The Market Today

CORONAVIRUS UPDATE (VS Coronavirus Chartbook – PDF)

Monitoring the Virus Headlines: Markets enjoyed improved footing on Tuesday as investors continued to reflect on Monday’s positive vaccine news from Oxford and AstraZeneca, the latest in a string of three reports that show multiple candidates could be available for distribution in the weeks ahead. In other virus-related news, the U.K. announced looser restrictions for Christmas that will allow up to three households to gather for the holidays. French President Macron said his country was past the second peak and the current lockdown would be lifted on December 15. However, tighter restrictions would remain in place than prior to the nationwide lockdown, with restaurants still required to remain closed and a daily curfew set for 9 p.m. He said the government would provide additional aid for businesses affected by the shutdown. German Chancellor Merkel was reportedly seeking tougher restrictions in December than state leaders but said her government was looking to extend current lockdown aid programs into December. In the U.S., Louisiana moved to a modified phase two that tightens capacity limits while New York City said it would conduct checkpoints at popular bridges and crossings into the city to ensure its mandatory quarantine protocols for out-of-state arrivals are followed. With regards to quarantines, a report indicated the CDC was considering shortening the 14-day recommended quarantine for someone exposed to the virus.

 

TODAY’S CALENDAR

3Q GDP Revision – Unchanged at Headline: The first revision to the 3Q GDP report shows headline growth unchanged at 33.1%, a stronger pace of recovery than was expected prior to initial estimate.  Beneath the headline, there were a few moving parts including a $16b increase in business investment in intellectual property and software, leaving investment in structures as the only category of investment to decline in 3Q.  Investment in equipment was marked down $6.4b while residential investment was revised up $3.0b.  State and local government expenditures were revised lower from -$16.9b to -$20.4, a sector we expect to struggle amid the decline in sales tax receipts.

Durable Goods Orders and Business Investment in Equipment – Solid: Durable goods orders rose more than expected in October across the board along with positive revisions to the previous month’s tally.  Headline orders rose 1.3% versus expectations of a 0.8% increase.  In the excessively volatile categories, nondefense aircraft orders rose 23.5% while defense aircraft orders jumped 79.1%.  However, motor vehicles and parts orders fell 3.2%.  Excluding transportation items, core orders rose a stronger-than-expected 1.3% on particular strength in computer and electronic product manufacturing, up 3.1%.  Shipments of capital goods items excluding defense and transportation items, a proxy for current business investment in equipment, rose 2.3% versus expectations for a 0.4% gain.  This marks a strong start to 4Q for the category.  Orders of the same items, a proxy for future business investment in equipment, rose 0.7% versus expectations for a 0.5% gain.  Overall, the October Durable Goods Orders report shows the largest category of business investment starting the final quarter of the year on a better note than expected.

Initial Jobless Claims Rise for Second Week in a Row for First Time since July: Initial jobless claims rose unexpectedly for a second week in a row, the first back-to-back increases since July, adding to concerns that the ongoing virus surge and new social and business restrictions across a growing list of states is weighing on the labor market recovery. New claims for unemployment insurance rose from 748k to 778k in the week ended November 21, disappointing expectations for a small decline to 730k. The state-level data show 41 states or territories saw non-seasonally adjusted claims rise during the week, reflecting a broad softening in the recovery trend. The continuing claims data for regular state programs did decline, from 6.37 million to 6.07 million, although the data lags initial claims by a week and 132k of the decline, or 44%, appeared to be a shift into a federal emergency extension program (PEUC) as opposed to actual improvement. New PUA claims, another federal emergency program for workers blocked from regular state programs were more stable, actually declining 8k from the week before. Continuing PUA claims, however, spiked 466k, although a 488k increase in claims in California skewed the broader trend. Collectively, total claims in all programs increased for the first time since the week of September 11, from 20.3 million to 20.5 million, showing the labor market recovery has slowed amid a virus surge.

Mortgage Applications Jump Again as Rates Hit New Lows: Mortgage applications for the week ending November 20 rose 3.9% on a 3.5% increase in purchase apps and a 4.5% increase in refis. The average 30-year mortgage rate dropped to a new record-low of 2.92% according to the data.  The recent downtick in rates have reignited the wave of purchase and refi activity.

Deluge of Data Before Thanksgiving: October’s report on personal income and spending, a key report given that it shows the net effect of lost jobs versus increased federal support on household incomes, is scheduled for 9:00 a.m. C.T.  Also at 9:00 a.m., the October reading on PCE inflation is expected to show the Fed’s preferred measure of consumer inflation falling from 1.5% YoY to 1.4% at the core level.  The University of Michigan’s final November read on consumer confidence will also be released at 9:00 a.m., as will the October New Home Sales report.  At 1:00 p.m., the Fed will release the Minutes of its November FOMC meeting.

YESTERDAY’S TRADING

Stocks Rose to Records as Outlook Became Less Unclear: While much uncertainty still attends the outlook, investors have cheered several developments that have helped alleviate some medical, economic, and political concerns. Excitement has been building in recent weeks as multiple vaccines have shown promise in late-stage trials, offering some hope that the current COVID-19 surge could be the last. In addition to the medical developments, markets found former Fed Chair Yellen, a familiar personality and economic paradigm, to be a comforting pick for the next secretary of the Treasury. Keeping with the political theme, the decision by the U.S. General Services Administration to authorize the Biden campaign to use federal funding to begin the presidential transition process was seen as a step towards more political certainty. Combined, the developments set the stage for a risk on rally Tuesday that sent stocks to a record, pushed oil to an eight-month high, dragged gold down to a four-month low, and lifted longer Treasury yields. The S&P 500 jumped 1.6% while the Dow added 1.5% to cross above 30,000 for the first time. Continuing a choppy and gradual climb higher that’s been in place since early August, the 10-year yield added 2.6 bps to 0.88%.

OVERNIGHT TRADING

Weekly Risk Rally Pauses Before Cornucopia of U.S. Data: This week’s risk rally paused overnight after U.S. indices closed at records as investors braced for one of the busiest days for economic releases in recent memory before the Thanksgiving holiday break. Positive developments on the medical front and signs of progress in a presidential transition have again outweighed worries about a surging virus. While cases in some European countries appear to have peaked since countries implemented stringent lockdowns, the European Commission’s president warned against paring back those restrictions too hastily and risking adding additional pressure to an already strained hospital system. November PMI data released earlier this week showed a more relaxed U.S. response to the ongoing case surge has allowed economic activity to outpace a slowdown that has unfolded in Europe. However, focus will be on this morning’s jobless claims report to determine if the gradual introduction of social restrictions across multiple states has had a negative impact on the labor market. Just before the data were released, S&P 500 futures were roughly flat. Stocks closed essentially unchanged in Asia on average and Europe’s Stoxx 600 was down 0.2%. Treasury yields were little changed but with a lower bias that nudged the 10-year yield down 0.3 bps to 0.88%.

NOTEWORTHY NEWS

Consumer Confidence Drops More than Estimated as Expectations Decline: The Conference Board’s Consumer Confidence Index fell more than expected in November on a notable decline in six-month expectations. The current assessment was little changed at 105.9 compared with October’s 106.2, but overall confidence dropped from 101.4 to 96.1, a three-month low and disappointing expectations of 98.0. The decline was driven by a sizeable 8.7-point drop in the expectations index, from 98.2 to 89.5, as consumers showed less optimism about future business conditions and job opportunities. Most of the alternative data has declined as virus cases have risen to a record level, leading to concerns about a slowdown of the recovery. The drop in confidence comes less than a week after jobless claims rose for the first time in five weeks. Combined with a disappointing retail sales report for October, the drop in confidence will cause some discomfort about the trajectory of near-term economic activity and sharpen the focus on incoming consumer data.

Richmond Fed Manufacturing Index Weakens but Signals Better Days Ahead: A day after its president warned of a challenging few months for the economy before vaccine developments can begin to have positive effects, the Richmond Fed Bank reported a larger-than-expected 14-point decline for its manufacturing activity index in November. The drop from 29 to 15 easily disappointed expectations of 20 and represented the largest one-month decline since April and the lowest level since July. Mirroring President Barkin’s outlook, current readings for every key underlying metric declined from October while future expectations improved. While Monday’s Markit PMIs showed a pick-up for manufacturing in November, most regional Fed reports have signaled activity has cooled, reflecting the continued uncertainty that attends the outlook amid the virus surge.