Summary and Price Action Rundown
US equities resumed their tech-led uptrend today ahead of key earnings releases later this week, the dollar’s ongoing downtrend accelerated, and investors continued to monitor signals from negotiations on Capitol Hill over the next pandemic relief bill. The S&P 500 retraced Friday’s downside to edge back into positive territory year-to-date but remained shy of last Wednesday’s peak for the pandemic. The tech-heavy Nasdaq erased last week’s rare underperformance. Equities in the EU and Asia were mixed. Longer-dated Treasury yields moved above March lows, with the 10-year yield at 0.62%, while more upbeat EU data lifted the euro and sent the dollar to a new multi-month low. Brent crude fluctuated above $43 per barrel.
Details Awaited on Senate Republican Stimulus Bill
Negotiations are set to heat up over the draft bill being crafted by Senate Leader McConnell. Republicans most notably have ramped up their rhetoric on cutting the soon-to-expire $600/week benefits down to a sliding scale of 70% of previous wages earned. The 70% payment scheme, according to several estimates, would take anywhere from two to five months to roll out as states will face significant difficulties in implementation compared to the flat rates previously used. Republican leaders have addressed the issue by suggesting a $200/week flat payment while states work on adjusting. This proposal is likely to be the main point of contention between the parties as Speaker Pelosi has made clear her intention of defending the $600 payments through the end of the year. Other provisions include liability protections for hospitals, schools, and nonprofits, $105 billion allocated towards school reopening, $16 billion for enhanced testing measures, a second round of the Payroll Protection Program (PPP) targeted at SMEs that have seen 50% or greater falls in revenue, according to Treasury Secretary Mnuchin, and the proposal to issue another set of $1200 direct payments to individuals and families. Friday’s CNN interview with Larry Kudlow also confirmed a plan to lengthen the period of the federal eviction moratorium that is set to expire.
Senate Minority Leader Schumer lambasted the previously-reported provisions as inadequate, failing to effectively cover issues ranging from rental assistance to state and local government funding, points that are staunchly defended in the Democrat’s previous HEROES Act proposal that passed in May. Where the GOP plan reports only loosening guidelines on spending previous CARES Act funding for states and localities, with no new added stimulus, the Democrats originally proposed nearly $1 trillion in spending to plug budget gaps from emergency relief spending and lost tax revenues.
Given the likelihood that negotiations will drag further into August than hoped, White House officials have already begun pushing a “skinny” version of stimulus, with both Chief of Staff Meadows and Secretary Mnuchin on Sunday news shows advocating a narrow focus on unemployment benefits while kicking future decisions down the road to a possible September stimulus. A narrow package has been labeled unacceptable by Democrats who claim the provisions are necessarily linked to each other, claiming that passing certain provisions will extend benefits to some while leaving others to fall through the cracks unaddressed. – MPP view: With the July 31st deadline for enhanced unemployment benefits approaching, debates over the coming week will likely push Republicans towards the bargaining table as a “no deal” scenario is politically unacceptable and it is widely understood that the bill will increase from the first draft $1 trillion anyway.
Stocks Rise Ahead of Earnings Barrage
Going into the busiest stretch of second quarter (Q2) earnings season and key releases from IT giants, stocks marched higher with tech again taking the lead. With last week marking the first third of S&P 500 companies to report Q2 earnings, analysts are still groping for consistent themes heading into this week’s major lineup of reporters. With 129 of S&P 500 companies having reported, 84.9% of results have featured a positive earnings-per-share (EPS) surprise and 67.4% have topped revenue estimates. Both percentages place higher than their respective five-year averages. Tomorrow, Visa, Pfizer, McDonald’s, 3M, Starbucks, AMD, Chubb, eBay, Aflac, and DR Horton report. Analysts will be focused on Visa’s payments volume since in May, as total US payments volume slumped 5% y/y. With shelter-in-place restrictions beginning to relax later in Q2, it is likely this will be reflected on payments volume, offsetting lagging cross-border revenues. AMD will fight to keep its recent price action hot-streak alive from Friday after Intel’s disappointing report last week disclosed that the company is looking to outsource its chip production to competitors like AMD. Chubb traded 1.9% lower amid expectations that, given the pandemic, the company has less growth in travel insurance, accident & health discretionary purchases, automobile insurance, and commercial lines of business. Lastly, DR Horton saw a significant 4.4% rise in share price today as analysts are expecting an earnings beat after estimates were recently revised upwards, which is usually an accurate indication of favorable trends for the company.
Additional Themes
US June Data Remains Strong – New orders for key US-made capital goods increased by the most in nearly two years in June and shipments accelerated driven by pent-up demand following the reopening of businesses. New orders for US manufactured durable goods rose 7.3% from the previous month in June, following a downwardly revised 15.1% jump in May and beating market forecasts of 7%. Demand for transportation equipment jumped 20%, mainly due to motor vehicles and parts (85.7%) while defense aircrafts and parts plunged 30.6%. Excluding transportation, new orders increased 3.3% and excluding defense, new orders increased 9.2%. Orders for non-defense capital goods excluding aircraft, a closely watched proxy for business spending plans, jumped 3.3% after a 1.6% gain in May. Core capital goods orders were hit much less hard by Covid-19 than by the crash of 2008 and the subsequent credit crunch. Moreover, the bulk of the hit to second-quarter gross domestic product was in consumption—not capital spending. – MPP view: Backward-looking June data is being discounted, and rightly so. The dollar took a beating today, as more upbeat EU data (see below) sent the euro to a new 2020 high and its strongest level in two years.
German Business Gauge Points to Continued Rebound – The Ifo Business Climate indicator for Germany rose by 4.2 points from the previous month to a five-month high of 90.5 in July, recovering further from an all-time low reached in April and beating market expectations 89.3. The services component index rose from -6.0 to 2.0, positive for the first time since February. The gauge indicating firms’ projections for the next six months came in at 97.0 for July, up from the previous month’s 91.4 reading and better than market expectations of 93.7 following the easing of the coronavirus-induced lockdown. In the entire month of July, the country of 83 million has had less than 10,000 new coronavirus infections.