The Market Today
Yields Remain at Lows as Unemployment Boost Set to Expire Today; Personal Income Recovering
by Craig Dismuke, Dudley Carter
Monitoring the Stimulus Headlines: The headlines related to stimulus negotiations continued to provide little hope of Congress quickly closing the wide divide between the partisan plans. With enhanced unemployment benefits set to expire today, Senate Majority Leader McConnell said the Democrats have so far refused to negotiate on a plan for more federal stimulus. Senator Schumer said “disunity” and “dysfunction” within the Republican party was to blame for bonus unemployment being on the brink of expiration. White House Chief of Staff Meadows said the last few days had been more about posturing than making actual progress towards a compromise bill. McConnell later called for a procedural vote that would require debate and a vote on possible interim bills. Several senators offered proposals for skinny bills that would extend unemployment while other aspects of the broader stimulus plan could be debated and hammered out. Although there were reports of an evening meeting between top Democrats and top officials from the administration, worries remain it may be too little too late.
Monitoring the Virus Headlines: While the data this week has reflected a plateauing of cases in the U.S., deaths have ticked higher as a result of prior weeks’ increases. Arizona, Florida, and Texas reported new records for daily deaths while California reported its second-largest daily increase. More encouraging were declines in hospitalization statewide in California and in Houston and Miami-Dade. Still, there are concerns about new infections. Wisconsin issued a statewide mask mandate and Illinois reported its largest number of new infections since May 24. Globally, Spain (April 30) and Italy (June 5) reported the largest case increases in some time and France’s health agency warned that the virus was accelerating.
Income Remains Buffeted by Federal Stimulus, Employment Income Recovering: Personal income pulled back while spending rebounded more than expected in June. Driving income lower was another reduction in the number of direct payment stimulus checks as “other transfers fell from $1.35T (annualized) to $744B, now only $260B higher in June than the average in 2019. Partially offsetting the decline, unemployment insurance payments increased again due to the $600 per week federal bump and the expanded eligibility from the CARES Act. UI payments rose $111B (annualized) to $1.42T. More important to the longer run trajectory of growth, employment income rose $245B to $11.13T, now just 3% below the average level from 2019. Taking into account the reduction in employment income and the gains from federal stimulus, total personal income remains almost 7% above the average level from 2019. With the better rebound in spending outpacing the decline in overall income, the savings rate fell from 24.2% to 19.0%, indicating that consumers continue to have spare capacity to fuel a rebound.
Core PCE Drops to 0.9% YoY: The Fed’s preferred measure of inflation, Core PCE, pulled back from 1.0% YoY to 0.9% in June. With energy prices remaining low and an expectation for significant spare capacity in the economy post-lockdowns, inflation has become less of a focus for Fed officials.
Consumer Confidence: At 9:00 a.m. CT, the University of Michigan will release their final revision to July’s Consumer Confidence report. Confidence is expected to be revised slightly lower after the recent increase in COVID-19 cases.
Tech Led Stocks Back from Early-Morning Lows: U.S. equities were generally weaker Thursday but the final losses were a far cry from steeper declines seen early on in the session. The global setup for U.S. trading was feeble as stocks fell in Asia and across Europe on virus concerns and in response to disappointing corporate earnings and data showing a larger-than-expected 10.1% contraction of the German economy in 2Q. That report came hours before the BEA’s first estimate confirmed the U.S. economy contracted by a record 32.9% in 2Q. Alongside the shocking GDP figures, new jobless claims increased for a second week and continuing claims rose by much more than expected, adding to concerns that an early and partial recovery may have stalled in recent weeks as new infections climbed.
Treasury Yields’ Drift to Record Lows Rolled On: The weight of those developments dragged the S&P 500 down as much as 1.7% within the first 30 minutes of trading and pulled Treasury yields as far out as 10 years below their previous record low closes. However, stocks gradually recovered as the technology sector led the major indexes back from their worst levels with investors awaiting a slate of earnings results from heavy-hitting tech companies. Energy companies, on the other hand, remained notably weaker on the day as U.S. WTI fell more than 3.2% to $39.92 per barrel, its lowest level since July 9. With tech outperforming, the Nasdaq turned positive and closed up 0.4%, more than erasing its 1.2% opening decline. Despite stocks’ recovery, Treasury yields closed near their daily lows. All setting new record lows, the 2-year yield slipped 1.4 bps to 0.117%, the 5-year yield dropped 2.0 bps to 0.231%, and the 7-year yield fell 2.3 bps to 0.404%. The 10-year yield ended down 2.8 bps at 0.546%, just above its all-time low of 0.543% from March 9.
Earnings Boost Tech Shares While Others Lag Behind: A flurry of developments over the last 24 hours has markets on pace for a mixed finish for July. Nasdaq futures were up by more than 1% after Amazon, Apple, and Facebook annihilated analysts’ earnings expectations after the closing bell on Thursday. Futures on the Dow and S&P 500, however, trailed the stronger gains following a record U.S. GDP contraction, the disappointing update on jobless claims, and more signs that stimulus negotiations in Washington were in disarray.
Treasury Yields Extend Record Lows: Globally, China’s CSI 300 rose 0.8% after the government’s manufacturing PMI beat expectations in July at 51.1. The non-manufacturing PMI, however, edged down unexpectedly to 54.2. Equities were mixed across Europe following another round of historically-bad GDP results. Initial (unannualized) estimates showed 2Q GDP contractions of 13.8% in France, 18.5% in Spain, and 12.4% in Italy. Combined with Germany’s report from yesterday, the Eurozone economy shrank an as-expected and record 12.1%. Despite the strength in tech stocks, the broader uncertainty helped push the Dollar down to a new low since May 2018, gold up by 1% to a new record, and Treasury yields to new all-time lows. At 7:30 a.m. CT, the 2-year yield was down 1.0 bp to 0.107%, the 5-year yield had declined 1.7 bps to 0.214%, and the 10-year yield was 1.8 bps lower to 0.528%.