show the impact of earlier efforts which have expired. Separately, Richmond Fed President Barkin reiterated that a return to low unemployment, on its own, will not be enough to move rates higher. Also addressing the rate outlook under the new policy framework, Chicago Fed President Evans repeated that there isn’t an explicit formula that will decide rate moves under the average inflation targeting approach. He also delineated between the conditions for initial lift-off versus the threshold for moving away from accommodative policy. Once inflation hits 2% and officials believe it will move higher, they can begin to raise rates. However, the policy rate will remain accommodative (i.e. less than the longer-run neutral estimate of 2.50%) at least until inflation averages 2% over time. Coming full circle to Powell’s push for more stimulus, Evans said more fiscal support is “fundamental, very important” to his outlook for the economy.

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