The Market Today
Stimulus Negotiations Continue
by Craig Dismuke, Dudley Carter
Monitoring the Virus Headlines: Negotiations around what the next aid package should include continued in Washington on Monday. Speaker Pelosi called the daily meetings productive but Senator Schumer said Democrats were holding to their position that an extension of the $600 per week federal unemployment supplement must be included in any bill. White House Chief of State Meadows said the sides were “so far apart right now” while Treasury Secretary Mnuchin hinted that the administration might be open to an agreement that exceeds the $1 trillion Senate Republicans proposed. California’s governor noted positive shifts in daily positives and the average case count, with the 7-day average for new cases down 21% from a week ago. New Jersey’s governor, however, tightened restrictions on indoor crowds in response to a rise in infections, lowering the limit on indoor gatherings from 100 to 25.
Stimulus Watch: All eyes remain on negotiations in Washington on a renewed stimulus effort. Given the lack of progress on payroll tax cuts in the Congressional stimulus discussions, President Trump is reportedly considering executive action to implement a payroll tax holiday, extend a moratorium on evictions during the pandemic and the White House is investigating its capacity to extend enhanced unemployment benefits. The moratorium on evictions and increased unemployment benefits from the CARES Act expired at the end of July with around 30 million Americans still receiving unemployment insurance.
Factory Orders Report: At 9:00 a.m. CT, the only economic report of the day will be the June Factory Orders report, including the final revision to durable goods orders.
Washington Still Working on a Stimulus Compromise: Treasury yields rose alongside the major equity indexes on Monday as stimulus talks rolled on and readings of global manufacturing activity in July topped expectations. While a compromise agreement has so far been elusive, officials from the White House and Treasury met again on Monday with top brass from the Democrats as Washington searches for a consensus on more relief funding for the U.S. economy.
Tech Stocks Continued to Lead Stocks Higher: The S&P 500, however, rose 0.7% to start the week and the Nasdaq rallied 1.5% to a new all-time high. The tech sector continued to lead gains after a flurry of stellar earnings last week from some of the biggest names lifted sentiment around the sector. Adding further support, the ISM’s manufacturing index beat expectations after similar reports from China and Europe exceeded estimates overnight. Amid stronger equity markets, Treasury yields pushed higher from Friday’s record-low levels, with the 2-year yield up 0.4 bps to 0.109% and the 10-year yield 2.6 bps higher to 0.554%.
U.S. Assets Pare Monday’s Moves as Investors Wait for Stimulus Progress: A continuation of Monday’s global rally lifted shares across Asia but the positive momentum petered out in Europe. MSCI’s Asia Pacific Index closed 1.7% higher while Europe’s Stoxx 600 erased a 0.6% opening jump and was 0.4% lower at its halfway point. In both cases, analysts pointed to corporate earnings as the deciding factor for whether regional equities extended Monday’s rally. Stocks rose around the globe to start the week as manufacturing PMIs beat expectations in China, Europe, and the U.S. As European equities retreated, sovereign yields in the region fell to their lowest levels in some time. Italy’s 10-year yield posted the largest decline, sliding 5.3 bps to 0.95%, its lowest level since February. Germany’s 10-year yield was 2.0 bps lower at -0.55%, the lowest mark since mid-May. U.S. assets had partially unwound Monday’s results at 7:25 a.m. CT, with equity futures down around 0.4% and the 10-year yield 2.1 bps lower to 0.533%, holding near Friday’s all-time low.
ISM Manufacturing Index Rose to 16-Month High in July: Consistent with overnight data from China and Europe, the U.S. ISM report showed manufacturing activity recovered more broadly in July than was expected. The headline PMI rose 1.6 points to 54.2, modestly better than the 53.6 expected. Leading the headline higher, indexes tracking new orders and production both rose around 5 points to 61.5 and 62.1, respectively, marking their strongest levels since late in 2018. While a smaller gain pushed the employment index to a five-month high, the 2.2-point gain to 44.3 left the index in contractionary territory for a 12-month. Readings across other metrics were mixed, including a drop in inventories. Separately, the Markit manufacturing PMI was reported up 1.1 points in July to 50.9, a downward revision from the 51.3 initially estimated.
Construction Spending Remained Weak in June: Construction spending fell unexpectedly in June and has now contracted in four consecutive months. Total construction spending and the private and public subcategories all dropped 0.7% in June. Total spending was expected to bounce back 1.0% after upwardly-revised declines of 1.7% and 3.4% in April and May. Private residential investment dropped 1.5% as weaker single family data offset improvement in the multi-family space, while non-residential activity edged higher. Public spending was dragged lower by a 1.1% drop in state and local spending that offset a federal gain.
Fed Presidents Maintain Uncertain View of the Economic Recovery: Richmond Fed President Barkin vocalized the concerns of many, saying that a new wave of virus infections could negatively affect economic confidence. Whether or not governments take official steps to limit activity, he noted that consumers could effectively “shut down” states. St. Louis Fed President Bullard said the apparent slowing of the recovery in July shows that there will be ups and downs along the way, but he still expects “rapid” growth in the third quarter. President Kaplan from Dallas also noted the slowing in July, but said the virus is something we have to adapt to and learn to live with.
Auto Sales Continued to Recover in July But Still Have Ways to Go: Auto sales recovered more than expected in July, rising 1.47 million annualized units to 14.52 million, a five-month high. Sales crumbled in March and April, cumulatively reducing the monthly pace to just half of the trend rate from February; April’s 8.58-million-unit pace represented a record low for sales. As the economy has reopened, however, sales have gradually picked up in each of the last three month, albeit to a level that remains below pre-pandemic averages.