The Market Today
Stocks Set to Rise, Yields Are Lower to Start Short Day of Trading
by Craig Dismuke, Dudley Carter
Early Market Close after Thanksgiving Holiday: There are no economic reports scheduled for today and the bond market will close early at 1 p.m. CT. The Treasury curve has moved lower and flatter on Friday following declines in European sovereign yields Thursday while U.S. markets were closed for Thanksgiving. Germany announced yesterday that it was extending its partial lockdown until at least December 20. While the medium-term outlook has improved in recent weeks with encouraging progress on multiple vaccines, the current virus outbreak remains a concern for the economy near-term. U.S. equity futures point to a recovery, although tech stocks, the best performers during the worst of the pandemic, were leading the way.
Stocks Edged Down from Records after Second Weekly Rise in Jobless Claims: Following a couple of days of upbeat trading which boosted stocks to new records, the Dow and S&P 500 both declined Wednesday after a flood of mixed economic data included a second weekly rise in jobless claims. Stocks improved prior to Wednesday’s stuffed economic calendar in response to more positive vaccine news, a market-friendly pick for Treasury Secretary in former Fed Chairwoman Janet Yellen, and the beginning of the presidential transition process. However, a week’s worth of economic reports crammed into a couple of hours on Wednesday (more below) offered a mixed assessment of recent economic trends. Most concerning was the disappointing jobless claims data that showed new claims rose in back-to-back weeks for the first time since July and total claims in all programs rose for the first time since September. The recent virus surge has led to the return of restrictions across many states, creating concerns that the combination could weigh on the pace of recovery. This was a risk discussed by the Fed at their November meeting according to the Minutes released Wednesday afternoon (more below). By Wednesday’s close, the S&P 500 had dropped 0.2% and the Dow had retreated 0.6%, both from all-time highs on Tuesday. Conversely, a rotation back into the relative safety of tech shares lifted the Nasdaq 0.5% to its first record since September 2. After a choppy day of trading amid the myriad economic developments, Treasury yields settled little changed with the 10-year yield up 0.2 bps to 0.88%.
NOTEWORTHY NEWS – Wednesday’s Second Wave of Data Showed Mixed Trends across Economic Sectors (See Chart of the Day)
Personal Income Dragged Down by Fading Fiscal Stimulus, Savings Decline as Spending Rises: A 6.2% drop in government transfers, driven largely by a decline in unemployment insurance supplements from FEMA’s Disaster Relief Fund after CARES Act support expired, more than offset a modest 0.7% gain for wages to drag overall income down 0.7%, disappointing expectations for a smaller 0.1% decline. With spending up 0.5% during the month, slightly stronger than the 0.4% improvement expected, the savings rate dipped from 14.6% to 13.6%, a sixth monthly decline but a level still notably above the pre-pandemic norms. While October spending shows a solid start to the fourth quarter, signs that the virus surge has caused some economic activity to slow will make incoming spending data key in determining the trajectory of the recovery heading into 2021.
Flat PCE Prices in October Drop YoY Inflation Rates: PCE inflation was flat at the headline and core levels in October, dropping the YoY headline rate from 1.4% to 1.2% (as expected) and the core rate from 1.6% to 1.4% (as expected). Inflation will determine when the Fed will raise rates for the first time after the recovery, and elevated labor and economic slack is expected to keep pricing pressure subdued.
Expectations Notched Lower Behind Small Net Revision for Consumer Sentiment: The University of Michigan’s Consumer Sentiment index for November was revised down 0.1 point to 76.9 in the final release, a small change that kept the index at a three-month low. However, the minor net adjustment was the result of a downgrade in expectations that offset a slightly better current assessment. A more pessimistic outlook, the result of responses received later in the month, is consistent with a spike of new infections across the country that, based on disappointing jobless claims data released earlier on Wednesday, appears to have slowed the labor market recovery.
New Home Sales Dipped in October but Pace Beat Expectations and There Were Positive Prior Revisions: While new home sales declined in October for the first time since April, the overall pace of activity actually beat out expectations and there was a cumulative positive revision to the prior three months’ results. Sales fell 0.3% in October to 999k after revisions pushed the prior two months’ pace above 1mm for the first time since 2006. Cumulatively, sales in July through September were revised up 64k, showing an even stronger pace of recovery than was reflected in the previous trend.
Fed Sees Need to Update Asset Purchase Guidance Soon, but Officials Are Still Working on the Details: When the Fed met earlier in November, officials highlighted the swift economic recovery in the third quarter but said data indicated the pace had moderated and there was concern about another potential surge of the virus slowing the recovery. Since that meeting, the seven-day average of new cases has climbed from 98,486 to 177,297, a new high for the pandemic. With fiscal stimulus stalled by irreconcilable differences between Democrats and Republicans, more focus has been placed on how the Fed could provide additional accommodation in the event the economic recovery stumbles. As expected, there was a lengthy discussion about how the bond buying program could be altered to strengthen a policy stance which already provides notable accommodation.
“While participants judged that immediate adjustments to the pace and composition of asset purchases were not necessary,” the Minutes indicated that “Many participants judged that the Committee might want to enhance its guidance for asset purchases fairly soon.” A few officials wanted to wait for more clarity on the outlook before committing to a shift, but “most…favored moving to qualitative outcome-based guidance…that links the horizon…[of] asset purchases to economic conditions.” But how the Fed will alter its current asset purchase plan continued to be debated without a consensus opinion. Options discussed included keeping the current plan but extending the horizon, increasing the pace of purchases, shifting the purchases to longer maturities, or extending the maturity of purchases but reducing the pace. With more evidence that the virus surge and new restrictions are indeed weighing on economic activity, the Fed is expected to alter their asset purchases in some form, potentially as soon as the December meeting.