The Market Today

Leaders Debate Size of Stimulus and Payroll Tax Cuts; Tensions with China Re-Escalate; Yields Hit New Lows

by Craig Dismuke, Dudley Carter


VS Coronavirus Chartbook (PDF) (Link)

Monitoring the Headlines: With the EU having passed its historic plan for jointly-funded recovery aid earlier in the day, most of the virus headlines during the U.S. session were focused on Congress’s efforts to reach an agreement for a fourth stimulus package. Treasury Secretary Mnuchin said the goal was to have a final agreement by the end of next week. Senate Majority Leader McConnell said that timeline was unlikely, but that the GOP would aim to provide money for education, reimburse businesses for virus expenses and provide them legal protections, and more targeted PPP funding, among other areas. Senate Minority Leader Schumer said he was concerned the GOP’s bill would be too focused on corporations and not provide enough assistance to the unemployed. Senator Romney indicated the next bill will have a smaller unemployment bonus. Indications from members of both parties signaled bipartisan support for another round of checks direct to Americans but bipartisan skepticism towards a payroll tax cut, a top priority of the White House.


Mortgage Applications Point to Full Recovery Ahead of Existing Home Sales Report: Mortgage applications for the week ending July 17 rose 4.1% on a 1.8% increase in purchase apps and a 5.3% increase in refi apps.  The average 30-year mortgage rate inched up 1 bp to 3.20%.  The 78% increase in purchase apps since their April low points to existing home sales rebounding sharply.  Existing home sales fell 32% from February through May. The June existing home sales report, scheduled for release at 9:00 a.m. CT today, is expected to recover almost half of the lost activity.  Mortgage applications point to sales recovering all of the lost activity over coming months.

Corporate Earnings: Today is a very busy day for corporate earnings reports including Microsoft and Tesla after the market’s close. If Telsa were to post a profit, unexpected by analysts, it would help the company in its effort to be included in the S&P 500 index.


Stimulus Hopes Support Global Equities on Tuesday: U.S. equities kept the positive global momentum going for the most part Tuesday after EU leaders struck a historic agreement for joint stimulus and Congress pressed forward with efforts to construct a fourth stimulus plan. Stocks rose across Asia and Europe as heads of state from the bloc’s 27 members announced plans to use, for the first time, common debt to fund 750 billion euros of grants and loans to aid the recovery from the pandemic. During the U.S. session, there was a continuous flow of headlines describing the ongoing discussions between parties in Washington as lawmakers look to find common ground for a fourth stimulus plan. The two sides are currently trying to reconcile Democrats’ desire for larger stimulus and the White House’s desire for it to  include a payroll tax cut. The developments reinforced market beliefs that governments will continue to take unprecedented steps to keep economies propped up amid historic disruptions caused by the pandemic.

Treasury Yields Held Near Record-Low Levels: The S&P 500 closed up 0.2% and at a new high since February, although it finished well below stronger levels it held for most of the day. The Dow rose 0.6% while the Nasdaq slipped 0.8%. Energy companies were the clear outperformers as oil prices rose amid the improvement in risk assets. Treasury yields, however, continued to leak lower with the 5-year yield finishing at a new all-time record low, down 1.4 bps to 0.26%. the 2-year yield inched 0.6 bps lower to 0.14% while the 10-year yield edged down 1.0 bps to 0.60%.


U.S. Tells China to Close its Houston Consulate: The cautious optimism that had lifted global equities to start the week was replaced overnight with concerns about U.S.-China relations. Tensions between the two countries have been simmering for months as the U.S. vocalized its frustrations with China for failing to contain the virus and responded legislatively to China’s government strengthening its grip on Hong Kong’s previously autonomous domestic affairs. But those frictions appeared to be tabled by investors who shifted their focus to positive medical developments on vaccines and efforts in the EU and U.S. to provide more fiscal stimulus. However, U.S. equity futures and Treasury yields both posted sharp intraday declines just before 2:30 a.m. CT Wednesday as news broke that the U.S. had demanded China close its consulate in Houston.

Stock Futures and Treasury Yields Reverse Lower as Tensions Rise: A spokesman for China’s Foreign Ministry announced the decision at a daily press briefing in China, which the U.S. State Department later said was made “to protect American intellectual property and Americans’ private information.” On Tuesday, the U.S. accused a couple of Chinese hackers of stealing significant amounts of data from U.S. companies and said China had joined countries such as Iran and Russia in offering safe haven to such criminals. China’s spokesman said, “We urge the U.S. to immediately withdraw its erroneous decision. Otherwise China will make legitimate and necessary reactions.” Chinese equities closed up on the day but gave up some gains on the news. U.S. futures, which had risen for a fourth day, swiftly turned negative with S&P 500 contracts down 0.1% at 7:30 a.m. CT. The 10-year yield erased an earlier rise and was down 1.5 bps to 0.59%. The 2-year and 5-year yields both fell to record lows at 0.137% and 0.258%, respectively.


WSJ – Fed Deliberates How and When to Roll Out More Economic Support Fed: “New policy isn’t expected at the July 28-29 meeting, but officials are working to forge conclusions on a key strategy change… Fed officials face three related deliberations over what to do. … The first concerns describing how long they plan to keep interest rates near zero. The second centers on whether to augment that support by changing the composition of their purchases of Treasurys and mortgage bonds toward longer-dated securities, as they did after the 2008 financial crisis. The third entails concluding a yearlong review of the Fed’s long-run policy-setting strategy.”

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