The Market Today
Sentiment Bolstered by President’s Return to White House
by Craig Dismuke, Dudley Carter
VINING SPARKS 4Q ECONOMIC OUTLOOK WEBINAR – The Winding Road to Recovery from the COVID-19 Pandemic: We will host our 4Q Economic Outlook Webinar Tuesday October 6 (tomorrow) at 10:00 a.m. CT. In the presentation, we will look at the two-speed nature of the economy’s recovery from COVID-19. While the 3Q rebound has been sharper than some expected, we will highlight a few headwinds that we expect to prolong a full recovery. In addition, we will discuss the looming election and its expected implications. To register for the webinar, please click here. Participants can earn up to one hour of CPE credit.
CORONAVIRUS UPDATE (VS Coronavirus Chartbook – PDF) (Updated 9:30 a.m. CT)
Monitoring the Virus Headlines: Continued improvement in President Trump’s prognosis was partly responsible for the positive market tone to start the week and led his doctors to discharge him Monday evening. While the President “may not entirely be out of the woods,” according to his doctor, he “has continued to improve. He’s met or exceeded all hospital discharge criteria.” While the president may be headed back to the White House, his press secretary will likely be away for a while. Mrs. McEnany became the latest high-profile person close to the administration to test positive for the virus. In New York, schools will close in several hotspots across NYC while there was confusion about whether non-essential businesses would close. Related to the virus itself, the CDC updated its guidance to include discussion showing the virus can become airborne and spread beyond the six-feet generally accepted as a safe distancing measure in indoor areas with poor ventilation. Negotiations between Treasury Secretary Mnuchin and Speaker Pelosi are expected to continue today with both side reporting progress yesterday in some key areas.
Central Bankers Ask Fiscal Policymakers to Do More: Fed Chair Powell and ECB President Lagarde are both speaking today. Lagarde has already weighed in on the economic risks of not providing more fiscal stimulus to help the region weather the pandemic. In the U.S., Powell has been making the same argument for several weeks and is likely to do so again at 9:40 a.m. CT. Also speaking today or Philadelphia Bank President Harker, Atlanta Bank President Bostic, and Dallas Bank President Kaplan.
Trade Volume Improves but Deficit Increases; Job Openings Report: The August trade balance report showed another larger-than-expected monthly deficit. Imports rose $7.4 billion while exports rose a smaller $3.6 billion. Gains in both imports and exports is a positive sign for domestic and global demand alike. However, as the U.S. economy is rebounding more quickly than others, the quarter-over-quarter annualized trade deficit is currently on pace to increase 98% in 3Q. This will prove to be a significant drag on the final GDP tally. At 9:00 a.m. CT, the August JOLTs report is expected to show job openings pull back from 6.62mm to 6.50mm.
Stocks Rebounded as President Trump Headed Back to the White House: Markets remained upbeat during the U.S. trading session as positive economic data reinforced stronger overnight momentum created by hopes for progress on more stimulus and positive reports on President Trump’s health. Global markets recovered Monday as doctors indicated President Trump’s condition had improved after his admission to Walter Reed on Friday for observance as he faced a positive COVID diagnosis. There also continued to be chatter over the weekend from both Republicans and Democrats over the weekend about the need for more economic aid. While no deal was struck Monday, Treasury Secretary Mnuchin and Speaker Pelosi held a phone call and plan to talk again today.
Treasury Yields Spiked Higher: There continue to be plenty of signs that the recovery is slowing, making Monday’s better-than-expected ISM Services a welcomed surprise (more below). The confluence of factors led the S&P 500 to a 1.8% and caused a sharp and steepening rise for Treasury yields. Energy companies led the way as U.S. WTI rose nearly 6% and tech shares rallied to lead a Nasdaq outperformance. The tech-centered index gained 2.3%, outpacing the smaller gain for the S&P 500 and 1.7% improvement for the Dow. The breadth of the gains, however, was solid with every sector and 90% of companies within the S&P 500 gaining on the day. Financials rose 1.6% as Treasury yields shot higher with the biggest moves up made by longer maturities. While the 2-year yield added 1.6 bps to 0.15%, the 10-year yield spiked 8.1 bps to 0.78%, its biggest daily increase since September 4th and highest level since June 9th. The spread between the yield on the two securities widened out to 63 bps, the steepest measure since a cluster of days in early June, which mark the highest since the market turmoil from March.
Markets Calm After Big Monday Moves as Investors Await Powell’s Speech: U.S. equities and Treasury yields are mixed overnight around Monday’s closing levels as investors take a breather ahead of a speech from Fed Chair Powell scheduled for shortly after U.S. trading begins. After stocks in Asia gained 0.7%, momentum cooled in Europe where the Stoxx 600 was up 0.1% around 7 a.m. CT. The European index rose 0.8% Monday as Wall Street rallied early. In contrast to the sharp increase in Treasury yields to start the week, yields across Europe remain relatively subdued. Germany’s 10-year yield was up just 0.9 bps to -0.50% despite a stronger-than-expected reading on factory orders in August. Europe’s second wave and the reintroduction of targeted restrictions that could stifle the early recovery have more recently weighed on the outlook. At 7:30 a.m. CT, S&P 500 futures were up 0.1%, the 2-year Treasury yield was 0.2 bps lower, and the 10-year yield had added 0.7 bps to yesterday’s big jump.
ISM Services Index Posts Surprise September Gain: The ISM Services index strengthened unexpectedly in September, rising 0.9 points to 57.8 and notching its second highest level since February 2019. The index had cooled 1.2 points in August from a post-pandemic high of 58.1 in July. September’s surprise increase topped expectations for a small decline to 56.2 and was driven by encouraging gains of 4.7 and 3.0 points for new orders and employment, respectively. The improvement in the employment index to 51.8 marked the first expansionary reading since February, an encouraging sign considering other indicators show the labor market’s recovery is slowing. Away from those two key indices, business activity inched higher and remained solid while other metrics were mixed. Backlogs of orders declined and new exports slowed, although both continued to expand. Sentiment in the important services sector holding up despite so much continued uncertainty provides a positive data point amid mixed signals about the trajectory of the economic recovery.
Evans Eager to See Core Inflation at 2.5%: Chicago Fed President Evans echoed the tone of his recent statements on Monday, urging lawmakers to provide the economy more direct stimulus and explicitly stating his desire to see core inflation rise to 2.5%. While the economic recovery has so far outpaced his expectations, he believes Congress providing another fiscal inoculation into the arm of the economy is critical to avoiding a long recession. Even with more aid from Washington, however, he still expects the road to full recovery will be long and arduous. Evans said he expects unemployment to fall to 4% and inflation to reach 2% persistently, but not until 2023. “I think we have to cross over, beyond 2%, with some momentum. I would be quite pleased if we could get core inflation up to 2.5% for a time,” Evans said.