The Market Today
Important Stimulus Plan Remains in the Works; U.S. – China Tensions Increase
by Craig Dismuke, Dudley Carter
Monitoring the Stimulus Headlines: Stimulus discussions in Washington rolled on Thursday as the clock continues to tick towards the expiration of expanded unemployment benefits on July 31. Treasury Secretary Mnuchin indicated the White House and Republicans had reached an agreement in principle on a deal worth roughly $1 trillion. The Secretary said the bill will include another round of checks to Americans matching amounts in the CARES Act but will look to extend the unemployment bonus at a lower level, potentially pegging the benefit at 70% of an employee’s prior wages. The bill would also have monies to help schools that plan to reopen. Notably, the draft doesn’t include a payroll tax holiday. As for timing, one Republican Senator indicated the plan may not be released until early next week. Across the aisle, Speaker Pelosi said she expects the Republicans’ plan is likely to be insufficient, setting the stage for tough negotiations ahead.
Importance of Stimulus Deal: In our 3Q 2020 Economic Outlook, we highlighted the basecase expectation for another round of stimulus. If a deal is not passed in short order, we would expect the economy to lose its steam more quickly than otherwise and risk a double-dip recession. While the double-dip may be unavoidable, another round of stimulus would extend the bridge built by fiscal and monetary policymakers for another period of time (length depending on size). The risk today is that it is uncertain how long this bridge needs to be, something that will be determined by the country’s ability to contain an unknown virus.
Markit PMIs to Show Which Economies Rebounding Most Quickly: After strong reports from the Eurozone, the U.S. Markit PMIs are scheduled to be released today at 8:45 a.m. CT. Both the Manufacturing and Services PMIs are expected to return to positive territory, rising back above 50. If so, the contractionary readings for manufacturing will have persisted for four months while services would have the last five months.
New Home Sales Rebound Expected to Slow As It Nears Ceiling: At 9:00 a.m. CT, the New Home Sales report for June is expected to show the pace of the housing rebound slow with new sales up 3.6% following May’s 16.6% gain.
Corporate Earnings: The heavy schedule for corporate earnings continues today with Schlumberger, Royal Caribbean, American Express, and Verizon among the thirteen companies to report.
Tech Stocks Turned Lower, Dragged Major Indexes Down: A turnabout in tech-related stocks Thursday sent the S&P 500 on its sharpest slide in nearly a month as investors digested disappointing jobless claims data, stimulus negotiations in Washington dragged on, and the number of cases in the U.S. rose above 4 million. A report about a multi-state probe into certain potentially deceptive practices at Apple drew headlines, dragging the stock down more than 4.5%. Microsoft shares fell by a similar amount after parts of its earnings report on Wednesday, including sales of its cloud computing service, disappointed expectations. Other major tech names, such as Amazon, Facebook, and Google, which have seen a torrid rally despite the ongoing recession, also declined.
Other Markets Reflected the Daily Uncertainty: Markets were already a bit anxious before the technology names turned lower after weekly jobless claims rose unexpectedly for the first time since March and sources said the Republican’s plan for stimulus could be delayed until next week. The weakness for equities was consistent with a drop in oil prices and a new nine-year high for gold. Oil prices slipped amid the broader risk-off tone and after an unexpected build in inventories was reported on Wednesday. Gold prices have risen rapidly as interest rates have dropped to record lows since March and the Dollar has weakened notably throughout the pandemic. The greenback hit a 22-month low on Thursday and the 5-year yield inched down 0.3 bp to 0.27%, less than 1 bp above its all-time low. The 10-year yield fell 2.0 bps to 0.577%, 3.6 bps from its record low.
U.S.-China Tensions Continue to Heat Up, Add to Tech-Pressure on Global Equities: Global stocks have moved deeply into the red on Friday following yesterday’s sell-off on Wall Street and further escalation of tensions between the U.S. and China. Technology stocks, which were the spark for Thursday’s U.S. declines, fomented the downside moves for most of the major world indexes on Friday. Thickening the negative sentiment was China’s retaliation to the U.S. demanding it close its consulate in Houston. China responded Friday with a demand for the U.S. to evacuate its consulate in the city of Chengdu, on the basis that some officials there had “engaged in activities inconsistent with their capacity, interfered in China’s internal affairs and harmed China’s national security interests.”
Unease Only Partially Offset by Solid EU PMIs: Chinese stocks were the continent’s clear underperformers in a day of widespread selling, with the CSI 300 closing 4.4% lower, its third-largest decline of the year. European stocks were down more than 1% and U.S. futures were pointing to a sour open. Japan’s yen strengthened in a bid for safety and gold continued its climb towards a record. Treasury yields, however, were mixed and little changed and European yields had moved higher despite the market unease. Investors took some solace in stronger-than-expected PMI data for July that pointed to expansion across major EU economies. Germany’s composite PMI surged from 47.0 to 55.5 in July’s preliminary estimate as the manufacturing index rose from 45.2 to 50.0 and the services index jumped from 47.3 to 56.7. Combined with a slightly-smaller improvement in France, the Eurozone’s composite index jumped from 48.5 to 54.8, a third monthly improvement and the first expansionary signal since February. At 7:30 a.m. CT, the 2-year Treasury yield was 0.6 bps lower to 0.145% while the 10-year yield had added 0.8 bps to 0.586%. Dow and S&P futures were both down 0.3% while contracts on the Nasdaq had slid nearly 1%.