The Market Today

Vaccinations Begin but Health and Economic Damage Remain High

by Craig Dismuke, Dudley Carter

CORONAVIRUS UPDATE (VS Coronavirus Chartbook – PDF)

Monitoring the Virus Headlines: Monday’s headlines highlighted the fact that the vaccine has significantly positive medium-term effects but no ability to treat the current ills the economy faces as the virus continues to wreak havoc and result in new restrictions. U.S. cases, hospitalizations, and deaths remain near their worst levels of the pandemic, with total reported fatalities crossing over 300,000 on Monday. The governor of New York and New York City’s mayor both indicated that the city could be shut down again if the current trends for cases and hospitalizations don’t improve. There were also several European countries that implemented new measures. Turkey announced a full lockdown from December 31 to January 4. The Czech government imposed a curfew from 11 p.m. to 5 a.m. starting on December 18. London will move to tier 3 restrictions on Wednesday, England’s most restrictive measures. Most severe, the Netherlands announced new lockdown measures that will last for five weeks.

Monitoring the Stimulus Headlines: As expected, a group of bipartisan lawmakers formally introduced two separate stimulus bills that bifurcated line items into those with widespread support and a couple of others that have kept negotiations stalled for several weeks. The $748 billion bill that appears to have deep support from both sides of the aisle would refill the PPP small business loan program with $300 billion of new funds, provide a $300 per week federal supplement for state unemployment insurance and extend the PUA emergency unemployment program for the first sixteen weeks of 2021, provide $25 billion in rent assistance and extend eviction moratoriums through January, and provide money for schools. Outside of the U.S., several European countries extended relief measures as they announced prolonged periods for restrictions and the Bank of Japan was reportedly extending its emergency corporate funding programs for six months.



First Report on December Manufacturing Remains Decent: The December Empire Fed Manufacturing Index fell from 6.3 to 4.9, its second-weakest level of the recovery, on mixed underlying details.  The new orders index was down fractionally but the employment index rose 7.8 points to 14.2, its strongest level of the year.  As one of the first two regional reports on manufacturing activity for any given month, this result is encouraging, showing that the goods producing sector is not slowing as much as the service sector.

November Industrial Production Expected to Show Slowing Recovery: At 8:15 a.m. CT, the November Industrial Production report is expected to show the manufacturing recovery continue, but slow to 0.4% MoM growth.

FOMC Meeting Begins: The Fed will begin their two-day FOMC meeting today.  We expect the Committee to provide new forward guidance based on vague qualitative guideposts.  The great uncertainty heading into the meeting is if they will move forward with any changes to their actual asset purchases.  Market sentiment appears to be pretty evenly split on the topic after recent Fedspeak talked down the idea.


Equities and Yields Gave Back Overnight Gains As U.S. Vaccinations Began: After a bit of excitement overnight and early in U.S. trading, U.S. equities retreated later in the afternoon to send the S&P 500 down 0.2% and to its fourth consecutive decline. Several developments from over the weekend stoked a global equity rally ahead of U.S. trading as the U.S. began shipping out doses of the vaccine, Congress signaled plans to carve out contentious stimulus topics in an attempt to get agreed-upon stimulus passed, and Brexit negotiators lived to fight another day. And while the first inoculations in the U.S. were cheered as a major milestone in the fight to defeat the virus, much of the optimism was likely already priced into U.S. markets. The S&P 500 was at an all-time high as recently as Tuesday as investors bet that Congress could reach some level of compromise to boost a slowing economy until the highly-anticipated vaccination process could allow for a more sustainable return to normal. With equities giving up their early gains, Treasury yields unwound their overnight rise that had been, in part, sparked by a jump in U.K. yields as investors clung to hopes for a trade solution between the U.K. and EU. Leaders from the two countries again agreed to extend a deadline to allow negotiators more time to settle differences that have so far prevented a new trade agreement, with the clock winding down on the transition period. The U.K. 10-year yield rose 5.0 bps to 0.22% while the 10-year Treasury yield edged 0.3 bps lower to 0.89% after having earlier reached 0.94%.


Markets Move Around in Void Between Key Weekend Headlines and Wednesday’s Fed Decision: Stuck between several key developments over the last several days and the Fed’s final policy decision of 2020 scheduled for tomorrow afternoon, global markets have moved unconvincingly in different directions. Vaccinations have begun to be administered in a couple of countries around the world, including here in the U.S., and Congress appears to be taking steps to get more economic stimulus into a slowing recovery that faces risks from an accelerating outbreak and new mobility restrictions in several cities and states. Those dynamics are expected to drive the Fed’s discussions over the next day and a half and be reflected in their updated statement and forecasts. Finding a void between those events, Treasury yields have inched higher after small declines on Monday as U.S. equity index futures recovered after slipping to start the week. Futures contracts on the S&P 500 were up 0.7% at 7:15 a.m. CT and the 10-year yield had added 0.8 bps to 0.90% ahead of a couple of secondary economic reports. Those trends took place amid a mixed session where Europe’s Stoxx 600 stayed around even after Asian equities slipped 0.4% on average.

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