The Market Today
Optimism on U.S. – China Trade Deal Ahead of Jackson Hole
by Craig Dismuke, Dudley Carter
CORONAVIRUS UPDATE (VS Coronavirus Chartbook – PDF)
Monitoring the Virus Headlines: U.S. cases were reported up 0.6% on Tuesday, another below-average reading for domestic infections growth. The controversy about the FDA’s wording around the potential benefits of a lower mortality risk from the recently-approved convalescent plasma treatment. While the FDA head again backed that approval as appropriate based on the data, he also said he could have been clearer in the weekend press conference. Adding to uncertainty created by the mixed economic data (more below), American Airlines said it expects to fly less than 50% of a typical fourth quarter schedule this year and plans to cut 19,000 jobs starting on or after October 1, once employment requirements tied to the government aid it received expire. Of those cuts, 17,500 employees will be furloughed while 1,500 positions will be eliminated.
Hurricane Laura Disrupting Energy Sector at a Time When Supply and Demand Are Not Exceedingly Tight: Hurricane Laura has now strengthened to Category 3 according to an early-morning statement from the National Weather Center. It is expected to strengthen to Category 4 before making landfall tomorrow. The hurricane’s expected path is toward much of the country’s oil refining capacity. However, demand for gasoline has already been damaged by the virus-related changes in travel.
Mortgage Applications Drop on Refis, Purchase Apps Remain Positive: Mortgage applications for the week ending August 21 fell 6.5% on a 10.2% decline in refi apps but a 0.4% uptick in purchase apps. While the pace of gains in purchase apps has slowed in recent weeks, they continue to point to an improving housing market. Mortgage rates remained near record lows during the reference week (see Chart of the Day).
Durable Goods Orders and Business Investment Beat Expectations in July: The initial reads on durable goods orders and business investment in capital goods in July were better than expected. Durable goods orders rose 11.2% during the month on strength in auto parts manufacturing and a partial rebound in defense aircraft orders. Even excluding transportation items, orders for goods designed to last more than three years rose 2.4%, a better-than-expected result. As for business investment in equipment, core capital goods shipments rose a better-than-expected 2.4%. Orders of the same items, an indicator of future investment, also beat expectations rising 1.9%. Through one month, the data point to a v-shaped rebound for business investment. However, the larger concern for businesses will be their recalibration to the new economic reality post-stimulus efforts.
After a Shaky Start, S&P 500 and Nasdaq Set New Records: The S&P 500 and Nasdaq posted another set of records on Tuesday, but it wasn’t without a bit of excitement and anxiety early in the morning session. The major indexes opened in positive territory as global stocks rose for a second day following reports that the U.S. and China had discussed the phase one trade deal and, according to the U.S. side, agreed to move forward with their respective commitments. The developments added to optimism created by news from the weekend on potential virus treatments that lifted stocks on Monday. However, sentiment turned south after an unexpectedly weak reading on consumer confidence dulled the shine of a surprise cycle-best result for new home sales (more on both below).
Treasury Yields Close Up but Off the Highs: Up-and-down trading ensued for the next several hours before a steady climb took hold in the afternoon to push the S&P 500 up 0.4% and the Nasdaq 0.8% higher, both settling at new all-time highs. The Dow, however, never could find its footing, falling 0.2% despite a slight improvement in the afternoon. As eventful as equity trading was, price action in interest rates was equally as exciting. Sovereign yields were notably higher heading into U.S. trading, with European yields leading the global rise. The optimism which has boosted equities pushed Treasury yields up as well, with investors also reportedly keeping an eye on an active calendar for public and private issuances. The 2-year Treasury yield edged 0.2 bps lower to 0.149% after climbing as much as 1.6 bps earlier in the day to 0.168%, its highest level since early July. The 10-year yield rose 2.9 bps to 0.683%, trailing increases of 5.9 bps and 8.2 bps on 10-year yields in Germany and Italy.
U.S. Equities Level Off After Back-to-Back Records While Treasury Yields Keep Moving Higher: Stuck in limbo between positive developments earlier in the week and Fed Chair Powell’s Thursday morning speech on the policy framework, U.S. equities leveled off after the S&P 500 set consecutive record closes. The weekend news on virus treatments and positive comments after a U.S.-China trade call were behind the early optimism that had lifted global shares. Within the last 24 hours, however, market headlines have shifted to focus more on investors’ anxiousness to hear what the Fed chief has to say about how officials will conduct monetary policy moving forward. While stocks inched 0.1% higher across Asia and were up 0.3% in Europe, futures on the S&P 500 were exactly flat at 7:20 a.m. CT. The weekly upward momentum for Treasury yields has continued, however, with the 2-year yield up 1.0 bps to 0.154%, a two-week high, and the 10-year yield 3.1 bps higher at 0.714%, its second highest mark since mid-June. The 5-year yield had moved up 1.8 bps to 0.311, its second-highest level since June, ahead of a midday auction of $51B of 5-year notes, a record.
Housing’s Divergence from the Rest of the Economy Highlighted Again in Tuesday Data: The divergence between the pace of recovery in the housing market and the rest of the economy was again on full display Tuesday. Shortly after equity markets opened, data showed new home sales surged 13.9% in July, easily beating expectations for a 1.8% gain and completing a full V-shaped recovery after falling earlier during the pandemic. The 901k annualized pace was much stronger than the 790k-unit pace economists expected and the best since 2006. On the other hand, consumer confidence tumbled unexpectedly to a new low for the post-pandemic period according to the Conference Board’s latest update. The surprise drop from 91.7 to 84.8, the result of notable weakness in both the current assessment and future expectations, left the headline index at its weakest level since 2014. A weaker outlook for employment opportunities and household incomes highlights the risks to spending and the broader recovery from a prolonged period of high unemployment that outlasts fiscal support.