The Market Today
Jobless Claims Improve; Europe Continues to Battle Second Wave
by Craig Dismuke, Dudley Carter
CORONAVIRUS UPDATE (VS Coronavirus Chartbook – PDF) (Updated 9:30 a.m. CT)
Monitoring the Virus Headlines: The White House physician said midday Wednesday that President Trump had experienced no symptoms over the last 24 hours and been fever-free for four days. White House Chief of Staff had said the president had spent most of the day in the Oval Office. Mr. Meadows also noted that he had worn full PPE when he met with the president. Away from the update on the president’s health, the continued roll-out of new restrictions across Europe remained a focus. France posted a record daily increase of 18,746 and President Macron said new restrictions would be forthcoming. The U.K. said that pubs and restaurants in northern England would be closed and Scotland said it would tighten restrictions on watering holes and eateries for two weeks. Italy will now require masks to be worn outdoors after the country posted its biggest case increase since April and Denmark extended its latest restrictions through the end of the month. Ireland’s Chief Medical Officer said all indicators related to the country’s outbreak were deteriorating.
Jobless Claims Data Shows Improvement: Initial jobless claims for the week ending October 3 inched down from 849k to 840k. On a positive note, initial PUA claims dropped 44k to 464k. Between both traditional and PUA claims, total initial jobless claims fell 53k to 1.304mm, the lowest level since the pandemic began. The number of people continuing to file for unemployment for the week ending September 26 pulled back more sharply than expected, down 1.0mm to 10.98mm, also the lowest level since the pandemic began. The improvement was broad-spread with 46 states reporting declining totals. For the second week in a row, California did not provide jobless claims totals but provided “estimates” that have been unchanged for the past two weeks. Continuing PUA claims for the week ending September 19 declined 434k to 11.39mm while continuing PEUC (the program which extends state programs) increased 154k to 1.96mm. The total number of persons filing for some form of unemployment for the week ending September 19 fell 1.05mm to 25.33mm, the lowest total since April.
More Fedspeak: There are several more Fed officials on the calendar to speak today: Kansas City’s George speaks at 8:15 a.m. CT, Boston’s Rosengren speaks at 11:10 a.m., and Atlanta’s Bostic is scheduled for 1:00 p.m..
Stocks Erased Tuesday’s Decline on Hopes Stimulus is Still Possible: Following a late-afternoon stumble on Tuesday after President Trump called off negotiations on a broad stimulus package, stocks recovered nicely Wednesday as he appeared to still be open for piecemeal economic aid. The initial tweet that the White House was postponing negotiations for a larger bill until after the election sent markets into a tailspin on Tuesday, pushing the S&P 500 down 1.4% by the close after it had earlier posted a solid gain. Subsequent tweets that evening after markets closed indicated the President would still sign individual bills for airline aid, PPP money, and another round of checks to individuals. U.S. stocks opened strongly Wednesday, strengthening gradually throughout the day to a 1.7% gain. Closing near its daily peak, the index finished at its highest level since September 4.
Treasury Yields Unwound Prior Day’s Decline Amid Risk Recovery: The Fed’s September Minutes, released Tuesday afternoon, showed divergent views on exactly how the Fed should portray its intentions with future policy moves, but widespread agreement that more fiscal aid will be necessary to keep short-term issues resulting from the virus disruptions from becoming longer-term problems that damage U.S. economic potential (more below). With hopes that some form of stimulus is still possible, Treasury yields more than reversed Tuesday’s decline that had halved Monday’s 8-bp jump. Wednesday’s 5.2-bp gain to 0.788% left the benchmark yield at its highest level since June 9th. An auction of $35 billion in 10-year Treasury notes saw solid demand and had little impact on the daily move in yields.
Stocks Continue to Recover on Stimulus Hopes: Treasury yields moved lower Thursday ahead of the weekly update on jobless claims in the U.S. even as equity futures signaled the major indices would extend Wednesday’s recovery when trading opened. Investors became anxious earlier in the week after President Trump said a comprehensive stimulus bill would have to wait until after the election. However, he later said he would sign piecemeal deals, giving investors some hope that a slowing recovery may still receive some form of additional support from Washington. Those hopes were strengthened within the last hour after President Trump said on Fox Business that talks had restarted and were “very productive.” Echoing what he said late Tuesday evening, he added, “We started talking again and we’re talking about airlines and we’re talking about a bigger deal than airlines. We’re talking about a deal with $1,200 per person, we’re talking about other things.”
Treasury Yields Tick Down Ahead of Jobless Claims: Breaking a recent timid trend, Treasury yields have actually shown some vigor this week as investors tracked the president’s progress in recovering from his COVID-19 infection, his polling position against Democratic presidential candidate Biden ahead of next month’s election, and the twists and turns in the stimulus developments. On the election front, the president said he would not participate in the second debate after the format was changed to virtual for health reasons. Yields are lower this morning, despite the gains for equity futures, but jumped off the lows as President Trump said the stimulus negotiations are “starting to work out.” Before the jobless claims data were released, the 10-year yield was 1.2 bps lower at 0.775% after having dropped as low as 0.765%.
Few Surprises in the Fed’s Dovish September Minutes: There were few surprises in the Fed’s September Minutes which acknowledged that the early part of the recovery occurred at a faster rate than most expected, but activity had been uneven across sectors and activity more broadly appeared to be slowing with the economy still well short of its pre-pandemic health. In comments on Wednesday, New York Fed President Williams said the economy is “nowhere near where we want” it. While certain sectors had seen a significant rebound in demand, others, primarily services sectors that require some level of close personal proximity, had lagged far behind. The lasting effects of this disruption could lead to longer-term negative effects, which in turn could be exacerbated by fiscal stimulus falling short of what is needed. In fact, the degree of recovery in many officials’ updated projections was contingent on more aid. In the discussion of the forward guidance, while most supported the new explicit forward guidance they also noted it was not an “unconditional commitment to a particular path.” On other areas of policy, some officials believe it will be prudent in future meetings to “assess and communicate how the Committee’s asset purchase program could best support” their dual mandate.
Senior Fed Researcher Estimates How Much QE May Still Be Needed: While the September Minutes were the major Fed development Wednesday, a less covered paper produced by a top researcher with the central bank also drew some attention. The Fed’s recent framework shift was driven by a desire to ensure monetary policy remains effective with the target rate already at the effective lower bound. The level of rates places more emphasis on asset purchases in the event more monetary stimulus is needed. Bloomberg’s article on the new Fed paper noted, “Bond purchases equal to 30% of U.S. economic output, or about $6.5 trillion, are required to offset the impact of the Fed’s benchmark rate already being nearly zero, …The Fed has so far purchased bonds…equal to about $3 trillion since March. That implies another $3.5 trillion is needed…to make up for the monetary policy handicap of zero rates.” Several Fed officials have indicated, including in yesterday’s Minutes, that more guidance on the Fed’s plans for asset purchases may be needed in the coming months.