The Market Today
Less Economic Uncertainty Despite Continued Election Uncertainty
by Craig Dismuke, Dudley Carter
2020 ELECTION UPDATE
Less Economic Uncertainty Despite the Continued Election Uncertainty: After 24 hours of vote counting, the story remains a high likelihood of a split Congress with Republicans retaining the Senate and Democrats retaining the House (paths to any outcome remain possible). The Presidential race remains too uncertain for novice political observers to weigh in on given tight margins in several states, the slow reporting processes, and potential recounts/litigation. Republicans came into the election with a 53-45 (+2 Independents) lead in the Senate while Democrats held a 233-201 lead in the House. It appears those majorities may be cut in both Chambers. Nonetheless, policy gridlock is the likely outcome over the next two years regardless of who emerges as the winner of the Presidential contest. It does not appear that a change in tax rates will be on the table. And, if Biden wins the White House, his appointees would likely need to be mostly moderate to get through a Republican-led Senate. (WSJ Live Election Results Tracker)
CORONAVIRUS UPDATE (VS Coronavirus Chartbook – PDF)
Monitoring the Virus Headlines: Poland closed schools, non-essential stores, and limited hotel use to work-related stays in its latest attempt to slow the spread of the virus. If those measures don’t have a noticeable impact on the infection rate, the country’s government said a full lockdown for seven to ten days could be required. Greece reported a record number of new infections and will reportedly announce a nationwide lockdown that will take effect on Friday morning. Italy placed Milan and Piedmont into its highest risk tier, which requires significantly more stringent social restrictions. U.K. Prime Minister Johnson said the virus situation is “grave, need for action acute” before the House of Commons approved the latest restrictions proposed by Johnson’s administration. In France, ICU occupancy continued to climb past 80%, the highest level since April, highlighting why officials moved to enact a partial lockdown last week. In the U.S., Senate Majority Leader McConnell, who easily beat out the challenger for his Senate seat, said, “Hopefully the partisan passions that prevented us from doing a rescue package have subsided, …That’s job one when we get back.”
Claims Data Show Positive and Negative Signs: Initial jobless claims disappointed expectations by inching lower from 758k to 751k for the week ending October 31. Initial PUA (I-PUA) claims inched up 4k. Overall, total initial jobless claims were discouragingly flat for the reference week, down just 3k to 1.114mm. On the continuing claims side, traditional claims fell a solid 538k to 7.29mm. Between one-third and one-half of people rolling off of the continuing claims rolls appears to be moving into the extended PEUC program, a trend which held true in this report. Continuing PEUC claims rose 278k for the week ending October 16. Continuing PUA (C-PUA) claims plunged 992k but that decline was driven by some volatility in the larger states. C-PUA claims dropped 1.3mm in California, alone, but jumped 245k in Texas and 201k in New York. Excluding those three states, C-PUA claims fell a more modest 133k. Overall, the pace of improvement in initial claims remains slow, the increase in PEUC claims shows some last damage, but the drop in overall continuing claims is encouraging.
When the Fed Plays Second Fiddle: The FOMC will conclude its two-day policy meeting today at 1:00 p.m. CT with a Policy Statement. Chair Powell will host a press conference at 1:30 p.m. It is expected that the Committee will hold off on making any new policy decisions at this meeting, preferring to make any decisions when the air of uncertainty has dissipated.
Yields Dove and Stocks Rose as Divided Government Makes Massive Stimulus and Major Policy Shifts Unlikely Probabilities: As votes continued to be counted throughout the day in an election that remained too close to call, stocks rallied and Treasury yields declined sharply reflecting a reversal in the general pre-election perception that Democrats could sweep the House, Senate, and White House. With Republicans expected to maintain control of the Senate, yields likely fell in response to the expectation for a smaller COVID-19 stimulus package which reduces concerns about a rapid increase in the Treasury supply. Additionally, a relatively smaller stimulus deal will could result in a relatively slower economic rebound and lower inflation pressures. Covering a daily range of nearly 19 bps, the 10-year yield settled down 13.3 bps to 0.77%. Stocks appeared to benefit from the lower outlook for rates and the optimism that a divided Congress reduces the risks of higher taxes and a significantly tighter regulatory environment. The S&P 500 jumped 2.2%, led by the health care sector with additional support provided by strong gains in tech-related stocks. The latter helped lift the Nasdaq by an impressive 3.9%.
Global Equity Rally Persists as Investors Digest Likely Election Outcomes: This week’s sharp rally for global equities persisted into Thursday and Treasury yields continued to drift lower ahead of the latest jobless claims report and this afternoon’s Fed decision. Stocks rose more than 2% in Asia and Europe’s Stoxx 600 was nearly 1% higher just before 7 a.m. CT. U.S. equity futures continued to march higher and tech continued to lead the ascent. S&P 500 contracts had firmed up 1.8% at 7 a.m. while Nasdaq futures had gained 2.5%, the outperformance largely credited to the election dynamics discussed above. With the probability of a multi-trillion dollar stimulus agreement in Washington significantly diminished by Republicans keeping the Senate, investors may look to the Fed to strengthen its accommodative position and provide the recovery with extra support. To be sure, any such decision is not expected to be made this afternoon.
Treasury Yields Continued to Drift Down Before Jobless Claims and the Fed: The Bank of England, however, increased its asset purchase program overnight amid a surge in cases that has pushed England back under a partial lockdown and led to tightening of restrictions elsewhere across the U.K. The central bank, which updated its forecasts to predict another quarterly economic contraction to close out 2020, kept interest rates unchanged but increased the size of its government bond-purchase program by 150 billion pounds, raising the total stock of planned purchases to 875 billion. Concluding a highly cautious policy statement, officials said “the Committee stands ready to take whatever additional action is necessary to achieve its remit,” should the situation devolve further. Before and after the jobless claims data were released, the 10-year yield had declined 0.7 bps on the day.
Services PMIs Send Mixed Signals About the Pace of Activity: The ISM’s Services PMI fell more than expected in October as virus cases climbed across the U.S. to new record levels. The headline services index dropped from 57.8 to a five-month low of 56.6, falling below the 57.5 expected but still solid relative to readings reported in the months prior to the pandemic. Concerns have been growing that a resurgent virus would negatively impact a services sector still reeling from the initial outbreak and related lockdowns. Business activity, new orders, and employment all slowed and weighed on the headline. Separately, Markit revised up its initial estimate for its services index from 56.0 to 56.9, its highest mark since April 2015. While directionally divergent during October, both indices point to continued expansion of the important U.S. services sector.