The Market Today
Stocks Have Best Month Since 1987 Despite Rampant Virus Escalation
by Craig Dismuke, Dudley Carter
CORONAVIRUS UPDATE (VS Coronavirus Chartbook – PDF)
Monitoring the Virus Headlines: Moderna announced final analysis of phase three trial results yesterday showing its vaccine to be more than 94% effective at blocking the coronavirus. Later in the day, the company filed for emergency use approval with the FDA with HHS Secretary Azar said the FDA would likely hold a hearing on December 17th. Secretary Azar also said that assuming vaccine approvals proceed as expected, vaccination of Americans could begin before Christmas. Until then, restrictions are likely to continue as states attempt to balance bringing the virus wave under control without totally breaking the economic recovery. Data showed hospitalizations hit a new record as several states continued to sound the alarm. New York hospitalizations climbed to their highest level since May and California’s governor said ICU beds could hit capacity in the coming weeks, potentially forcing activation of some of the state’s 11 surge hospitals. New Jersey’s governor ended indoor high school sports for the rest of the year and cut outdoor gathering limits from 150 to 25. In D.C., the Senate Majority leader called for Congress to deliver additional fiscal aid this year after a report indicated a group of senators had formed a bipartisan group to discuss possible options.
Manufacturing PMIs, Construction Spending, Auto Sales: Today’s economic calendar will bring both the Markit and ISM PMIs on the manufacturing sector for the month of November. Markit’s initial read was released last week and rose to its highest level in five years. Also released today will be reports on October’s construction spending (9:00 a.m. CT) and November auto sales (released throughout the day).
Powell and Mnuchin at Senate Banking Committee: Fed Chair Powell and Treasury Secretary Mnuchin will appear for the Senate Banking Committee this morning at 9:00 a.m. CT. Investors will be listening carefully for any further hint at how the uncertainty accompanying the recent run-up in virus cases will affect the Fed’s monetary policy position (more below). The November Minutes, released last week, showed “many” participants were ready to tweak the guidance on asset purchases, but held differing views on the appropriate tweaks. Adding to the intrigue of today’s Senate hearings, it was just over a week ago that Treasury Secretary Mnuchin directed the Fed not to extend five of its liquidity facilities at year-end and to return the unused funds to Treasury. A bipartisan group of Senators is currently working on a proposal to extend expiring unemployment insurance programs, citing those monies as one source of funds.
Fedspeak: Speaking today are Governor Brainard (11:00 a.m. CT), San Francisco’s Daly (12:15 p.m.), and Chicago’s Evans (2:00 p.m.).
Equities Ended Incredible November Rally with a Daily Dip: U.S. equities slipped to start the week but rounded out one of their best months in decades amid encouraging vaccine progress made throughout the month. The S&P 500 edged 0.5% lower Monday but finished up 10.8% for the month, its strongest November ever recorded and second best month since 1987 behind April’s snapback after the March collapse early in the pandemic. The Dow notched its best single month since 1987 with a 11.8% improvement. In a fitting finish to the month, Moderna filed for emergency approval with the FDA Monday after final analysis showed its vaccine is more than 94% effective at blocking the coronavirus and even better at preventing severe illness. Investors hope the progress on multiple vaccines means the current wave of the virus could be the last, allowing for a more sustainable economic recovery. U.S. hospitalizations hit a record on Monday and data on housing and a couple of regional activity indices retreated more than expected. While equities moved around throughout the day, Treasury yields remained locked in relatively tight daily trading ranges. Despite expectations that month-end rebalancing could lead to some volatility and lower yields, the 10-year yield inched up 0.2 bps to 0.84%.
PMI Data Lifts Markets to Start December: Global equities got back on track to start December after pausing Monday to close out a strong November on a quiet note. The MSCI All World Index surged 12% last month to new all-time highs amid progress towards multiple vaccines before dipping 0.9% Monday. However, the positive momentum has returned on Tuesday to push U.S. equity futures and Treasury yields higher ahead of U.S. trading. The gains began during Asian trading after a private survey of small and medium-sized manufacturing institutions in China rose unexpectedly to a 10-year high. An official survey of the largest companies in China also rose unexpectedly on Monday on gains in both the manufacturing and services sectors. While other national manufacturing PMIs across the continent were mixed, MSCI’s Asia Pacific equity index rose 1%. After tracking that upward move in early trading, U.S. futures made another leg higher as Europe’s Stoxx 600 jumped at the opening bell. Manufacturing activity cooled across the Atlantic as restrictions were rolled out to slow the virus, but November’s decline was smaller-than-expected after initial estimates were revised up 0.2 to 53.8. At 7:30 a.m. CT, the Stoxx 600 was trading 0.7% higher and helping to keep U.S. index futures up just under 1% and near their highs of the day. Before the U.S. PMIs are released and Fed Chair Powell testifies on the economy before a Senate Committee, the 2-year yield had added 0.2 bps to 0.15% and the 10-year yield was 2.6 bps higher to 0.87%.
Pending Home Sales Dip for Second Month Signaling Existing Home Sales Should Cool: Pending home sales fell for a second month in October in a sign that sales of existing homes may cool some heading into the winter months after a torrid summer recovery. Sales slipped 1.1% in October after a 2.0% decline in September. Even after those small declines, however, the pending sales index remains 86% higher than April’s low, up 16% from February’s pre-pandemic pace, and nearly 20% higher than a year ago. The chief economist for the National Association of Realtors, which tallies and reports the pending home sales results, said, “The housing market is still hot, but we may be starting to see rising home prices hurting affordability. …very strong demand has pushed home prices to levels that are making it difficult to save for a down payment, particularly among first-time buyers.”
Dallas Fed Manufacturing Activity Slows in November: Echoing the message of most other Fed Bank activity indices already released for November, the Dallas Fed Manufacturing Activity index declined more than expected from October. The 7.8-point decline to 12.0 left the index below the 14.0 expected and at its weakest level since August. While employment-related indices improved month-over-month, measures tracking production and new orders posted sizeable declines. Looking ahead six-months, an index tracking expectations for business activity generally also declined, although it held at a solid level relative to readings from the last couple of years.
Fed Joins Other Agencies in Update on LIBOR: In Fed news, the Board of Governors of the Federal Reserved joined with other banking agencies to release a statement confirming that banks should cease writing new contracts tied to LIBOR by December 31, 2021. However, the agencies also agreed to continue publishing certain LIBOR benchmark rates through June 2023. The statement said, “Extending the publication of certain USD LIBOR tenors” which were originally set to end at the end of 2021, “until June 30, 2023 would allow most legacy USD LIBOR contracts to mature before LIBOR experiences disruptions.”
Powell Will Tell Senators Recovery is Moderating and Outlook Remains Highly Uncertain: Based on the prepared remarks released yesterday afternoon, Fed Chair Powell will tell a congressional committee today that the pace of economic recovery has moderated and faces risks from the ongoing surge of new cases and hospitalizations across the U.S. While the recent news on several effective vaccines is “very positive for the medium term,” he will also acknowledge his belief that many uncertainties remain around the distribution of the vaccines and any effects it will have on actual economic activity in the months ahead. Addressing the Treasury’s decision to end five the Fed’s nine emergency lending and liquidity programs, Powell will note that the Treasury has sole authority to do so.