The Market Today

Stimulus Compromise Remains Elusive; Europe Continues to Battle Second Wave


by Craig Dismuke, Dudley Carter

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

Monitoring the Virus Headlines: Europe’s outbreak continues to drive concerns about the potential for its economic recovery from the first wave to be disrupted by new restrictions to address the second. After a top survey of financial experts on the economic outlook for Germany’s economy came up well short of expectations, the country reported its largest single-day case increase since April. Chancellor Merkel said, “I’m watching with great concern the climbing infection numbers, actually in almost every part of Europe.” France saw another jump in cases and Italy’s tally was the largest since March. The situation in the U.K. dimmed as lawmakers battled over how to address the country’s case surge. Prime Minister Johnson took targeted measures aimed at certain hot spot regions as leadership of the opposition Labour party called for another full lockdown for two weeks. The Netherlands announced a partial lockdown that will close bars, restaurants, and coffee shops and stop the sell of alcohol by 8 p.m. If that doesn’t work, a top government official said a full lockdown may be required.

Monitoring the Medical Headlines: Within the last forty-eight hours, Johnson & Johnson has paused its vaccine trial and Eli Lilly halted a test of its antibody treatment, both actions taken because of an unexplained illness in a participant. The developments were seen as at least a partial setback in the push for a medical breakthrough to allow for a more full return to pre-pandemic economic activity.

Monitoring the Stimulus Headlines: Despite closing the gap between separate aid proposals from the White House and Democrats in recent weeks, there were multiple signs Tuesday that talks remain stuck ahead of the upcoming presidential election. Senate Majority Leader McConnell said he would call a vote next week on targeted aid for the PPP program, a step that will certainly be dismissed by House Democrats as insufficient. Shortly after his pledge to do so, President Trump tweeted, “STIMULUS! Go big or go home!!!” Following the senator’s remarks, and after discussions with Treasury Secretary Mnuchin over the weekend, House Speaker Pelosi said, “Tragically, the Trump proposal falls significantly short of what this pandemic and deep recession demand, …Significant changes must be made to remedy the Trump proposal’s deficiencies.”


TODAY’S CALENDAR

Inflation Outlook Remains Tame Even with Slightly Firmer PPI Report: The September Producer Price index proved to show slightly firmer-than-expected inflation in the production pipeline with headline and core prices both rising 0.4% MoM.  Ironically, the price of producing both core goods and services rose 0.4% MoM also.  On a year-over-year basis, core producer price inflation rose from +0.3% to +0.7%.  While a firmer reading, price pressures from the production pipeline remain negligible.  Parsing out the components which feed through to the PCE inflation report, the data point to a weaker-than-expected result.  Combined with yesterday’s broadly soft consumer price data, the outlook for inflation remains modest.

Mortgage Rates Hit New Record Low: Mortgage applications for the week ending October 9 fell 0.7% despite mortgage rates falling 1 bp to a new record low.  Purchase applications fell 1.6% while refi apps inched down 0.3%.  The average 30-year mortgage rate dropped to 3.00% for the first time.

Another Wave of Fedspeak: Speaking today are Richmond’s Barkin (7:35 a.m. CT), Vice Chair Clarida (8:00 a.m.), Vice Chair Quarles (9:30 a.m.), and Dallas’ Kaplan (2:00 p.m.).  Also on the calendar, the ECB’s Chief Economist, Phillip Lane, who made waves two weeks ago when he said monetary policymakers should take into account the euro currency’s strength.


YESTERDAY’S TRADING

Stocks Dipped Despite Better Bank Earnings as Outlook Remains Highly Uncertain: U.S. stocks slipped Tuesday after strong gains to start the week as the corporate earnings season began amid continued uncertainty about the virus and consternation about the probability of more fiscal stimulus. Shares of JPMorgan and Citigroup both declined despite beating earnings and posting better-than-expected credit costs. Both major U.S. banks warned that the economic shock caused by the pandemic, while less deep than previously feared, would still require a long and tough recovery. Separately, shares of Apple pulled back after the company released its iPhone 12 model on Tuesday, cutting into Monday’s big push higher. Shares of Amazon closed essentially flat as its two-day Prime shopping event kicked off.

Treasury Yields Fell Flatter as Equities Slipped Amid Concerns: On the virus front, U.S. cases have been on the rise as Europe battles its second wave with a growing list of new restrictions being announced across the continent. While no new major lockdowns have been put in place in the U.S., medical setbacks over the last couple of days have compounded fears of more stimulus potentially being delayed until after the election which could weigh on the pace of the domestic recovery. For the day, the S&P 500 closed down 0.6% after Monday’s 1.6% jump with banks leading nine of eleven sectors lower. As equities backpedaled, Treasury yields made a notable move lower and flatter with the sharpest drop occurring at the outset of the U.S. trading session. The 2-year yield dipped 1.4 bps to 0.14% while the 10-year yield fell 4.6 bps to 0.73%.


OVERNIGHT TRADING

Equities Fluctuate as Investors Keep an Eye on Corporate Earnings Amid Broader Uncertainty: Global equities have moved in different directions on Wednesday as a slow overnight news cycle kept the focus on corporate earnings, the virus, and the gridlock in Washington over more fiscal stimulus. Stocks in Asia and Europe both dipped just below breakeven on the day while U.S. futures were little changed but pointing in different directions just after 7 a.m. CT. Earnings from U.S. banks continued to roll in early Wednesday with Bank of America posting disappointing results for most key metrics, excluding a small release of reserves for loan losses. Wells Fargo also missed earnings estimates and cautioned that improved credit cost could be misleading. Similar to the message from JPMorgan yesterday, the bank said payment deferrals and fiscal stimulus could delay a wave of charge-offs into 2021. Shares of both banks were down around 1.8% in pre-market trading. Goldman’s stock rose 2.5%, however, following a record earnings-per-share figure that handily beat estimates, helped out by big gains in trading revenue and improved credit costs for its loan book.

10-Year Treasury Yield Inches Down to Seven-Day Low as German Yields Fall to Levels Last Seen in Early May: While U.S. equity futures had perked up some heading into U.S. trading, Treasury yields remained modestly lower, consistent with the broader trend across Europe. The 2-year yield was flat at 0.14% while the 10-year yield had edged 1.2 bps lower to 0.72%. The yield declines were generally smaller than those across Europe, where Germany’s 10-year yield dipped 2.3 bps to -0.58%, the lowest yield since early May.


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