The Market Today
U.S. Economy Recovers More Than Expected in 3Q but Lasting Concerns Remain
by Craig Dismuke, Dudley Carter
CORONAVIRUS UPDATE (VS Coronavirus Chartbook – PDF)
Monitoring the Virus Headlines: The dire situation in Europe continued to drive the headlines and was the reason for the rout that upended global markets on Wednesday (more below). After weeks of worrisome case increases, both Germany and France, Europe’s two largest economies, confirmed the new nationwide lockdowns that had been hinted at in reports on Tuesday. German Chancellor Merkel said the virus has begun to spread exponentially and could lead to the hospital system being overwhelmed within weeks. As a result, the government said it will shut bars, restaurants, and leisure facilities for a month starting Monday while providing aid to replace up to 75% of lost revenues for affected businesses. Citizens were also told to limit their private contacts to one additional household up to 10 people and avoid non-essential travel. In France, President Macron said the virus is spreading at an unexpected speed and there could be up to 9,000 patients in ICUs within weeks. As a result, a new nationwide lockdown set to begin Friday and last through December 1 will shut down bars, restaurants, and non-essential retailers, close down national borders, and prohibit domestic travel and public gatherings. Around those announcements, Spain, Greece, Italy, the U.K., and Sweden were among the European countries to report a record number of new infections.
U.S. Economy Recovers More Lost Activity Than Expected in 3Q: The U.S. economy rebounded 33.1% according to the first estimate for 3Q GDP, an even stronger recovery than was expected. In annualized Dollar terms, the economy expanded $1.28 trillion, from $17.30 to $18.58 trillion. Based on December’s cycle peak of $19.25 trillion, the economy contracted 10.1% through 2Q20 but has now recovered 65.7% of that lost activity.
Strong Consumer, Business Investment in Equipment, Housing, Demand for Imports: Driving 3Q growth were particularly strong recoveries of personal consumption (+40.7%), business investment in equipment (+70.1%), residential investment in structures (+59.3%), and a much better rate of change for inventories which added 6.6% to the final GDP tally. On the negative side of the ledger, business investment in structures was pummeled, down another 14.6% while investment in intellectual property fell 1.0%. Government spending declined 4.5% including a 6.2% decline in federal spending and a 3.3% drop at the state and local level. A stronger recovery of imports (+$475B) than exports (+$239B) drove the trade deficit from $775 billion to $1.01 trillion, the largest trade imbalance on record, and dragged 3.1% from the final GDP tally.
Jobless Claims Remain High but Continue to Improve: The level of jobless claims remain high, but the trend continues to improve a bit more quickly than expected, an encouraging sign considering the worrisome rise in virus cases globally that has rattled markets and raised concerns about the economic recovery slowing. Initial jobless claims fell from 791k (revised up from 787k) to 751k during the week of October 24, beating expectations for a small decline to 770k. Despite a small 14k rise in new PUA claims to 360k, overall unadjusted new claims dropped to a new low for the post-pandemic period. Continuing jobless claims, which are lagged by a week compared with initial claims, also beat expectations, falling 709k from 8.46mm (revised up from 8.37mm) to 7.76mm compared with estimates for 7.78mm. Similar to prior weeks, the decline in the total number of claims being paid from all programs was smaller than the drop in regular state program continuing claims. While some of decline in unemployment rolls was unemployed Americans finding work, a notable portion was a transition of longer-term unemployed workers maxing out their regular state benefits and moving into an extended federal benefit program created by the CARES Act. Claims in the PEUC program rose 387k for the week of October 10, limiting the drop in the total number of Americans receiving some form of unemployment to 416k to 22.56mm, still a new low since April.
Global Equities Unraveled As Major European Economies Were Placed Under New Lockdowns: Global equities unraveled Wednesday as Europe’s top two economies announced new lockdowns in response to exponential virus spread across the continent in recent weeks. Most European countries have set records for new infections in recent days and reported increased hospitalizations and deaths. Combined, the virus surge and new government restrictions are seen exacerbating a slowdown of the recovery that is already underway based on the most recent PMI data. Europe’s Stoxx 600 slumped 3% in its worst performance in more than a month to its lowest level since May. Equities in France and Germany collapsed 3.4% and 4.2%, respectively.
Treasury Yields Failed to Catch a Safe-Haven Bid Even as U.S. Equities Sank Alongside European Indices: While similarly stringent measures haven’t yet been taken in the U.S., the domestic outbreak is gaining steam in the wrong direction, leading to worries that economic activity here could also slow. The fact that Washington failed to expeditiously agree to another round of stimulus has only aggravated those concerns. Stateside, the Dow and S&P 500 fell around 3.5% to register their largest declines since the first half of June. The Nasdaq dropped by an even-larger 3.7%. In a somewhat suspicious twist, Treasury yields actually rose despite the plunge in equity prices, sparking a debate among analysts as to why Treasurys failed to catch a safe-haven bid. There was no clear consensus explanation reached as to why the 10-year yield inched up 0.3 bps to 0.77%, although many pointed to the significant headline risks posed by an incredibly busy 9-day stretch upcoming.
Stocks’ Struggles Continue: After four daily declines, including yesterday’s plunge, S&P 500 futures temporarily found their footing ahead of this morning’s 3Q GDP report and weekly jobless claims update. Nonetheless, the rocky trading terrain persisted. The index contracts rose more than 1.4% even as most Asian equities declined. After peaking around 2 a.m. CT, however, the trend reversed abruptly on a choppy open for European equities, and futures fell back to near unchanged as the Stoxx Europe 500 dropped 0.3% around 7 a.m. CT, its eighth decline in nine sessions. As discussed previously, the recent loss of market confidence has been caused largely by the rapid growth of the infection globally that has spurred new restrictions across Europe, as well as the stalling out (again) of stimulus negotiations in Washington.
BoJ, ECB Hold but Remain Watchful and Willing: Those two dynamics were pervasive in Governor Kuroda’s commentary after the Bank of Japan’s decision to keep its policy position unchanged, despite cutting its forecast for growth in fiscal 2020. After pledging to act if necessary, Kuroda said, “Uncertainty remains high and downside risk remain large for the economic outlook. Globally the spread of the virus hasn’t been contained, …I believe the uncertain situation will continue with the trajectory of the virus continuing to impact domestic and overseas economies.” Ahead of the ECB’s decision at 7:45 a.m. CT, in which officials elected to keep policy unchanged but signaled they remained vigilant and could “recalibrate” stimulus measures in December, Germany’s 10-year yield had inched lower for a fifth day to -0.64%, a new low since March. Treasury yields were little changed but lower before the morning’s U.S. economic data and equity futures were mixed around even.