The Market Today
Stimulus Talks Continue Past Deadline; Jobless Claims Improve
by Craig Dismuke, Dudley Carter
CORONAVIRUS UPDATE (VS Coronavirus Chartbook – PDF)
Monitoring the Virus Headlines: The severity of Europe’s new virus outbreak was on full display in Wednesday’s daily updates as Italy, Germany, the Netherlands, Luxembourg, and Greece all posted record increases. The U.K., France, and Spain also saw notable day-over-day increases with the latter becoming the first Western European country to cross over 1 million cases. The Czech government closed non-essential businesses, Poland’s prime minister signaled support for a nationwide “red zone” lockdown, Switzerland indicated it was planning new restrictions, and curfews are said to be likely for Milan and Rome in the coming days. Data in the U.S. also remained a concern with hospitalizations rising to a two-month high. New York reported more than 2,000 new infections for the first time since May.
Monitoring the Stimulus Headlines: By end of U.S. trading on Wednesday, there was still no agreement in Washington to provide another round of stimulus for the U.S. economy. However, there continued to be signals from both sides that negotiations were progressing. Democratic House Speaker Pelosi said she was “pretty happy” with how talks were going and believes they are close to having prospects for a stimulus agreement. She said there will be a new cash influx, the only open question relates to when it can be agreed to. White House Chief of Staff Meadows said he was “optimistic that we’re making progress” towards a “reasonable” deal, adding the next two or three days will be important. The president’s communications director said the administration was cautiously optimistic about an agreement and predicted that you could see some movement sometime within the next 48 hours.
Better Jobless Claims Data; California’s Back to Reporting: California is now back to reporting its state data which resulted in significant revisions to the previous weeks’ data. California’s claims totals were previously being left unchanged (at a high level) on a week-over-week basis. They have now been adjusted to reflect actual results. As such, initial claims for the week ending October 10 were revised down from 898k to 842k. For the week ending October 17, claims fell 55k to 787k, a larger decline than expected. Combining the better revisions with the better weekly result, initial jobless claims fell to 787k, 83k lower than expected. The number of initial PUA-related claims did inch up 8k to 345k. Combining the traditional UI program with the PUA claims, the weekly total dropped to 1.13mm, the lowest level of the cycle.
Continuing Claims Show Same Improvement: Continuing claims showed the same results with favorable revisions and larger-than-expected declines in the current week’s data. For the week ending October 10, traditional state-level continuing claims fell from 9.37mm (revised down from 10.02mm after California’s revisions) to 8.37mm, a larger decline than expected. All told, traditional continuing claims ended the week 1.3mm lower than was expected. PUA claims for the week ending October 3 fell 426k to 10.23mm. PEUC extended claims did increased again, up 510k to 3.30mm. While that is reason for concern, the improvement seen in other parts of the report should outweigh that concern for the time being. In fact, the total number of people filing for some form of unemployment assistance declined from 24.196mm to 23.150mm, the lowest since April.
Home Sales, Leading Index, Regional Fed Report, Fedspeak, Presidential Debate: The September Existing Home Sales report (9:00 a.m. CT) is expected to show sales, already at their highest level since 2007, jump another 5.0% to 6.3mm units. September’s Leading Index (9:00 a.m.) is expected to improve but at a slower pace than in August. The Kansas City Fed Manufacturing index (10:00 a.m.) is expected to hold at +11. Richmond Fed Bank President Barkin is schedule to talk at 12:10 p.m. while Dallas Bank President Kaplan is scheduled for 5:00 p.m. Finally, the final presidential debate will be held at 8:00 p.m. CT tonight.
Treasury Yields Kept Moving Higher Despite Small Equity Declines: A down day for U.S. equities couldn’t dislodge Treasury yields from their upward path, leaving the 10-year yield 3.7 bps higher at 0.82% by Wednesday’s close, its highest level since June. An empty economic calendar and an only mildly interesting day of Fedspeak (more below) left investors eyeing the progress towards another stimulus bill (more above). While an agreement proved out of reach again on Wednesday, both sides continued to signal progress and optimism that a deal would be reached.
Long Yields Hit Four-Month Highs: Nonetheless, risk markets moved lower after Tuesday’s sanguine rebound. The S&P 500 flipped back and forth between gains and losses throughout the session before closing down 0.2%. Energy companies led nine of eleven sectors lower as crude prices slumped 4% following a discouraging supply report. The Nasdaq dipped 0.3% and the Dow led declines with a 0.4% drop. However, longer Treasury yields pushed higher for a fifth session, leaving the level of yields and steepness of the curve at multi-month highs. The 30-year bond added 4.4 bps to 1.64%, notching its highest level since early June. The 2s10s spread closed at a four-month high and 5s30s widened out to a four-year high.
Same Story, Different Day: The market narrative is unchanged Thursday as investors continue to digest corporate earnings announcements, keep hopes for a breakthrough in stimulus negotiations, and remain concerned about the resurgent virus outbreak round the globe. As a result, global markets continue to trade with mixed results. Stocks in Asia dipped 0.5% while Europe’s Stoxx 600 was back around unchanged after erasing a steep opening decline. A larger-than-expected dip for German consumer confidence in November and unexpected weakness for French business confidence in October highlight the fears that Europe’s second wave is slowing the continent’s economic recovery. Before the weekly update on U.S. jobless claims, U.S. equity futures were just below flat for the session and Treasury yields inched down from multi-month highs. The market trends weren’t changed by the better-than-expected jobless claims figures, with the 10-year Treasury yield still down -1.7 bps at 0.81% shortly after the report’s release.
Brainard Said Easy Recovery is Over, Tough Sledding Ahead: After a strong initial recovery from April’s lockdown lows, Fed Governor Brainard said the U.S. economic recovery remains uneven and uncertain and the labor market’s improvement has slowed. She cautioned that the easiest portion of the jobs recovery is “likely behind us” with employment still “far short of its maximum level.” Further healing will be more strenuous and heavily reliant on additional fiscal aid and continued monetary accommodation. The Fed must “stay the course resolutely” in order to ensure its new forward guidance, which she referred to as a “significant change” and “concrete expression” of the Fed’s pledge to no longer preempt a rise in inflation, has the intended effects of lifting inflation and inflation expectations. Asset purchases are an “important part” of the policy approach and she expects officials to clarify their plans for the ongoing program in the coming months.
Mester Believes More Communication on New Framework Is Necessary: Cleveland Fed President Mester said officials may need to provide continued and clearer communications on the Fed’s new framework, including how officials will respond to various economic situations, so as to ensure the accommodation provided by the less preemptive policy approach reaches its maximum potential. Because the new framework explicitly calls for rates to remain lower for longer, the Fed needs to ensure it has the tools, monetary or otherwise, to address any systemic risks that a low-rate regime may create.
Kaplan Keeps His Upbeat Outlook: Dallas Bank President Kaplan remains among the more upbeat Fed officials with respect to the outlook, providing some perspective as to why he dissented to the adoption of more explicit forward guidance which says rates will remain low for years, and in any case until inflation hits 2% and is on track to move higher. Kaplan’s optimistic outlook for the recovery provides additional context to why he felt the Fed should have retained more flexibility for future policy actions. Kaplan said Wednesday that he expects “very healthy” growth to close the year and a “strong” pace of activity to continue in 2021.
Bullard’s a Believer in the Sustainability of the Recovery: St. Louis Fed President Bullard has also become one of the central bank’s most openly optimistic officials when it comes to the economy’s path of recovery. He said monetary policy is currently in “great shape” and the plan to keep rates low for a good while are well understood by the markets. Like Kaplan, Bullard believes the strong recovery from the third quarter has carried over into October and will persist into early next year. Unlike most of his colleagues at the Fed, Bullard said he estimates that there is already enough fiscal stimulus in the system to support the recovery for the rest of the year.
Beige Book Backs Up Recent Fed Commentary That the Recovery Continues but Has Slowed: There were no surprises in the Fed’s October Beige Book, which painted a picture of an uneven recovery that has slowed from a faster pace and an outlook that remains plagued by heightened uncertainty. Economic growth was reported across every district, but the “slight to modest” pace was qualitatively weaker than the “modest” pace described in September. Consistent with other indications, commercial real estate remained a concern while housing and the consumer remained steady. Hiring has continued in almost all districts but the pace was tepid and there continued to be reports of furloughs and layoffs. Inflation pressures were noted for some sectors with mixed abilities to pass the cost increases to consumers, and overall prices rose only modestly. Looking ahead, the Fed’s business contacts were “generally optimistic or positive” about the outlook but noted “a considerable degree of uncertainty.” For banks specifically, many “expressed concern that delinquency rates may rise in coming months.”