The Market Today

Retail Sales Show Reason for Optimism; Stimulus and Virus Remain Front-and-Center; Brexit


by Craig Dismuke, Dudley Carter

CORONAVIRUS UPDATE (VS Coronavirus Chartbook – PDF) (Updated 9:30 a.m. CT)

Stimulus Headlines: Yesterday began with a sliver of optimism on reports that the White House would not let a national testing strategy get in the way of a larger stimulus package.  By mid-morning, President Trump indicated he was open to a deal larger than $1.8 trillion, the cap placed on negotiations by the White House last week.  Senate Leader McConnell immediately indicated his members would not support a larger deal and continued to prefer a $500 billion plan. However, Secretary Mnuchin relayed to Speaker Pelosi that President Trump would lean on McConnell as they reach a larger deal. Pelosi reportedly relayed to House Democrats the need for additional stimulus sooner rather than later.

COVID-19 Outbreak Headlines: The U.K. government announced a ban on indoor gatherings of people from different households to begin Friday night.  Reports emerged that the Spanish government is preparing to shutter restaurants and bars in Barcelona.  The resurgent outbreak in some Midwest U.S. states continued to escalate and two of Senator Harris’ staffers tested positive, shutting down her travel schedule through next Monday.


TODAY’S CALENDAR

Retail Sales Show Reason for Optimism If Income Cliff Can Be Avoided: Retail sales beat expectations in September, rising 1.9% at the headline level and 1.4% core.  August’s sales figures were revised down 2/10ths but the September improvement more than accommodated for that. Particularly strong were sales of clothing and accessories (+11.0% MoM), sporting goods/books/hobbies/music (+5.7%), autos and parts (+3.6%), and food services and drinking places (+2.1%). After falling 45% initially, the sale of sporting goods/books/hobbies/music have rebounded more sharply than any other category, now up 15% from pre-virus levels. Online sales, which never declined, increased another 0.6% bringing them to 21.5% above their pre-virus level.  The consumer continues to spend at a better-than-expected rate.

Manufacturing Output, Consumer Confidence, and Fedspeak: At 8:15 a.m. CT, the Industrial Production and Capacity Utilization data is expected to show manufacturing output recover an additional 0.6%.  Manufacturing output fell 20% from February to April and remains 6.7% below its February level.  At 9:00 a.m., the University of Michigan Consumer Confidence report is expected to show confidence remains low but inch higher. Also at 9:00 a.m., Business Inventories are expected to have increased 0.4% in August.  Speaking from the Fed today are St. Louis Bank President Bullard (8:35 a.m.) and New York Bank president Williams (8:45 a.m.).


YESTERDAY’S TRADING

Investors Cling to Hope for Stimulus: The DJIA fell 333 points at the open on the stalled stimulus talks, growing COVID-19 concerns, and an unexpected increase in initial jobless claims. The disappointing increase in initial jobless claims, while discouraging for the economic outlook, may well have boosted sentiment by highlighting just how acute the need is likely to be for additional stimulus.  While the COVID-19 headlines failed to improve intraday, the outlook for stimulus talks did and helped equities recover most of their initial losses.  For the day, the DJIA closed down just 20 points and the S&P inched lower 0.2%. Following a similar pattern, the 10-year yield hit its lowest mark near 8:00 a.m. CT at 0.689% before rising to 0.732% by day’s end.


OVERNIGHT TRADING

Brexit Risk Intensifies as U.K.’s Johnson Says to Prepare for No Deal: Reaching his October 15 deadline to have a Brexit deal mapped out, British P.M. Boris Johnson said overnight that he now views a trade deal with the E.U. as unlikely. He said the country should begin preparing to leave the single market and customs union without a deal. Despite that, E.U. chief negotiator Michael Barnier still expects trade discussions to continue next week as Johnson seemed to leave that door open. The Euro Stoxx 600 is up 0.5%.  S&P futures are flat and the 10-year Treasury yield is fractionally lower at 0.726%.  Immediately following the retail sales report, the 10-year yield jumped to 0.751%.


NOTEWORTHY NEWS:

October Economic Projections and Bloomberg Survey (PDF)

October Economic Projections and Bloomberg Survey PWPT

Vice Chair Quarles Questions Stability of Short-Term Funding Markets: Fed Vice Chair for Supervision, Randal Quarles, questioned the need for revised regulations for short-term funding markets a day after calling into question the ability of the private markets to support the Treasury market during periods of financial strain (the two thoughts are related).  In describing the “kaleidoscopic gallimaufry of actions” taken by the Fed to support the markets, Quarles noted, “The runs on prime money funds and commercial paper were particularly disappointing” and that “it is worth asking whether there may be other steps needed to secure these very important sources of liquidity.”

Vice Chair Clarifies Comments – Was Not Suggesting Fed Provide Permanent Backstop: Following up on his Wednesday comments that it was an “open question” if there was an “indefinite need for the Fed to … participate as a purchaser” of Treasurys, Quarles said, “I wouldn’t want the comments that I made today … to suggest that I think that there’s some need for some permanent backstop of the Treasury market in normal times”.

Barkin Notes Less-Preemptive Nature of New Framework: Richmond Fed Bank President Barkin said, “The Fed will aim to keep rates low until we see moderate overshoots of inflation or the development of financial stability risks.”  He continued, “Under the new framework, a low level of unemployment alone would not lead to preemptive increases in interest rates.”


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