The Market Today
Stimulus Talks Fizzle; U.S. Data Sizzle
by Craig Dismuke, Dudley Carter
CORONAVIRUS UPDATE (VS Coronavirus Chartbook – PDF)
Monitoring the Virus Headlines: Most of Monday’s virus headlines were still saved for the worrisome outbreak updates from recent days showing the pandemics in the U.S. and Europe rising to new record levels. Despite reporting lower daily tallies on Monday, Italy, Spain, and France all reported new records for daily infection increases over the weekend. France, on Monday, reported its largest increase in hospitalizations since early April. Denmark reported a new record for infections and Norway became the latest country to impose more stringent restrictions on households and businesses. Similarly, Nottingham was reported to be moving to the highest level of virus restrictions. Related to the U.S. stimulus talks, White House Economic Adviser Kudlow said there are a couple of areas of the Democrats’ plan that President Trump can’t concede to while Speaker Pelosi said the White House refused to accept testing language after Treasury Secretary Mnuchin said they would. A top Republican Senator said chances of an agreement before the election were “very, very slim.”
Expectations for Stimulus Going Forward: With pre-election stimulus talks having appeared to have failed, an eventual stimulus package remains the baseline outlook. Now the election results are expected to dictate the size and scope of the package. If Republicans retain the Senate, we expect a package between $500 billion and $1 trillion. If Democrats take the Senate, a $2- to $3-trillion package appears more likely. The differences in the two packages will obviously yield different economic outcomes and rate projections.
Durable Goods Orders Continue to Recover Faster Than Expected: Durable goods orders rose a much stronger-than-expected 1.9% in September, continuing a trend of outperformance during the pandemic recovery. Excluding the volatile transportation categories, orders rose 0.8% while non-defense orders jumped 3.4%. Core capital goods orders, a proxy for future business investment in equipment, doubled the expected growth rate rising 1.0% in September along with a positive revision to August’s tally. Shipments of the same core capital goods, a proxy for current-quarter business investment in equipment, rose 0.3%. After fixed investment in equipment contracted 15.2% in 1Q and 35.9% in 2Q, the durable goods data point to a stronger rebound than expected in 3Q.
Home Prices, Consumer Confidence, Regional Fed Index: The FHFA and S&P CoreLogic home price indices (8:00 a.m. CT) for the month of August are both expected to show continued traction for home prices. Consumer confidence for the month of October is expected to tick higher in the Conference Board report (9:00 a.m.). Confidence currently remains soft but is at its highest level of the pandemic. The Richmond Fed Manufacturing Index (9:00 a.m.) is expected to remain positive but inch lower.
Risk Markets Retreated on Rise of Infections, Dwindling Odds of Pre-Election Stimulus: The overnight jitters that dropped equity futures ahead of U.S. trading intensified during Monday’s session, handing the S&P 500 its largest single-day drop in a month. Over the weekend, the virus outbreaks in the U.S. and Europe hit record levels based on new cases and data showed increases in hospitalizations and deaths. Additionally, Italy and Spain announced new restrictions which are likely to weigh on an already-slowing economic recovery. Adding to the broader worries, the prior week’s progress towards a compromise stimulus agreement stalled over the weekend as signals from both sides indicated that the remaining differences would be tough to reconcile. The combined effects were enough to break the market’s spirit on Monday, pushing the S&P 500 down 1.9% and the 10-year Treasury yield 4.1 bps lower to 0.80%.
U.S. Futures Rise Slightly Despite Global Equities Remaining Weak: Global markets remained mostly lower Tuesday following the S&P 500’s slide to a three-week low to start the week. Stocks in Asia closed down 0.2% on average and Europe’s Stoxx 600 was trading just below even on the day. The European index slumped 1.8% on Monday as global equities retreated on a rise in global infections, some countries to records for the pandemic, and a lack of progress in U.S. stimulus negotiations. While they could be recalled within 24 hours if a stimulus agreement is somehow reached this week, U.S. senators left Washington after confirming Amy Coney Barret to replace the late Justice Ginsburg on the Supreme Court.
Treasury Yields Drift Lower to Add to Yesterday’s Drop as Uncertainty Looms Large: U.S. index futures had perked up by between 0.4% and 0.5% around 7 a.m. CT, a marginal recovery of the steep declines in the prior session. Adding to the list of items for investors to digest, the busiest week for quarterly corporate earnings has kicked off ahead of the market open with mixed results. Reporting ahead of the session were 3M, Caterpillar, Eli Lilly, Pfizer, and Merck. Microsoft will report after markets close today. Before this morning’s durable goods report, Treasury yields had continued to drift lower after Monday’s drop, with maturities five years and longer down by around 1 bp.
New Home Sales Disappoint in September, but 3Q Surge Still Intact: A housing report finally disappointed as new home sales fell unexpectedly in September and August’s gain was trimmed in revisions. Sales of new homes were expected to increase 1.4% last month but dropped 3.5% instead, registering the first decline since April. The 4.8% improvement in August was lowered to a 3.0% rise, still the best pace since 2006 but softening the overall trend after a stellar rebound from the April lows. Notwithstanding the flatter-than-expected two-month pace, September’s 959k annualized pace was the third-strongest since 2006 behind July and August. Combining those three months shows sales surged in the third quarter at an annualized rate of 267%, signaling the sharp snapback for housing that is expected in Thursday’s first look at the 3Q GDP report.
Dallas Fed Manufacturing Posts Surprise Gain but Outlook Levels Off amid Continued Uncertainty: The Dallas Fed’s Manufacturing Activity index posted a surprise gain in October, rising from 13.6 to 19.8 to mark its strongest level since October 2018. Except for a couple of slightly softer employment metrics, most current indicators strengthened from September, including indices tracking production and new orders. The forward looking indicators, however, signaled some leveling off of expectations amid a mix of gains and losses in six-months-ahead indices.