The Market Today
Markets Digest Fading Stimulus Odds, Mixed Jobless Claims Data
by Craig Dismuke, Dudley Carter
CORONAVIRUS UPDATE (VS Coronavirus Chartbook – PDF) (Updated 9:30 a.m. CT)
Monitoring the Virus Headlines: U.S. stimulus negotiations and Europe’s second wave remained the major focus on Wednesday. White House adviser Kudlow said Democrats have taken an “all-or-nothing” approach on more stimulus and Speaker Pelosi “keeps stringing us along.” While talks haven’t yet completely collapsed, the deadlock continues to frustrate White House negotiators. Treasury Secretary Mnuchin said they have continued to make progress on some issues but remain far apart on others, making a pre-election pact a difficult task. In Europe, Italy and Portugal reported new records for daily infections and France and the U.K. both saw elevated positive case identifications. French President Macron announced a new curfew from 9 p.m. to 6 a.m. for Paris and other large cities in the country. German Chancellor Merkel said her country is in a “serious” phase of the pandemic with “exponential” spread before announcing new restrictions to limit the size of gatherings in hot spots and close bars and restaurants at 11 p.m. Germany said additional measures will be announced if the virus situation hasn’t improved in 10 days. Switzerland and Northern Ireland announced new restrictions to slow the virus.
Initial Jobless Claims Show Very Little Improvement: Initial jobless claims for the week ending October 10 unexpectedly rose 53k to 898k, showing further evidence that the weekly tally is struggling to fall below the 800-900k range. On a positive note, initial PUA claims fell 91k to 373k bringing the total number of new filings down 38k to 1.27mm, the lowest weekly increase of the pandemic.
Continuing Claims Show More Encouraging Picture, but Longer Term Damage Emerging: While initial jobless claims disappointed expectations, continuing claims for the week ending October 3 fell more sharply than expected, down 1.165mm to 10.02mm, another new low for the pandemic. However, a sizeable share of those falling off the traditional state programs appears to be migrating to the PEUC program, the pandemic-related extension of traditional insurance. The number of people filing continuing PEUC claims for the week ending September 26 rose 818k to 2.778mm, the highest of the pandemic. California reported an increase of 253k while New York showed an increase of 201k. Continuing PUA claims, reflecting the program which increased the pool of eligible recipients to include gig-economy workers and those affected by the virus, fell 222k to 11.17mm. The number of people enrolled on all continuing jobless claim programs combined fell 215k to 25.29mm for the week ending September 26.
Regional Fed Reports Mixed But Show Cumulative Improvement: The New York and Philadelphia Fed bank reports on regional manufacturing activity were mixed with the New York index fall more than expected, down from 17.0 to 10.5, and the Philadelphia index up sharply, increasing from 15.0 to 32.3. The details of the two reports show a few similarities, though, including an increase in the new orders indices and notable improvement in the average workweek indices. Ironically, the two reports differ on the employment picture with the New York reporting an improved employment index but Philadelphia reporting a weaker index. Combining the data from the two reports, they point to the ISM Manufacturing index improving near two points in October.
Fedspeak: Today brings another busy day of Fedspeak including comments from Atlanta’s Bostic (8:00 a.m. CT), St. Louis’ Bullard (9:10 a.m.), Vice Chair Quarles (10:00 a.m.), Dallas’ Kaplan (10:00 a.m.), Richmond’s Barkin (1:00 p.m.), and Minneapolis’ Kashkari (4:00 p.m.).
Stocks Gave Up Early Gains as Banks Weighed and Stimulus Talks Showed No Progress: Stocks briefly turned positive at Wednesday’s open before the major indices dipped into negative territory and remained lower through to the close. Pre-market earnings releases from three major U.S. banks were mixed and continued to highlight a cautious economic outlook amid heightened uncertainty created by the virus. Banks fell more than 1% as Wells Fargo tumbled 6.0% and Bank of America slumped 5.3%. Both companies reported earnings ahead of U.S. trading that disappointed analysts’ expectations. Consumer discretionary stocks, however, were the worst performers as shares of Amazon Inc., the heaviest weighted component of the S&P 500, fell 2.3% as investors waited for reports from the company’s two-day Prime shopping event. Treasury yields ended Wednesday in close proximity to where they began with the 2-year yield flat at 0.14% and the 10-year yield down just 0.2 bps to 0.73%.
Risk-Off Tone as Investors Lose Hope in Stimulus Deal: The dissolution of trade talks over the past 24 hours continued to weigh on market sentiment overnight. The 10-year Treasury yield is down 3.0 bps to 0.696% while yields on high-grade sovereign debt globally have fallen similarly. The German 10-year yield is down 4.8 bps overnight to -0.631%. The Nikkei fell 0.5% overnight but equities in Europe are down 2.7% as of 7:30 a.m. CT. U.S. equity futures are also red, down 1.1%.
Barkin Highlights Labor Market Disruption: Richmond Fed President Barkin noted that spending had recovered faster than the labor market, which had seen uneven effects across various sectors. Actual unemployment is higher than the unemployment rate indicates, Barkin said, once the effects of workers leaving the labor force are considered. Nonetheless, sectors such as health care, manufacturing, and technology are having a difficult time finding employees which is weighing on the pace of recovery. The recent increase in cases in the U.S. could also impact the pace of hiring and serve as a headwind for the recovery.
Clarida Says More Stimulus Likely Needed as Economy Faces Long and Uncertain Recovery: Fed Vice Chair Clarida stressed again on Wednesday that additional monetary and fiscal support will likely be a requisite to keep the economic recovery moving ahead. While he believes “there is pent-up demand in services sectors” and that “the arrival of a vaccine, and also at-home testing…could really change the picture quite dramatically,” he cautioned that a full economic recovery is at least a year away and the labor market’s rehabilitation will take even longer. Linking his outlook to the Fed’s new framework, officials will not raise rates even if unemployment returns to a low level unless it is paired with an unexpected rise in inflation to undesirable levels. While he still believes there is some level of unemployment that would cause inflation to rise, he said it could be lower than officials previously thought.
Quarles Says the Fed May Be Forced to Stay Involved to Keep Treasury Market Functioning: Fed Vice Chair Quarles said the silent part out loud on Wednesday, admitting that the “sheer volume [of Treasurys outstanding] may have outpaced the ability of the private market infrastructure to support stress of any sort there.” As a result, he wonders whether there will be “some indefinite need for the Fed to provide – not as a way of supporting the issuance of Treasuries, but as a way of supporting a functioning market in Treasuries – to participate as a purchaser for some period of time. I haven’t concluded that that’s the case, the institution certainly hasn’t concluded that that’s the case, but I do think it’s an open question.” (WSJ article)
Kaplan Wishes the Fed Would Have Kept More Flexibility: Dallas Fed President Kaplan offered a more conservative figure than his colleagues from Chicago and St. Louis of a “moderate” inflation overshoot under the Fed’s new policy framework. While Evans and Bullard have both said 2.5% inflation for a time would be fine, Kaplan said he considers 2.25% to represent a “moderate” overshoot of the 2% average inflation target. As he explained after his September dissent, Kaplan worries that the Fed’s new forward guidance doesn’t give officials enough flexibility in the future and poses ancillary risks from rates remaining too low for too long.