The Market Today
Jackson Hole Expected to Deliver Another Defense of Monetary Policy Practices
by Craig Dismuke, Dudley Carter
CORONAVIRUS UPDATE (VS Coronavirus Chartbook – PDF)
Monitoring the Virus Headlines: The U.S. case load maintained its stable growth rate while updates from several European countries continued to drive concerns about the region’s outbreak. France reported more than 5,400 cases, the most in four months, while Italy announced that it had identified nearly 1,400 new infections, the most in more than three months. While Democrats and the White House remain at a stalemate on more stimulus, Senator Rubio said he expects Republicans to make another effort at passing more aid but believes it’s unlikely they’ll find support from across the aisle. White House Chief of Staff Meadows said his staff had reached out to Speaker Pelosi’s office but anticipates she is unlikely to be interested in making a deal before the end of next month. In the latest controversies surrounding the virus, new CDC rules for testing asymptomatic individuals drew the ire of a couple of governors and some medical officials while the EU’s top trade official, in charge of the ongoing Brexit negotiations, resigned after violating virus restrictions on a trip to Ireland.
Jackson Hole Again the Focus for Fed Policy Developments: The Fed’s Jackson Hole Symposium kicks off today with a speech from Fed Chairman Powell specifically addressing the year-and-a-half-long monetary policy review. It is generally expected that the Fed is piecing together a new approach to monetary policy which will target an average rate of inflation over a specified period in lieu of a point-in-time-2.0% target. Implicit in such a change would be a willingness to allow inflation to run above 2.0% for a period of time to make up for a period of below-2% inflation. As such, adopting this new framework against a backdrop of persistently below-target inflation would be interpreted as a dovish move. Chairman Powell’s speech is expected to lay the foundation for a potential announcement at the Fed’s September 16 FOMC Meeting.
GDP Revised to Show 31.7% Contraction in 2Q: The U.S. economy contracted 31.7% according to the first revision to the initial estimate of a 32.9% contraction. The details show personal consumption, business investment, and residential investment all declined slightly less than initially estimated. Additionally, the trade data showed an even-larger decline in the trade deficit. The largest driver of the better revision was a smaller reduction in inventories than initially reported. Regardless, the focus now is on the recovery velocity which does not appear to be forming a v-shaped rebound.
Initial Jobless Claims Improve but Joblessness Remains Very High: The weekly jobless claims data were roughly as-expected and point to improvements for each metric tied to regular state programs but increases in the PUA programs. Initial claims for the week ending August 21 fell from 1.104mm to 1.006mm including widespread declines in 41 states/territories. New claims for the PUA program for the previous reference week ticked up 53k to 547k. On a non-seasonally adjusted basis, new PUA claims are now up three consecutive weeks to 608k.
Continuing Claims Drop Less Than Expected, Extended Programs See Increase: Continuing jobless claims were a bit disappointing, falling just 223k to 14.535mm versus expectations for a 444k decline. However, claims under the two extended benefit programs, including the PEUC which added weeks beyond regular state programs, rose 229k for the week ending August 8. Overall, the number of people receiving some form of unemployment during that reference week fell 1.042mm to 27.0mm, improvement but still very elevated.
Change in Methodology: As an aside, the BLS has finally changed its methodology for calculating its seasonal adjustment but the new methodology will not go into effect until September. Instead of using a percentage adjustment, which distorts seasonal patterns during unusual periods (e.g. a pandemic), they are now using an additive factor. As we have discussed previously, this appears to the be the more appropriate methodology during this period.
Pending Home Sales Expected to Continue Higher; Kansas City Fed Index: At 9:00 a.m. CT, the July Pending Home Sales report is expected to show another 2.0% gain in existing homes going under contract. Pending sales are already up 4.9% from their pre-virus peak. At 10:00 a.m., the Kansas City Fed’s Manufacturing Activity Index is expected to inch up from +3 to +5.
Overcoming Weak Overnight Futures Action, S&P 500 Set Fourth Consecutive Record: Despite a sluggish overnight session for U.S. equity futures, positive momentum returned and built up throughout the morning session to send the S&P 500 to its fourth consecutive record-high finish. Developments related to a couple of treatments for the virus and positive discourse between the U.S. and China on trade lifted stocks to start the week. While a weaker reading on consumer confidence Tuesday raised worries about the economic outlook, it only briefly interrupted this week’s equity rally. An indicator for the pace of business investment in July beat expectations just before markets opened. The 1.0% improvement for the S&P 500 raised this week’s gain to 2.4% and pushed the index to a new record with tech and other momentum names leading the way. Energy companies were the biggest drag as Hurricane Laura strengthened to a category 4 storm as it moved closer to the heart of the U.S. oil refining industry.
Treasury Yields Rapid Ascent Paused After Strong Demand at a 5-Year Auction: Treasury yields were higher for all of the overnight session and most of morning trading, continuing this week’s global trend for higher yields that had nudged longer U.S. yields up to their highest levels in more than two months. However, a swift downdraft occurred at noon CT on Wednesday after a record auction of $51 billion in 5-year Treasury notes saw notably strong demand. Yields dropped sharply after the auction stopped through with an above-average bid-to-cover ratio and the lowest share awarded to primary dealers since 2017, an indication of strong voluntary interest. The 5-year yield finished down 0.8 bps at 0.285% after rising as high as 0.316% overnight. The 2-year yield rose 0.6 bps to 0.15% while the 10-year yield added 0.5 bps to 0.688%.
Weekly Market Tone Reverses as Laura Rips Ashore and Investors Look Ahead to Powell’s Pivotal Speech: This week’s market trends reversed overnight as Hurricane Laura made landfall in Louisiana and investors turned their attention to this morning’s highly-anticipated speech from Fed Chair Powell. Sovereign yields collectively moved lower after rising steadily in recent days as stocks climbed to records and supply forces added pressure. Following a mixed session in Asia, stock markets across Europe pulled back from near-post-pandemic highs and U.S. futures dipped by 0.3% around 7 a.m. CT. Futures for oil and gasoline declined even as Laura made a powerful landfall, with demand battered by the virus absorbing any potential upward price pressure from supply disruptions.
Yields Unwind a Portion of This Week’s Rise: The moves unfolded as markets braced for a busy morning of economic data in the U.S. which will offer a microcosm of the current economic dynamics that could determine the continued pace of recovery. Between 7:30 a.m. and 8:30 a.m. CT, investors will be reminded of the depths of destruction with the GDP revision, see if the slowing of the labor market has continued with the jobless claims data, and hear how the Fed plans to carry out policy in the future with Powell’s speech. Before the first two events, the 2-year yield was 0.8 bps lower at 0.143%, the 5-year yield had slipped 0.5 bps to 0.275%, and the 10-year yield had declined 1.3 bps to 0.675%. Despite both reports topping expectations, markets held their overnight moves, highlighting the incredible focus markets have on Powell’s policy speech.
August Economic and Interest Rate Projections, and Bloomberg Survey of Economists (August Update and Bloomberg Survey Results)