The Market Today
Yields Fall as Covid Cases Surge, OPEC+ Increases Oil Production
by Craig Dismuke, Dudley Carter
Cases Rising in All 50 States: With the recent uptick in COVID-19 cases and concerns about additional disruptions to the economic recovery, we are now publishing a new chartbook specifically showing state-level COVID-19 data (link). For context, the recent increase in cases in the U.S. has been fractional, daily cases have increased from a low of 11,412 on June 17 (7-day average) to 26,261 on July 15. New cases remain well below the peak of 250,893 per day reported on January 8. However, all 50 states, as of Friday’s data, were reporting an increase in cases on a week-over-week basis. One of the most important trends we are waiting to see is if consumers, businesses, and policymakers perceive the health threat to be as high as they did during the first year of the pandemic. There is speculation from some health experts that future infection severity may be lower in the U.S. than it was during the initial waves given that 1) a large percentage of the most vulnerable population has been vaccinated and 2) the vaccines are purported to reduce the severity of infections. Data from the U.K., a country with a high relative vaccination rate, show a dramatic increase in cases resulting from the Delta variant but a divergence in the historical correlation between cases and fatalities. (Chartbooks: Vining Sparks Coronavirus Chartbook and Vining Sparks Coronavirus State Charts)
Positive New for Inflation, Builder Confidence, Corporate Earnings: OPEC+ reached an agreement over the weekend to unwind 5.8 million barrels of daily production cuts, starting next month through September 2022. The news pushed oil prices lower in overnight trading (more below). Coming the week after headline CPI hit 5.4% and core hit 4.5%, this is one of the first pieces of positive news for the inflation outlook. The July Homebuilder Confidence index (9:00 a.m. CT) is expected to show builders remaining very confident despite some broadly weak housing data recently. Several regional banks will report 2Q earnings today along with, IBM, PPG, and others.
24 HOURS OF MARKET ACTIVITY
Treasury Yields Retreat to New Five-Month Lows as Risk-Off Bid Intensifies Amid Rising Uncertainties: Treasury yields are sharply lower Monday as equities around the world have been buffeted by falling oil prices and rising uncertainties, including concerns about climbing global infections caused by the Delta variant. Oil prices were down more than 3.5% early Monday and U.S. WTI had fallen below $70 per barrel for the first time since early June on the OPEC+ agreement. Combined with the resurgence of virus cases around the world, the slide in oil has weighed heavily on global equities. Asian markets fell 1.3% and Europe’s Stoxx 600 was down more than 2% before 7 a.m. CT. While many countries in Asia and several across Europe have cautiously reintroduced some restrictions to address rising cases, the U.K., which has seen cases surge but has so far avoided a related rise in fatalities, removed the last remaining virus measures put in place earlier in the pandemic. At 7:15 a.m. CT, U.S. equity futures had declined around 1.0%, leaving most of the focus on a drop in interest rates. The 2-year yield had inched 0.8 bps lower to 0.21% while the 10-year yield spilled to a new five-month low, sliding 6.3 bps to 1.23%. The spread between the two yields fell below 100 bps for the first time since early February.
ICYMI – July 16, 2021 Weekly Market Recap: Treasury yields were volatile last week, unusually so in shorter maturities, as investors digested another hotter-than-expected CPI report that Fed Chair Powell said continued to point to transitory pressures. Yields rose Monday but accelerated higher Tuesday after the BLS reported its headline and core consumer price indexes (CPI) increased more than expected in June. Monthly increases of 0.9% for both measures nearly doubled expectations and lifted annual rates to 5.4%, the fastest increase in the overall price level since 2008, and 4.5%, the swiftest gain for core prices since 1991. Nonetheless, much of the heat remained concentrated within sectors with supply-chain issues (e.g. autos), recovering from sharp declines early in the pandemic (e.g. airfares, hotels), or struggling with strong demand as more of the economy reopens (e.g. restaurants). Those dynamics were key points of Fed Chair Powell’s defense to members of Congress on Wednesday and Thursday as to why he believes stronger pressures will fade over time. Nonetheless, the Fed’s Beige Book signaled supply constraints remain widespread and may continue for several months. Treasury yields shot higher Tuesday after the CPI data, with longer yields also being pushed up by weak demand at a 30-year bond auction, but faded back lower on Wednesday and Thursday amid Powell’s persistence that the recent strong readings are likely to be transitory. The economic data were uneven. Small business confidence rose unexpectedly while manufacturing activity was mixed, continuing to show signs of a drag from auto production. Retail sales data remained solid in June but July’s preliminary report on consumer sentiment from the University of Michigan fell unexpectedly and included rising inflation expectations. For the week, the 2-year yield rose 0.9 bps, the 10-year yield fell 6.9 bps, and the S&P 500 slipped 1.0% after setting a new record on Monday. Click here to view the full recap.