The Market Today

Virus Rages on But Markets Remain Calm Prompting Treasury to Remove Safety Net

by Craig Dismuke, Dudley Carter

CORONAVIRUS UPDATE (VS Coronavirus Chartbook – PDF)

Monitoring the Virus Headlines – Restrictions: More U.S. states announced new restrictions to slow the ongoing wave of virus infections across the country. Missouri extended its state of emergency to May 31 and New Hampshire readied a statewide mask mandate. Rhode Island said it would implement a “pause” that will put in place temporary restrictions for two weeks to address a surge of infections and concerning trends in hospitalizations. Illinois also reported hospitalization levels that set a record for the pandemic. California issued a limited stay-at-home order that implements a 10 p.m. curfew for 94% of its population. Texas and South Carolina, however, said they would not be returning to a lockdown. The CDC issued guidance recommending against Americans traveling on Thanksgiving. On a related note, Southwest Airlines’ CEO said he doesn’t expect to hit 2019 travel levels until 2024. Outside of the U.S., Quebec, Ontario, and Northern Ireland all announced new restrictions.

Monitoring the Virus Headlines – Vaccine: Early Friday morning, Pfizer confirmed that it would file its request for emergency FDA approval of its vaccine later in the day. Next on the calendar will be a December 8-10 meeting between the FDA and outside advisers who have reviewed the trial data.


Today’s calendar will bring three Fed speakers: Dallas’s Kaplan, Richmond’s Barkin, and Kansas City’s George.  Chicago Fed Bank President Charles Evans appeared on CNBC’s Squawk Box this morning noting that Treasury’s decision to request the unused funds from the Fed was disappointing.


Treasury Yields Declined After Treasury Ends Several Emergency Programs Despite Slowing Recovery: U.S. equities managed to turn morning losses into afternoon gains as the weekly swings continued amid vaccine optimism and worries about the surge of infections across the country. Another vaccine showed promising results with Oxford and AstraZeneca’s shot said to produce a strong immune response in the elderly, although full phase three trial results are not expected for several weeks. The positive medical developments over the last couple of weeks have battled a raging virus in a fight for investors’ attention. Worries that the ongoing outbreak could weigh on the economic recovery were fanned by the first rise in weekly jobless claims in five weeks and a couple of Fed surveys showing a slower pace of activity in early November.

Stocks Turned Positive After Stimulus Talks Were Said to Start Back: Still, the S&P 500 turned positive early in the afternoon following a comment from Senator Schumer that Senator McConnell had agreed to resume stimulus discussions. The index rose 0.4% on the day with nine of eleven sectors closing higher on the day. Treasury yields, however, declined, with most of the move occurring late in the afternoon after the Treasury said it would only allow the Fed to extend four of its emergency programs into 2021 and asked the central bank to deposit unused funds back into the Treasury’s account when the programs are closed (more below). Longer yields led declines, with the 10-year yield falling 4.1 bps to 0.83%, a nine-day low, while the 2-year yield dipped 1.2 bps to 0.16%.


Stocks Set for Mixed Finish to a Week of Uncertain Swings: Global markets are mixed Friday after a week of ups and downs driven by vaccine developments and a continued surge of the virus across the U.S. The weekly caution was further aggravated by the Treasury’s decision late Thursday to announce the end of five of the Fed’s emergency lending programs and request the return of unused funds (more below) provided by the CARES Act. Stocks in Asia inched 0.2% higher on average, although underlying national indices were mixed. Japan’s Nikkei 225 declined for a third session as weak economic data enhanced investors’ concerns about a nascent rise of infections that has already led to a raised alert level in Tokyo. Core inflation in Japan fell 0.7% YoY in October, a third monthly decline and the sharpest since early in 2011. Additionally, a composite PMI for Japan dipped for the first time in seven months and remained in contractionary territory for a tenth month.

U.S. Asset Markets Little Changed Before U.S. Trading Begins: European indices were somewhat firmer with the Stoxx Europe 600 up 0.4% while U.S. futures reflected a shift to a risk-off tone. Consistent with a trade that has prevailed in times of uncertainty during the pandemic, contracts on the tech-heavy Nasdaq edged higher while the broader S&P 500 and Dow declined. The net moves, however, were small and trading levels heading into the U.S. session were well off early-session lows. Stock futures slumped sharply at the open following the Treasury’s announcement, after equity markets closed on Thursday, related to ending the Fed emergency programs. Much like equities, Treasury yields were little changed before U.S. trading. The 2-year and 10-year yields were mixed but had moved less than 0.3 bps away from yesterday’s close.


An Unexpected Record for Existing Home Sales Surprises Even the Realtors: Existing home sales rose unexpectedly in October, gaining 4.3% from September to an annualized pace of 6.85 million units, the fastest pace of activity since November 2005. The gain, which was spread across all four geographic regions and drove the median price up 15.5% from a year ago to a record $313,000, even surprised those responsible for compiling the data. The NAR’s chief economist said, “It’s quite amazing, and certainly surprising, …It’s quite remarkable given that we’re still in the midst of the pandemic and the high unemployment rate.” With mortgage rates falling to record lows as a result of the pandemic’s widespread damaging effects on most other sectors of the economy, sales of existing homes have soared 75% from May’s low-pace of 3.91 million units and are 19% higher than February’s pre-pandemic pace of 5.76 million.

Treasury Asks Fed to Return Unused Funds and Let Five of Nine Emergency Programs Expire at the End of 2020: Late Thursday afternoon, Treasury Secretary Mnuchin sent a letter to Fed Chair Powell asking the central bank to extend only four of its emergency facilities (CPFF, PDCF, MMLF, PPPLF) for 90 days into 2021, leaving the five remaining programs to expire at the end of the year. The Treasury Secretary also asked for the return of unused funds provided to the Fed by the CARES Act to support lending under the programs. From the letter: “With respect to the facilities that used CARES Act funding (PMCCF, SMCCF, MLF, MSLP, and TALF), I was personally involved in drafting the relevant part of the legislation and believe the Congressional intent as outlined in Section 4029 was to have the authority to originate new loans or purchase new assets (either directly or indirectly) expire on December 31, 2020. As such, I am requesting that the Federal Reserve return the unused funds to the Treasury. This will allow Congress to re-appropriate $455 billion, consisting of $429 billion in excess Treasury funds for the Federal Reserve facilities and $26 billion in unused Treasury direct loan funds. In the unlikely event that it becomes necessary in the future to reestablish any of these facilities, the Federal Reserve can request approval from the Secretary of the Treasury and, upon approval, the facilities can be funded with Core ESF funds, to the extent permitted by law, or additional funds appropriated by Congress.”

Fed Issues Statement Regarding Treasury’s Decision to Allow Emergency Programs to Expire and Claw Back Unused Funds: After the Treasury requested the Fed to allow several emergency programs to expire at the end of the year and send back funds it hasn’t used in support of emergency lending, the Federal Reserve issued a statement showing its disappointment with the decision. The statement said, “The Federal Reserve would prefer that the full suite of emergency facilities established during the coronavirus pandemic continue to serve their important role as a backstop for our still-strained and vulnerable economy.” Fed officials have repeatedly credited the emergency programs for restoring smooth market functioning during the pandemic, pointed to those programs as measures that continue to provide accommodation for the economy, and openly called for more fiscal stimulus to ensure the recovery doesn’t reverse in response to expired fiscal aid and a surge of new infections.

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