The Market Today
President Calls off Stimulus Package Talks, Takes Piecemeal Approach
by Craig Dismuke, Dudley Carter
CORONAVIRUS UPDATE (VS Coronavirus Chartbook – PDF) (Updated 9:30 a.m. CT)
Monitoring the Stimulus Headlines: The biggest headline to come out of the White House on Tuesday had nothing to do with the president’s progress in recovering from his COVID-19 diagnosis, although his doctors did say he was doing extremely well. Instead, the markets pivoted violently after President Trump said he had told his team of negotiators to stop negotiating with Democrats until after the November election (more below). Earlier in the day, Fed Chair Powell warned of negative economic consequences if additional fiscal stimulus was not provided forthwith.
Monitoring the Virus Headlines: In other news, the outbreak in Europe continued to elicit new restrictions from various countries. After Germany reported its biggest single-day increase since mid-April, Berlin announced it will require bars and restaurants to close up shop at 11 p.m. each night and prohibit outdoor gatherings. Belgium took the same step and additionally will require no more than four persons per table. The country’s capital took it a step further, closing down bars altogether for a month. The Western European country will also limit private gatherings to four individuals, with the new restrictions set to remain in place for a month. Romania said it will forbid indoor restaurant dining and close movie theaters as hospital capacity has become a concern. In the Americas, Argentina recorded a record case increase and New York confirmed that non-essential businesses will close along with schools in New York City virus hotspots.
Mortgage Rates Inch Down to New Record Low: Mortgage applications for the week ending October 2 rebounded 4.6% as mortgage rates hit a new record low and refi apps jumped. Refi applications rose 8.2% but broadly remain within a range established in mid-May. Purchase apps did pull back 1.5% for the week and are on the low side of their recent growth pattern. As discussed in our 4Q Economic Outlook Webinar yesterday, the foundation for housing is more solid this year than in 2006, and is expected to continue to be a positive source of growth for the economy.
Fed Communications Likely to Tout Need for Fiscal Help: The Minutes from the Fed’s September meeting are scheduled for release at 1:00 p.m. CT. The Minutes are expected to sound a similar alarm as those raised in recent Fed communications about the need for some form of fiscal stimulus. The expiration of the enhanced unemployment insurance benefits is expected to finally drag consumer income back down near pre-virus levels (see Chart of the Day). Thus far, household income has actually been higher than pre-virus due to the direct payments and increase UI benefits from the CARES Act. Also today, there is a handful of Fed speakers including Williams (1:00 p.m.), Kashkari (1:40 p.m.), Bostic (1:40 p.m.), Rosengren (1:40 p.m.), and Evans (3:30 p.m.).
Market Sentiment Sank After President Trump Called Off Stimulus Negotiations: Stocks dipped Tuesday after Fed Chair Powell warned of risks to the recovery if fiscal stimulus is withdrawn too quickly (more below), but plummeted after President Trump tweeted that he was cutting off negotiations with Democrats on more aid until after the election. For weeks, the economic data have, on balance, pointed to the pace of recovery cooling after rapid improvement following the initial reopening from the shutdowns. While stimulus talks have been stalled for months, there had been signs of progress in closing the gap between the two sides in recent weeks which had kept investors hopeful and markets propped up. With the White House postponing any further negotiations, the economic recovery will be forced to continue sans fiscal support for at least another month. The S&P 500 plunged from its daily high, converting a 0.7% gain into a 1.1% loss in a matter of minutes. The index ultimately ended down 1.4% and near its lows of the day. Treasury yields pulled back abruptly on the news, with the 10-year yield falling from 0.78% to 0.73%. After the dust settled, the benchmark yield closed down 4.6 bps at 0.74%, more than halving Monday’s 8-bp spike higher.
Confusion Over Stimulus Outlook Keeps Markets in Limbo: Global markets have moved in different directions Wednesday after Wall Street sunk in the prior session following news that President Trump was halting stimulus negotiations until after the election. While MSCI’s Asia Pacific Index closed 0.4% higher, Europe’s Stoxx 600 quickly erased an opening gain and was off 0.3% just before 7 a.m. CT, its low mark of the day. U.S. assets, however, had reversed most of Tuesday’s moves as equity futures and Treasury yields both pushed higher. The uncertainty for foreign markets and rebound for U.S. assets unfolded after a second wave of tweets from the president indicated that he was still open to piecemeal bills for more aid.
President Still Open to a Piecemeal Deal: Late Tuesday evening President Trump implored lawmakers to agree to provide $25 billion for the airlines and $135 billion for the Paycheck Protection Program, using unspent CARES Act funding. He followed that with a pledge to “sign right now” a stand-alone bill for another round of $1,200 checks to Americans. The need for more stimulus has been pushed widely by Fed officials who see fiscal spending as the medicine the economy currently needs to weather to persistent drag from the virus disruptions. At 7:25 a.m. CT, the 10-year Treasury yield was 4.3 bps higher at 0.78%, almost fully unwinding yesterday’s decline, and futures tracking the major U.S. equity indices were up more than 0.8%.
Powell Keeps Pushing for More Fiscal Aid: Fed Chair Powell’s previously gentle nudges for lawmakers to provide the economy with more emergency stimulus became more firm in his Tuesday remarks. Speaking at a virtual economics conference, Powell said, “Too little support would lead to a weak recovery, creating unnecessary hardship for households and businesses. By contrast, the risks of overdoing it seem, for now, to be smaller. Even if policy actions ultimately prove to be greater than needed, they will not go to waste.” Fed officials have beseeched Congress for weeks for more stimulus amid signs the economic recovery is slowing and with Fed policy already at full throttle. Although consumer spending has fared better than expected since fiscal aid expired, Powell said, “since it appears that many will undergo extended periods of unemployment, there is likely to be a need for further support.”
JOLTS Data Affirm Labor Market Recovery Slowing: Openings in the JOLTS report nearly matched expectations in August at 6.493 million, representing a 204k increase from July. For reference, openings are 1.5 million higher than the low in April but 500k below February’s pre-pandemic level. Hiring of 5.9 million in August nearly matched July’s pace but, as official payroll data had already showed, was skewed higher by temporary census workers. Private sector hiring slowed from 5.57 million to 5.34 million. In addition to fewer hires, quits cooled from a more brisk pace of recovery, with both metrics registering their first declines since the recovery began. Layoffs remain the most surprising portion of the report, considering the slowing pace of improvement in the jobless claims data. The number of layoffs posted another decline of nearly 300k to 1.473 million, the lowest in data back to 2000. Despite the further decline in layoffs, the broader messaging remains that the labor market’s recovery continues to moderate.