The Market Today
Final Day of 2Q: Global Stocks Up Double-Digits for Quarter, Belly of Treasury Curve at Record-Low Yields
by Craig Dismuke, Dudley Carter
Monitoring the Virus Headlines: The U.S. saw a small reprieve Monday from the incessant acceleration of cases, with the 1.2% daily increase trailing the prior seven-day average of 1.6%. Encouragingly, the relief was also seen in several of the recent states which had become hotspots across the country. Arizona, California, Florida, and Texas all reported daily increases that were smaller than their most recent respective seven-day average. However, the news wasn’t all good. Miami-Dade reported its highest number of hospitalizations since May and the Texas Medical Center said Houston-area hospitals’ ICU usage rose from 93% to 95% of capacity. New Jersey “hit pause” on plans to allow indoor dining and Arizona announced it was closing bars, gyms, and theaters for the next 30 days. From a global perspective, the WHO warned that the pandemic was speeding up and not even close to being over.
Monitoring Other Related News: The Treasury and IRS issued a statement indicated taxpayers must file taxes by July 15 or file for an automatic extension until October 15.
Chairman Powell and Secretary Mnuchin Testify on Busy Day for Fedspeak: Today’s economic calendar will bring several Fedspeakers and reports on home prices and consumer confidence. Fed Chair Powell will be joined by Secretary Mnuchin in testimony before the House Financial Services Committee (11:30 a.m. CT) on the policy response to the pandemic. Powell is expected to reiterate the uncertainty going forward and the need for fiscal policymakers to help the economy weather the storm. In his prepared remarks for today, Secretary Mnuchin said he will discuss the need for more aid with lawmakers in July. At 10:00 a.m. CT, New York Fed Bank President Williams will speak to the IIF on central banking during COVID-19. Governor Brainard will discuss the impact of Dodd-Frank after ten years at the Brookings Institute. And Atlanta Bank President Bostic and Minneapolis President Kashkari will speak on diversity at a NABE conference.
Home Prices and Consumer Confidence: At 8:00 a.m. CT, the S&P CoreLogic home price indices are expected to show home prices gain remain stable just below 4.0% YoY. At 9:00 a.m. CT, the Conference Board’s June report is expected to show fractional improvement in consumer confidence, but sentiment remaining well below the pre-virus level.
Stocks Recouped Some Losses: The complexities of the competing forces affecting the current market paradigm were on display Monday as equities rallied while Treasury yields moved lower. The 1.5% gain for the S&P 500 helped recoup some of last week’s decline precipitated by an acceleration of virus cases across the U.S. Concerns that the new momentum for infections could lead to localized lockdowns were further fueled by Texas, Florida, and some cities in California closing down bars to slow the spread. The risk that more cities and states could follow suit arises just as the economic data has reflected a pick-up in activity as states emerged from initial lockdowns.
Treasury Yields Remained Timid: The latest signs of some recovery came early in the session from a surge in pending home sales (more below) and another regional Fed survey recovering more than expected in June (more below). Led by industrials and shares of Boeing taking off, all 11 sectors gained. The U.S. aircraft maker embarked on its first certification flight, a process that could ultimately lead to the end of the grounding of it 737 Max. But while equities stormed back, Treasury yields inched lower in a sign that a sense of caution continues to overhang the outlook for a sustainable recovery. The 2-year and 10-year yields both fell 1.8 bps to 0.15% and 0.62%, respectively.
Mixed Markets Set to Close a Strong Quarterly Rebound: For a second day, market momentum from a strong start in Asia ebbed as Europe opened with a strong quarter for equities set to close. Markets across Asia jumped following gains on Wall Street and were further supported by a better-than-expected update on manufacturing activity in China. While industrial production contracted more sharply than expected in May in South Korea and Japan, more recent PMIs for June showed China’s manufacturing (+0.3 to 50.6, exp. 50.9) and services (+0.8 to 54.4, exp. 53.6) sectors expanded at a modestly better pace than was predicted. Signs of economic recovery and historic stimulus efforts to send equities soaring after a first-quarter collapse. The MSCI All-Country World Index was up 17.4% for the quarter through Monday, on pace for its best quarter since 2009.
Uncertainty to Define Third Quarter: After accumulating most of that gain in the first two months, however, the index leveled off in June as signs of the virus accelerating again began to pop up. Futures on the S&P 500 were essentially unchanged at 7:15 a.m. CT after an up-and-down overnight performance. Adding pressure to risk assets, President Xi of China signed the controversial national security bill for Hong Kong that has drawn sharp criticisms from heads of state around the world. The U.S. yesterday announced it was ending some special trade arrangements with Hong Kong as it looks to weaken ties with the previously-autonomous city. Treasury yields were little changed at 7:40 a.m.
Pending Home Sales Soared in May: Pending home sales soared by a record in May following a torrid nine-week, 77% run higher for mortgage purchase applications. The 44.3% spike last month followed a 21.8% plunge in April that resulted from government restrictions keeping potential buyers at home. The overall pace for pending sales was the best since February and driven by equally-impressive gains across all four regions. New pending contracts to buy existing homes rose 44.4% in the Northeast, 37.2% in the Midwest, 43.3% in the South, and 56.2% in the West. Existing home sales should pick up in June and the housing sector remains one of the most resilient sectors of the consumer economy.
Another Fed Survey Shows Signs of Improvement: Consistent with the trends set by previously-released regional Fed reports, the Dallas Fed’s manufacturing activity index recovered more sharply than expected in June, although overall activity held below better levels before the pandemic. The index rose from -49.2 in May to -6.1 in June, handily topping the -21.4 median economist estimate, supported by widespread gains in key underlying details and a retreat in outlook uncertainty. Collectively, the body of regional Fed surveys offers evidence of stabilization as economies have reopened and supports expectations for a bounce back in Wednesday’s ISM Manufacturing survey.
Fedspeak Echoes Undertone of Uncertainty: Fed Chair Powell’s prepared remarks for today’s testimony were released Monday afternoon, echoing his recent comments that the outlook is “extraordinarily uncertain” and dependent on “containing the virus.” The summary of San Francisco Fed President Daly’s message was that the jury is still out on whether the economy reopened too soon and whether or not there will need to be more stimulus provided by lawmakers in Washington.
Fed’s PMCCF Goes Live: The more notable Fed news, however, was the announcement that the Fed’s Primary Market Corporate Credit Facility (PMCCF) was now open to lend to businesses. The PMCCF, which offers direct funding to certain large businesses for up to four years, will be able to purchase bonds or syndicated loans directly from the borrower at “issuer-specific” pricing that is “informed by market conditions” and “subject to minimum and maximum spreads” to Treasurys.