The Market Today

Vaccines, Stimulus, and Low Rates

by Craig Dismuke, Dudley Carter


ADP Data Disappoints Expectations with Slowing Pace of Private Job Recovery: The economy recovered 307k private nonfarm payrolls in November according to the initial report from ADP, disappointing expectations and showing a slowing pace of recovery. After losing 19.7 million jobs in March and April, the ADP data show 10.0 million of those jobs have been recovered with 9.7 million still lost.  The service sector added 276k payrolls in November while the goods sector added 31k.  The service sector has recovered more slowly than the goods-producing sector.  The service sector lost a total of 17.3 million private payrolls and has recovered on 8.4 million of those.  The goods-producing sector lost 2.4 million private payrolls and has now recovered 1.6 million of those.

Purchase Applications Continue Higher but Refis Take Breather: Mortgage applications for the week ending November 27 fell 0.6% as a 4.6% drop in refis outsized a 9.0% gain in purchase apps. The average 30-year mortgage rate held at its record-low 2.92%.  With this report’s bounce, purchase apps are now at their highest level since July 2008.  Both purchase apps and refi apps remain at high levels portending continued strength in the housing sector.

Fedspeak: Fed Chair Powell will appear before the House Financial Services Committee to discuss the CARES Act at 9:00 a.m. CT.  Also speaking today is New York Bank President Williams in an unusual press-briefing format.  Williams will be discussing the economic impact of COVID-19.  The Fed will also release its Beige Book report today at 1:00 p.m.

CORONAVIRUS UPDATE (VS Coronavirus Chartbook – PDF)

Monitoring the Virus Headlines: Tuesday’s virus headlines were squarely focused on multiple signs that lawmakers in Washington had resumed efforts aimed at striking a deal to provide a slowing recovery with more stimulus. Negotiations had been called off in late October as both sides dug in on their positions ahead of the November elections. On Tuesday, however, there were several separate reports that indicated discussions had been restarted, on both a partisan and bipartisan basis. Capturing the most headlines, a bipartisan group of lawmakers from both the House and Senate released a $908 billion stimulus proposal, the ultimate cost of which would be offset by $560 billion of repurposed funds originally provided for by the CARES Act, including those clawed back from the Fed. From the WSJ’s analysis of the details, the proposal includes $160 billion for state and local governments, liability protections for businesses, $288 billion for small businesses, $82 billion for schools, $25 billion in rental assistance, $180 billion to support extending expanded unemployment through March (includes a $300 weekly federal supplement), and $17 billion for the airline industry. Some lawmakers want the bill, or any stimulus, to be part of an omnibus spending package while others said it still wasn’t enough. The White House said they were in discussion with top Republicans about a stimulus plan, but weren’t considering the bipartisan bill.


Yields Shot Higher as Equities Notched Another Record: Treasury yields sprung higher Tuesday as equities rose to new records amid vaccine optimism and reports of bipartisan efforts to create a compromise stimulus package that can pass in a lame duck session. The move up for equities began in futures trading overnight as stocks rose across both Asia and Europe following the release of China’s private manufacturing PMI, which climbed more than expected to its highest level in a decade. Treasury yields had also edged higher, but took off after reports that a bipartisan stimulus plan was in the works.

Stimulus Hopes Compound Vaccine Optimism: There were separate indications that partisan plans were being revisited by both parties, but most interesting was the $908 billion proposal from a group of Republicans and Democrats from the House and Senate that includes multiple items from both parties’ wish lists. Earlier in the day, both Treasury Secretary Mnuchin and Fed Chair Powell told the Senate Banking Committee that the recovery would likely need additional fiscal support. Hopes that the recovery could be quickened by a vaccine and strengthened by more fiscal stimulus sent the S&P 500 up 1.1% to a new record and the 10-year Treasury yield 8.7 bps higher to 0.93%, its highest level since November 11. The daily increase was the second-largest for the 10-year yield in 2020 outside of several days during the extreme volatility in the early days of the pandemic in March.

Markets Cool Wednesday After Strong Moves in the Prior Session: After rising in tandem to registering strong gains on Tuesday, global equities edged away from record levels overnight and Treasury yields inched lower ahead of the November ADP report. Stocks have been boosted back to all-time highs in recent weeks despite the virus surge, primarily because of encouraging late-stage trial results that indicated a successful vaccine was near. The U.K. granted emergency approval for the Pfizer-BioNTech vaccine on Wednesday, the first country to officially allow one of the novel drugs to be distributed and used. The hope is that the historic efforts undertaken by global scientists to create effective vaccines in record time will bring the pandemic to an end and reinvigorate the global economic recovery. After small moves and mixed results in Asia and Europe, U.S. equity futures were down between 0.3% and 0.4% before the ADP report and the 10-year Treasury yield was 0.8 bps lower. After the disappointing jobs data, futures mostly held their declines while the 10-year yield rose to up 0.7 bps on the day to 0.93%.


ICYMI – November 2020 Monthly Review

PMIs Diverge, with ISM Echoing Other Indications of a Slowdown Amid the Virus Surge: Divergent PMIs released Tuesday offered a mixed read on U.S. manufacturing activity in November. The initial PMI estimate from Markit of 56.7 was unrevised in the final release, representing a 3.3-point gain from October to the strongest reading since September 2014. A survey from the ISM, however, signaled activity slowed last month. The headline index fell from 59.3 to 57.5, a bit weaker than expected but still solid at the second-strongest level in nearly two years. Key indices tracking new orders and production both cooled but held at high levels and inventories continued to grow but at a slower pace. However, a discouraging 4.8-point drop pushed the employment index back into contractionary territory at 48.4. Compared with the sanguine signal from the Markit release, the downshift in the ISM is more consistent with most other indicators, including several regional Fed Bank manufacturing indices, which show activity slowed last month amid the resurgent virus outbreak

Construction Spending Beats as Federal Outlays Add to Private Residential Strength: Construction spending beat expectations in October but underlying details showed the prior trends generally persisted. Total construction spending rose 1.3% in October, beating expectations for an 0.8% gain, and mixed revisions were a net improvement to the broader trend. The August gain was revised up from 0.8% to 2.0% while September’s 0.3% improvement was replaced by a 0.5% decline. After months of weakness, spending in the public sector rose on the back of strong federal outlays, adding to private sector gains which continued to be driven by the residential sector. Private residential spending rose 2.9% while non-residential construction contracted 0.7% and for an eighth month in the last nine.

Fed Officials Reiterated That Rates Will Stay Low For Years: A couple of Fed officials stated again that the heavy toll of the pandemic on the economy and the new framework for monetary policy means the Fed’s key policy rate will remain low for several years from now. Chicago Fed President Evans again said his outlook is for the fed funds rate to be kept at its current level near zero at least until 2023, if not for longer. San Francisco’s Daly echoed that low-rate sentiment, saying the slow economic recovery will require it, even as she acknowledged the potential risks it creates for financial stability. She said that regulatory actions are better suited to address financial stability risks than monetary policy.

Daly Signals She Prefers to Wait on Altering Asset Purchases: San Francisco Fed President Daly echoed Fed Chair Powell’s message from earlier in the day that the current virus wave will likely weigh on economic activity in the near-term. Interestingly, however, she indicated she may prefer to wait on altering the Fed’s current policy stance. While expectations have been growing for the Fed to alter their asset purchases soon, potentially in December, Daly said that while that is the “next natural step,” now “is not the time to stimulate the economy aggressively and get people out in the economy because that would be unsafe. …I judge policy as in a good place.” “We are thinking hard about what does the economy need and … when can we shift gears mentally … from building a bridge to actually trying to stimulate the economy into a strong recovery,” she went on, but said “we are not there yet.”

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