The Market Today
Record High Cases, New Restrictions, Stimulus Deal Remains Elusive
by Craig Dismuke, Dudley Carter
CORONAVIRUS UPDATE (VS Coronavirus Chartbook – PDF)
Monitoring the Virus Headlines: Globally, there were 445k new COVID-19 cases reported yesterday, a new daily high. Europe’s exponential outbreak continues to draw new restrictions while rising infections in the U.S. have stirred concerns about new outbreaks stateside. The WHO said half of Europe has seen cases increase by 50% over the last week as the continent’s second wave intensifies. Ireland was placed back under a severe lockdown as the government announced it was requiring non-essential businesses, including bars and restaurants, to close up shop for six weeks. Wales announced similarly restrictive measures for a period of two weeks. Irish citizens will also be required to stay within roughly 3 miles of their residences. The Czech government will require masks to be worn outdoors and a top U.K. medical official said a reliable vaccine may not be available until the spring. In the U.S., every state across the Midwest and into the Mountain states is seeing new daily records: from West Virginia up to Michigan and across to Idaho and Utah. Wisconsin received the most attention as a judge in the state reinstated a 25% capacity limit for certain indoor venues, such as bars and restaurants, while a related lawsuit works its way through the courts. Despite reports of some progress, no stimulus deal was reached as the clock ticks away towards today’s deadline.
Multi-Family Weakness Drags on Starts and Permits but Single Family Activity Continues Boom: Housing starts disappoint in September rebounding just 1.9% after declining a revised-lower 6.7% in August. The weakness for new starts was once again on the multi-family side, dropping 16.3% MoM bringing the YoY change to -19.7%. In contrast, single family starts were up 8.5% in September, now up 23.8% YoY. Building permits improved more than expected in September, rising 5.2% as single family permits jumped 7.8% (+32.5% YoY). Multi-family permits declines 0.9% bringing them down 28.1% YoY.
Stimulus Talks, Fedspeak, Corporate Earnings: The focus in Washington will remain on stimulus discussions and earnings reports today. There is also a bit of Fedspeak including Vice Chair Quarles, Chicago’s Evans, Governor Brainard, and Atlanta’s Bostic. Reporting earnings will be Netflix, Snap, Lockheed and Lockheed Martin, among others.
Equities Erased Early Gains as Stimulus Anxieties Linger: U.S. equities opened with solid gains on Monday before quickly reversing and declining gradually to close near the lows of the day. Despite reports of progress in stimulus talks between Treasury Secretary Mnuchin and Speaker Pelosi, investors remained cautious about the prospects for another round of fiscal stimulus. A spokesperson for the Speaker said the two parties “continued to narrow their differences” and “will speak again [Tuesday] and staff work will continue around the clock.” The aide said, the “Speaker continues to hope that, by the end of the day Tuesday, we will have clarity on whether we will be able to pass a bill before the election.” Over the weekend, Speaker Pelosi said a deal would need to be reached by Tuesday if more aid is to be provided prior to the election.
Treasury Yields Ticked Higher and Steeper: The S&P 500 gained 0.5% shortly after the open before tumbling more than 1.6% by the close with all 11 sectors lower on the day. Even shares of homebuilders slumped more than 2% despite another record for builder confidence in October (more below). Despite the downturn for equities, Treasury yields held on to their overnight increases. The 2-year yield closed the day up 0.2 bps to 0.15% while the 10-year yield added 2.3 bps to 0.77%.
Markets Recover as Investors Eye Stimulus Deadline: U.S. equities are set to recover a portion of Monday’s decline based on overnight futures trading, signaling some hope among investors that progress yesterday in negotiations could allow for an agreement on more pre-election fiscal stimulus ahead of Speaker Pelosi’s Tuesday deadline. A quiet economic calendar this week has kept investors squarely focused on the stimulus developments, and any headlines related to the fate of negotiations could fuel intraday volatility for U.S. asset markets. A busy day and week for corporate earnings announcements as well as growing worries around the pace of the second virus wave in Europe and the U.S. also poses risks for unexpected market swings. A decline in IBM’s stock price after disappointing revenue results was weighing on the Dow while shares of Netflix inched up ahead of their afternoon earnings announcement. More broadly, index futures for the big three U.S. indices were up around 0.6% before 7 a.m. CT following a mixed global session. Treasury yields had edged higher with the 10-year yield up 1.5 bps to 0.78%.
Homebuilder Confidence Improves for Sixth Month to New Record High: Confidence among U.S. homebuilders advanced unexpectedly in October, extending its record run amid housing’s surprising resilience during the pandemic. Overall homebuilder sentiment rose 2 points to 85, a new high in records back to 1985. While foot traffic of prospective buyers was unchanged, the assessments of current and future sales both strengthened to new all-time highs. The historic labor market disruption has so far more severely impacted lower-wage sectors, leaving higher earners to benefit from the drop in mortgage rates to record lows. While the pace of sales remains below levels from the last housing boom and bust, demand relative to supply is notably stronger. While those factors have kept housing moving forward during the historic recession, the NAHB’s chairman signaled activity may be forced to slow, noting, “it is becoming increasingly challenging to build affordable homes as shortages of lots, labor, lumber and other key building materials are lengthening construction times.”
Yellen Says Congress Must Do More: Former Fed Chair Janet Yellen weighed in on the economy Monday, calling for more aid from Washington as the first round of assistance is used up. Consumer spending has been hardy in the months since the pandemic first wreaked havoc on the U.S. economy, she acknowledged, but could soon run into trouble as the stimulus savings in consumer accounts begins to run out. While the Fed is likely to offer more guidance on asset purchases in the months ahead, a heavier burden will fall at the feet of Congress and the White House. Yellen noted, “There are some limits [to monetary policy] and it’s important for fiscal policy to fill in that gap, …While the pandemic is still seriously affecting the economy, we need to continue extraordinary fiscal support.” The previous stimulus packages, and the fact that they have yet to cause significant market disruptions, shows the government can carry more debt than officials previously thought.
Clarida Says Long Recovery that Will Rely on Continued Stimulus: Efforts from the Fed and U.S. government have aided in a surprisingly strong rebound for the economy since April, Fed Vice Chair Clarida said Monday. However, similar to his sentiment from last week, it will likely take at least another year for a full recovery of the economy and even longer for the labor market to return to its pre-virus state. Those projections consider more aid from Congress and continued accommodation from the Fed. The central bank won’t raise rates, he said, until the economy is well into its recovery and in any matter until inflation has hit 2%. Touching on a topic that is being watched and discussed as a critical component in the recovery conversation, Clarida said on the call with the American Bankers Association that U.S. banks entered the current crisis in excellent shape and passed the “ultimate stress test” in March and April.
Bostic is Concerned About Economic Hysteresis: Atlanta Fed President Bostic reaffirmed his previous position that significant fiscal stimulus has been key to the partial recovery since April and will be critical to keep short-term economic disruptions from morphing into long-term economic damage. Some sectors have seen activity pick back up more than others and a slowdown in the pace of hiring poses risks to the labor market. “Widespread permanent job loss could become a material risk to the recovery,” Bostic noted, adding “The data on this are clear: permanently laid off workers find it far more difficult to rejoin the labor force. This would make recovery more difficult to sustain.”