Author: marketsp

Summary and Price Action Rundown

Global risk assets are retreating this morning as news that President Trump has contracted Covid-19 compounds investor concerns over the outlook for US politics and policy. S&P 500 futures indicate a 1.6% lower open after the index closed 0.5% higher yesterday, upping its year-to-date gain to 4.6%, which is about 5.5% below early September’s record high. Equities in the EU are also down, while Asian markets were mixed amid widespread holiday closures. Demand for safe haven assets is providing modest support for the dollar, while longer-dated Treasury yields are also reflecting rising demand, with the 10-year yield at 0.66%. Brent crude prices are extending this week’s steep downtrend, falling below $40 per barrel.

Political Uncertainty Intensifies Following President Trump’s Covid-19 Diagnosis

In an already fraught election season, last evening’s news that President Trump, the First Lady, and a key White House staffer have tested positive for the coronavirus has deepened investor anxieties over the political and policy outlook. Financial markets are reflecting heightened risk aversion following the news overnight from Washington, as investors grapple with the potential ramifications of these developments. The key area of uncertainty is of course the election, with President Trump off the campaign trail for a few weeks at a minimum and only a month to go before Americans go to the polls. Joe Biden and his team will certainly need to release their Covid-19 testing status as soon as practicable, and the likelihood of one or more follow-up debates to this week’s first installment have clearly declined. Meanwhile, analysts are pondering whether the slim prospects of the fiscal stimulus package have been impacted in any way, as House Speaker Pelosi and Treasury Secretary Mnuchin had been making halting progress toward a compromise over the last few days (more below). Similarly, some commentators now expect that the process of confirming Amy Coney Barrett to the Supreme Court is more likely to be delayed until after the election. On the economics front, there is speculation that the President’s high-profile infection will underscore the high transmissibility and continued virulence of Covid-19 to the general public, a view that is congruent with the pre-market selloffs in airline, travel, and other equity sectors that are adversely impacted by coronavirus concerns. Lastly, analysts are bracing for a lack of transparency from the White House over President Trump’s ongoing condition, citing the example that the severity of UK Prime Minister Johnson’s illness with coronavirus was not disclosed until after his recovery.

US Nonfarm Payrolls Due

Amid heightened uncertainty over the prospects for the US economic recovery, today’s key September labor market data is expected to remain robust. Nonfarm payrolls are projected to show 850K new jobs after the US economy added 1.371 million jobs in August, down from 1.734 million in July, and only slightly below market forecasts of 1.4 million. That left payrolls 11.5 million below pre-pandemic levels as more than 22 million jobs were lost in March and April. This comes amid worrisome headlines on the employment front from Walt Disney, which has announced 28,000 layoffs due to diminished attendance at theme parks, depressed cruise demand, and struggles at retail outlets. Airlines are also poised to begin cutting headcount as government stimulus rolls off this week, with around 40,000 expected to be impacted. Other US economic data this week has been mixed, with August personal income surprising to the downside, while personal spending and inflation for that month was perkier than estimated, and the manufacturing purchasing managers’ index for September remained in robustly expansionary territory.

Additional Themes

Slim Fiscal Stimulus Hopes – Effort to forge a compromise stimulus package are expected to continue today despite the President’s diagnosis, as House Democrats and the White House remain at odds over remaining gaps, particularly the amount of state aid and degree of unemployment benefit augmentation. The House passed the Democrat-drafted $2.2 trillion version of the bill last night, which was expected to be the final step before a month-long recess, though Speaker Pelosi has indicated that talks will continue today.

Looking Ahead – With investor attention affixed on the US political and policy situation, the President’s health, and market volatility, next week’s relatively light economic calendar is likely to garner only modest notice. The minutes of the Fed’s September meeting have the greatest potential to move markets, to the extent they provide additional insight on the announced policy and forecast shifts. Global service sector purchasing managers’ indexes (PMIs) for September are due as well, alongside another week of US jobless claims data, a gauge of small business optimism, and a decision by the Reserve Bank of Australia.

Summary and Price Action Rundown

Global risk assets are trading with a hopeful tone amid signs of progress toward a US fiscal stimulus deal, while investors await key US economic data. S&P 500 futures point to a 0.9% higher open after the index closed 0.8% higher yesterday, upping its year-to-date gain to 4.1%, which is about 6% below early September’s record high. Equities in the EU are slightly higher while Asian markets were mixed amid widespread holiday closures and a technical outage at the Tokyo Stock Exchange. As fiscal stimulus hopes rise, the dollar is extending this week’s downtrend, while longer-dated Treasury yields are edging higher, with the 10-year yield at 0.70%. Brent crude prices remain choppy, falling below $42 per barrel.

Hopes for a US Pandemic Relief Bill Reverberate in Markets

Effort to forge a compromise stimulus package are coming down to the wire today as price movements in stocks, the dollar, and Treasuries reflect rising degrees of optimism. Equities continue to ride the hopes of more fiscal stimulus as Speaker Pelosi and Secretary Mnuchin continued talks in an attempt to strike a deal on necessary economic relief, though skeptical commentary from Senate Majority Leader McConnell dampened spirits in later trading yesterday. The two met today on Capitol Hill, where Secretary Mnuchin presented a counteroffer to the Democratic proposal announced on Monday that allocates $2.2 trillion towards needed economic stimulus in the form of direct payments, PPP funding, unemployment benefits through January 2021, and funding for local and state governments among other initiatives. Secretary Mnuchin’s reportedly $1.62 trillion counteroffer is comparable to the size and scope of a proposal crafted by the House “Problem Solvers’ Caucus,” and is said to include $250 billion for state/local governments, $400/week in unemployment enhancement, which are both below the Democrats’ figures, and increased funding for testing from the prior White House offer. Early reports suggested that the plan also contains an escalator clause in the case the virus’s persistence, in which case roughly $2 trillion could become available, but subsequent reports have not featured this element. An agreement between Secretary Mnuchin and Speaker Pelosi would like garner enough support to pass the Senate. Meanwhile, House Majority Leader Steny Hoyer has delayed a vote on the new Democratic legislation until later today, allowing time for final negotiations before House members go on recess until after November’s election results.

US Labor Market Data in Focus

Investors are awaiting this morning’s release of last week’s jobless claims figures and tomorrow’s September nonfarm payrolls after a private sector jobs reading topped consensus estimates yesterday. This morning, markets participants will parse another US labor market release in advance of nonfarm payrolls, as initial jobless claims data for last week is due. For context, unemployment filings rose by 870K in the week ending September 19^th, topping estimates by 30K, and a 4K increase from last week’s upwardly revised 866K figure. While monthly nonfarm payrolls figures have generally remained solid, these weekly jobless claims tallies have remained in the 800K’s territory for four consecutive weeks, suggesting the labor market recovery may be stalling as government support continues to wane. For context, September nonfarm payrolls report is expected to show new 868K new jobs, which is a strong level but would be below the 1.37 million in August. This comes after yesterday’s estimates from ADP that private businesses hired 749K workers in September, handily beating market expectations a 650K rise. While this was the largest ADP jobs number in the last three months, it still means only half of the near 20 million jobs lost since March have been recovered.

Additional Themes

More Brexit Drama Roils the Pound – The pound, which has acted as a market-based barometer for the fortunes of Brexit, has been choppy this morning after the EU took steps to initiate legal action regarding the UK’s Internal Market Bill, which passed the Lower House of Parliament and awaits a verdict in the House of Lords. For context, the Internal Market Bill is deemed by Brussels to be a clear breach of the Withdrawal Agreement between the UK and EU, undermining that accord’s treatment of Northern Ireland post-Brexit. Amid concerns that his brinksmanship will backfire, Prime Minister Johnson has set an unofficial deadline of October 15^th for a Brexit deal with the EU as the final departure date looms at year-end.

Inflation Headlines Today’s US Data Lineup – Following the Fed’s pivot toward a more permissive policy stance on inflation over the past month, analysts will parse today’s release of the central bank’s favored metric for price pressures, core personal consumption expenditure prices (core PCE). With the Fed’s revised inflation target of an average 2% core PCE over some unspecified period of time, today’s estimated reading of 1.4% for August would remain well shy of any key threshold for a policy response, though representing improvement from 1.3% in July. This datapoint comes alongside August person spending and income figures, which are forecast to deteriorate from the prior month, as well as the ISM manufacturing purchasing managers’ index (PMI) for September, which is expected to remain in robustly expansionary territory

Summary and Price Action Rundown

Global risk assets are moving lower again this morning after last evening’s first presidential debate between President Trump and Joe Biden highlighted US political uncertainty, while investors continue to monitor a final push on Capitol Hill to pass a pandemic relief bill. S&P 500 futures indicate a 0.4% lower open after the index slipped 0.5% yesterday, paring its year-to-date gain to 3.2%, which is about 7% below early September’s record high. Equities in the EU and Asia were broadly lower overnight. The dollar is steady near its highest level since early August, while longer-dated Treasury yields are flat, with the 10-year yield at 0.65%. Brent crude prices are extending yesterday’s steep decline, falling below $41 per barrel.

Testy and Chaotic Debate Underscores US Political Risks

The disheartening spectacle of last night’s first presidential debate is highlighting the potential for a disorderly and disputed election outcome. Last evening, President Trump and Democratic presidential nominee Joe Biden met on the debate stage for the first time, with the election only 34 days away and partisan passions running high around the country. Analysts broadly suggest that neither the incumbent nor the challenger scored a decisive victory as substantive political and policy issues were swamped by crosstalk, blather, and invectives. With the polls in former VP Biden’s favor going into the debate, the perceived draw is giving his odds a modest boost in betting markets this morning. Despite a climate of civic unrest fueled by racial justice grievances, coronavirus containment shortfalls and the corresponding economic fallout, and a battle over appointing the next Supreme Court Justice, the election race has remained relatively stable. While it is unclear to what extent the debate will move national polls, what is clear is that the election is set to be the most volatile US political season for generations. Futures and options on some currencies and government bonds are showing unusually high premiums around November 3rd and continuing through December, while equity volatility futures (the VIX index) are elevated around the election and for months beyond, suggesting concerns over protracted uncertainty. On the other hand, analysts suggest that a smoother-than-expected election process could spur a relief rally that continues fueling risk asset upside through the end of the year.

US Fiscal Stimulus Talks Down to the Wire

The last-ditch effort to forge a compromise stimulus package culminates over the coming few days with more engagement between House Speaker Pelosi and Treasury Secretary Mnuchin. House Democrats are awaiting the Trump administration’s response to their revised pandemic relief package, which features $2.2 trillion in fiscal support including $1200 stimulus checks, federal unemployment benefits at $600/week through January 2021, $436 billion in state and city aid for budget shortfalls, PPP loans for businesses, and $275 billion for education and childcare. Speaker Pelosi and Secretary Mnuchin spoke both Monday evening and yesterday morning in an effort to negotiate a compromise on the existing gap between this new package and the administration’s current position, which has not been accepting of figures over $1.5 trillion. While the new Democratic bill manages to satisfy Mnuchin’s top priorities of aid to airlines and small businesses, sticking points are likely to include the $600/week benefits and hundreds of billions in state aid that thwarted a deal last time.

 

Additional Themes

Jobs in the Headlines – This morning’s reading of the ADP private payrolls gauge for September, which precedes Friday’s more closely-followed nonfarm payroll release, is expected to show 649K new jobs versus 428K the prior month. Nonfarm payrolls are projected to show 850K new jobs after the US economy added 1.371 million jobs in August, down from 1.734 million in July, and only slightly below market forecasts of 1.4 million. That left payrolls 11.5 million below pre-pandemic levels as more than 22 million jobs were lost in March and April. This comes amid worrisome headlines on the employment front from Walt Disney, which has announced 28,000 layoffs due to diminished attendance at theme parks, depressed cruise demand, and struggles at retail outlets. Airlines are also poised to begin cutting headcount as government stimulus rolls off this week, with around 40,000 expected to be impacted.

ECB Echoes the Fed on Inflation – After yesterday’s releases of September inflation figures for France and Germany showed notable downside surprises, European Central Bank (ECB) President Lagarde today indicated that the central bank’s current inflation target of “below, but close to, 2%” would be re-examined as part of its ongoing strategic review. In a statement redolent of the Federal Reserve’s recent policy shift, she noted that “the promise of inflation overshooting raises inflation expectations and therefore lowers real interest rates.” For context, Germany’s September inflation reading was its lowest since the global deflation scare in early 2015. September’s price gauge for the EU is due on Friday, with estimates showing a rebound. The euro edged lower and a gauge of long-term EU inflation expectations tilted higher today.

Summary and Price Action Rundown

Global risk assets are mixed this morning as investors monitor prospects for US fiscal stimulus and await the first presidential debate between President Trump and Joe Biden this evening. S&P 500 futures point to a slightly higher open after the index advanced 1.6% for a second straight session yesterday, upping its year-to-date gain to 3.7%, which is 6.4% below early September’s record high. More traditional equity sectors, like financials, benefitted from hopes for another pandemic relief bill while tech shares also continued their rebound. Equities in the EU and Asia were gently mixed overnight. A broad dollar index is continuing to retrace its recent rebound from 28-month lows, while longer-dated Treasury yields are flat, with the 10-year yield at 0.65%. Brent crude prices continue to hover around $42 per barrel.

Intrigue Continues Over US Fiscal Stimulus Deal

House Democrats unveil their latest draft bill as Speaker Pelosi and Treasury Secretary Mnuchin re-engage over the terms. Renewed hopes of a deal on the stalled pandemic relief package have been supportive for investor risk appetite in recent days, though uncertainty over the outcome remains high. Speaker Pelosi and Secretary Mnuchin spoke by phone last evening shortly after the House Democrats released their revised $2.2 trillion draft, which is intended to be the basis for renewed negotiations with the White House. This version’s inclusion of specific support for airlines, restaurants, and other impacted sectors is tailored to meet the stimulus priorities of the Trump administration, as spelled out by Secretary Mnuchin in his testimony last week before Congress. It also features a nearly 50% reduction in state support funds from the prior version, the $3.4 trillion HEROES Act, to roughly $500 billion. Pelosi and Mnuchin are reportedly set to speak again today in an effort to bridge the remaining gap between the two sides, which is still wide. Secretary Mnuchin signaled earlier this month that the administration would be unwilling to approve any stimulus exceeding $1.5 trillion. Speaker Pelosi has already announced that the House will not go into pre-election recess until it has passed a stimulus package, and sources have indicated that the new legislation could come to a vote on the House floor as early as tomorrow.

US Political Uncertainty Remains in Focus

Ahead of tonight’s first presidential debate, investors continue to ponder the potential for a disorderly and disputed election outcome. This evening, President Trump and Democratic presidential nominee Joe Biden will debate each other for the first time, ahead of the election only 36 days away. Despite a climate of civic unrest fueled by racial justice grievances, coronavirus containment shortfalls and the corresponding economic fallout, and a battle of appointing the next Supreme Court Justice, the election race has surprisingly remained relatively stable. Former VP Biden has continued to lead the President in the polls, though the gap has been narrowing heading into tonight’s event. Some analysts have noted that the President’s public lambasting of Biden’s mental health may have diminished expectations for his performance despite the former VP’s prominent experience in debates. While it is unclear to what extent the debate will move national polls, what is clear is that the election is set to be the most volatile US political season for generations. Futures and options on some currencies and government bonds are showing unusually high premiums around November 3rd and continuing through December, while equity volatility futures (the VIX index) are elevated around the election and for months beyond, suggesting concerns over protracted uncertainty. On the other hand, analysts suggest that a smoother-than-expected election process could spur a relief rally that continues fueling risk asset upside through the end of the year.

Additional Themes

Beijing Monitors Troubled Chinese Property Giant – Shares of Evergrande, the largest issuer of speculative grade dollar bonds in Asia, have rebounded from multi-month lows and the price of its bonds have recouped a portion of their steep losses from Friday amid reports that arrangements with investors may forestall a potential cash crunch early next year. Reports indicate that the magnitude of Evergrande’s borrowings, with an estimated $88 billion and $35 billion in loan and bond liabilities, respectively, have drawn the attention of China’s leadership and the highly leveraged developer is under scrutiny from the government’s financial stability committee, though no policy recommendations have been issued.

China Slows US Goods Buying – Reports overnight indicate that Chinese purchases of US agricultural goods under the Phase One trade deal slowed in August, falling further behind the targets set forth in that agreement. Trump administration officials have generally expressed a favorable assessment of the Phase One accord despite ongoing signs of slippage from benchmarks, with the impact of the coronavirus understandably impacting progress.

Summary and Price Action Rundown

Global risk assets are extending Friday’s rebound, led by high-flying tech stocks, as investors weigh the prospects of a Covid-19 resurgence and US fiscal stimulus. S&P 500 futures indicate a 1.4% higher open after the index jumped 1.6% on Friday, paring its loss on the week to 0.6% and upping its year-to-date gain to 2.1%, which is less than 8% below early September’s record high. Equities in the EU are outperforming despite accelerating regional coronavirus outbreaks, while Asian stocks were mostly higher overnight. A broad dollar index is retracing a portion of its recent rebound from 28-month lows amid support from safe haven demand, while longer-dated Treasury yields are edging higher, with the 10-year yield at 0.67%. Brent crude prices continue to hover around $42 per barrel.

Hopes Rise for US Fiscal Stimulus Deal

With consensus over the need for more pandemic support pushing both sides back to the table, House Speaker Pelosi made encouraging statements over the weekend. Optimism is rising amid renewed negotiations on the stalled pandemic relief package after Speaker Pelosi expressed “trust” in Treasury Secretary Mnuchin and stated her belief that “we come to an agreement” in remarks over the weekend. Speaker Pelosi’s office indicated that the two had spoken by phone on Friday. For context, House Democrats have slimmed their $3.4 trillion HEROES Act to a roughly $2.4 trillion package designed to restart negotiations with the White House. Last week, both Treasury Secretary Mnuchin and House Speaker Pelosi emphasized the importance of additional fiscal support for the economic recovery and expressed eagerness to continue negotiations. This comes after last week’s data showed further signs of backsliding. Initial jobless claims rose by 870K in the week ending September 19^th, which is the fourth consecutive week in the 800K’s range, suggesting that the labor market recovery has stalled, while US durable goods orders for August also surprised on the downside. This week’s September nonfarm payroll number and ISM PMI reading, as well as August personal spending and income data, will be scrutinized for any signs of weakness. – MPP view: If the Pelosi/Mnuchin deal-making odd couple strike a bargain, we do not expect Senate Republicans to block it – not with the tight races some of their key members are in. We remain on the optimistic side of consensus that a deal can be done over the coming week.

Unwelcome Coronavirus Trends

The prospect of accelerating infection rates during a fall/winter second wave of Covid-19, which already appears to be occurring in the EU and UK, is spurring familiar pandemic-driven market dynamics. High-flying tech stocks are back in favor after a period of correction, with their rebound thus far coinciding with rising concerns over a resurgence of Covid-19. For context, IT and biotech sectors are among the equity market winners of the pandemic, generating outsized gains due to their relative advantage amid Covid-related economic impingements and social distancing. Although the number of daily cases and deaths have fallen slightly from their second peak this summer, the US is still averaging roughly 40,000 new infections and over 700 deaths each day, which was largely driven by surges in southern states along with a resurgence in California. Additionally, the past four weeks have seen all states in the country’s Midwest except Ohio report more cases compared with the previous four weeks, led by South Dakota and North Dakota. The number of tests conducted in the US has been dropping from a peak in late July amid shortages and delays, and that may affect the number of cases reported. Testing has surged in Europe, with France, for example, targeting 1 million tests a week, though the EU is experiencing a new spike in infections, linked to vacationers who caught the virus and brought it home, as well as young people socializing. German Chancellor Merkel warned today of a potential spike in cases by year-end.

Additional Themes

TikTok Ban Delayed by Court – A federal judge has granted an injunction against the ban sought by the White House on controversial social media app TikTok. The Trump administration had filed papers on Friday in response to an injunction request by TikTok’s Chinese owner ByteDance and the ruling was handed down yesterday after a hearing. The presiding federal judge had also offered the government the option of delaying the ban. This comes as lawyers for the administration attempt to overturn the judicial stay imposed on President’s intended ban on WeChat, another Chinese social media app targeted for national security concerns. Meanwhile, the Commerce Department announced restrictions on a key Chinese chipmaker over the weekend – MPP view: We continue to see low risk that the White House is gearing up for a high-profile “tough on China” October surprise and expect that the TikTok drama will remain the focal point, amid incremental policy action on other fronts like IT.

Oil Supply Dynamics in Focus – Oil prices remain stalled in a narrow range as analysts note surging supply from Libya after both sides in the ongoing civil conflict approved renewed crude output. Full supply capacity of the war-torn country is over 1 million barrels per day (bpd), and reports indicate that 250K bpd is already back on-line, with estimates suggesting that pace could double by the end of the year. This comes as Saudi and Russia struggle to maintain compliance with ongoing OPEC+ supply curbs and demand remains suppressed by the pandemic.

Summary and Price Action Rundown

Global risk assets are tuning lower again this morning amid fears of a Covid-19 resurgence, a cloudy outlook for US fiscal and monetary policy stimulus, and pronounced US political uncertainty. S&P 500 futures point to a 0.8% lower open after the index edged 0.3% higher yesterday, recovering from a late session selloff and upping its year-to-date gain to 0.5%, which is 9.3% below early September’s record high. Equities in the EU are underperforming as coronavirus outbreaks re-accelerate, with Spain potentially facing a return to mass lockdowns, while Asian stocks were mixed overnight. A broad dollar index is continuing to rebound from recent 28-month lows amid support from safe haven demand, while longer-dated Treasury yields are slightly lower, with the 10-year yield at 0.66%. Brent crude is sliding below $42.

Faint Glimmers of Fiscal Stimulus Hopes Amid the Murky Growth Outlook

As US economic data shows signs of backsliding risk, consensus over the need for more pandemic support may be pushing both sides back to the table. House Democrats are reportedly working to slim their $3.4 trillion HEROES Act to a roughly $2.4 trillion package designed to restart negotiations with the White House and headlines suggested that prospects for renewed talks are rising. For context, both Treasury Secretary Mnuchin and House Speaker Pelosi have emphasized the importance of additional fiscal support for the economic recovery and expressed eagerness to continue negotiations in their remarks this week. This comes after flickers of hope for progress last week, with Speaker Pelosi vowing that the House would not go into recess for the November election until an additional round of stimulus is passed and the House “Problem Solvers Caucus” unveiling a compromise plan for $1.5 trillion in stimulus that was subsequently praised by President Trump. This comes after yesterday’s data showed that initial jobless claims rose by 870K in the week ending September 19^th, which is the fourth consecutive week in the 800K’s range, suggesting that the labor market recovery has stalled as government support continues to wane. This morning’s readings of US durable goods orders from August are expected to show a deceleration, while next week’s September nonfarm payroll number will be scrutinized for any signs of weakness. A bevy of Fed officials have redoubled their calls for more fiscal stimulus this week, asserting that additional support is necessary to extend the recovery.

Investors Ponder Fed Policy Communications

In addition to nearly unanimous calls from Fed officials this week for more fiscal stimulus, FOMC speakers also tried to add some specificity to their latest policy shift but the messages were somewhat mixed. After last week’s Fed meeting drew a nuanced reaction from financial markets, with analysts seizing on certain ambiguities in the delineated policy shift, scant additional clarity was achieved this week amid some crosstalk from Fed officials. Most prominently, Chicago Fed President Evans admitted on Tuesday that the Fed’s new guidance does not prevent tightening before inflation averages over 2%, “and so, we could start raising rates before we start averaging 2%.” This statement highlights that the Fed’s expressed projection of holding rates at the 0-0.25% range “until labor market conditions have reached levels consistent with the committee’s assessments of maximum employment and inflation has risen to 2% and is on track to moderately exceed 2% for some time” does not amount to a firm commitment. Additionally, Evans pointed out that there is no clarity on the time frame the Fed may use when calculating an inflation average. Fed Vice Chair Clarida on Wednesday emphasized a more dovish posture but still acknowledged policy optionality, saying “we’re not going to even begin to think about lifting off, we expect, until we actually get observed inflation… equal to 2%” and suggested that rates may be held steady even beyond that.

Additional Themes

Chinese App Bans Head to Court – A federal judge set a deadline of 2:30pm today for the Trump administration to delay its upcoming ban on TikTok, which is set to take effect on Sunday, or file papers in response to Chinese owner ByteDance’s injunction request in advance of a scheduled Sunday morning hearing on the injunction. This comes as lawyers for the administration attempt to overturn the judicial stay imposed on President’s intended ban on WeChat, another Chinese social media app targeted for national security concerns.

Chinese Property Giant Under Scrutiny – Shares of Evergrande, the largest issuer of speculative grade dollar bonds in Asia, fell nearly 10% overnight and the price of its bonds tumbled amid reports that it is facing potential cash crunch early next year.

Looking Ahead – Next week’s calendar features some key US economic data, with September nonfarm payrolls as the headliner on Friday, with estimates reflecting a slackening pace of job growth. Purchasing managers’ indexes (PMIs) for the US and China will also be in focus, alongside US personal income, spending, and price data for August.

Summary and Price Action Rundown

Global risk assets are struggling to stabilize this morning after yesterday’s early gains evaporated into losses amid increasing consternation over the outlook for US fiscal and monetary policy stimulus, alongside coronavirus resurgence fears and US political uncertainty. S&P 500 futures point to a 0.1% lower open after the index surrendered 2.4% yesterday, retracing Tuesday’s gain and cutting its year-to-date upside to 0.2%, which is 9.6% below early September’s record high. The tech-heavy Nasdaq underperformed, with Tesla among the downside leaders following an underwhelming corporate event, cutting its year-to-date gains to 18.5%. Equities in the EU are slightly lower after steeper losses in Asian stocks overnight. A broad dollar index is continuing to rebound from recent 28-month lows amid support from safe haven demand, while longer-dated Treasury yields are stable, with the 10-year yield at 0.67%. Brent crude prices are hovering below $42 per barrel.

US Policy Uncertainty Deepens Amid a Barrage of Communications

Another day of Congressional testimony by Fed Chair Powell, again alongside Treasury Secretary Mnuchin, as well as an array of speeches by FOMC officials are set to redouble the message that more fiscal stimulus is necessary and monetary policy is on hold. Some market participants are expressing concerns that by continually emphasizing the importance of additional fiscal support in sustaining the US economy recovery, Chair Powell and his Fed colleagues are implying a worrying degree of monetary policy ineffectiveness, which may be denting investor confidence. In referencing the Fed’s barely utilized $600 billion Main Street Lending Program, he stated that he and his colleagues had “done basically all of the things we can think of” to fix it but it remains inert. This quote has since been taken out of context by multiple market commentators as a broad expression of the Fed’s monetary policy impotence. Additionally, the chorus of calls from Fed officials for another pandemic relief plan and grim prognostications for the recovery absent such stimulus come against a backdrop of waning odds of a deal. Amid the battle over replacing Justice Ginsburg, who passed away last Friday, the prospects for bipartisan compromise on the bill have dwindled. Meanwhile, the messaging of Fed speakers over the specifics of their recent policy shift have been somewhat garbled, with Vice Chair Clarida attempting yesterday to clarify the Fed’s newly formulated policy posture toward to inflation, saying “[w]e’re not going to even begin to think about lifting off, we expect, until we actually get observed inflation… equal to 2%” and suggested that rates may be held steady even beyond that. However, earlier in the week, Chicago Fed President Evans averred that the Fed’s new guidance does not prevent tightening before inflation averages over 2%, “and so, we could start raising rates before we start averaging 2%.”

US Labor Market Data in Focus Amid Recovery Concerns

With increasing hints of economic backsliding in recent US data, which is being seen even more clearly in EU data, analysts will monitor today’s release of last week’s initial jobless claims for any signs of weakness. Initial jobless claims for the week of September 19^th are expected to improve to 840K after the prior week’s tally improved modestly to 860K from 893K the prior week but slightly undershot consensus expectations of 850K. This marked the third consecutive week with claims below 1 million, but the weekly rate of improvement has plateaued. Furthermore, continuing jobless claims, which consist of the total number of Americans on state benefit rolls, fell to 12.63 million in the week ended September 5^th, below market consensus of 13.0 million and now the lowest level since the beginning of April when the effects of the coronavirus pandemic became observable in the data. Another positive in last week’s release was that filings in the federal program created in response to the Covid-19 crisis, called Pandemic Unemployment Assistance (PUA), decreased for the first time in five weeks, to 659k from 868k. However, PAU claims have been volatile on a weekly basis as the previous two weeks showed increases of 260k.

Additional Themes

Rising US Political Risk – Investors are increasingly concerned about a protracted and disruptive post-election period in the US amid a fraught and litigious process to declare an eventual winner. President Trump redoubled his criticism of mail-in ballots, intimating that they are susceptible to voter fraud, and declined to specify his response in the event Joe Biden were to win. Futures contracts on US equity volatility are showing increasing investor expectations of market turbulence around the election date and for months thereafter.

EU Biz Confidence Holds Up Despite Covid Resurgence – Metrics of German and French corporate optimism for September improved from the prior month, although they mostly fell slightly short of expectations. Earlier this week, preliminary September purchasing managers’ indexes for the EU display a notable weakening in service sector activity. A measure of UK consumer confidence is due later today. For context, resurgent Covid-19 outbreaks have recently spurred a return to stricter containment measures in various UK and EU locations.

Summary and Price Action Rundown

Global risk assets are attempting to build on yesterday’s gains, as investors monitor mixed global economic data and another day of testimony for Fed Chair Powell. S&P 500 futures indicate a 0.4% higher open after the index rallied 1.1% yesterday, retracing Monday’s loss and upping its year-to-date gain to 6.6%, which is 7.4% below early September’s record high. The tech-heavy Nasdaq outperformed for a second day, as coronavirus concerns gave a lift to tech and other “stay at home” stocks, hoisting year-to-date gains to 22.2%. Equities in the EU are outperforming but Asian stocks were muted overnight. A broad dollar index is continuing to edge above its recent 28-month low ahead of key US data this morning, while longer-dated Treasury yields are stable, with the 10-year yield at 0.68%. Brent crude prices are rising toward $42 per barrel as traders monitor incoming US oil and gasoline inventory data.

Global Economic Data Reflects a Degree of Backsliding

As investors warily monitor the resurgence of Covid-19 in the EU and elsewhere, preliminary purchasing managers’ indexes (PMIs) for September in the EU, UK, and Japan revealed signs of weakness. For the EU, the downside surprise was primarily in the services gauge, which fell into a relatively steep contraction at 47.6, undershooting estimates of a moderately expansionary 50.6 and the August reading of 50.5. For context, PMI readings above 50 denote expansion of activity in the sector. Manufacturing, which has tended to be more resilient in the face of the pandemic, remained upbeat, topping expectations of 51.9 and the prior month’s 51.7 with a robust reading of 53.7. This left the EU composite PMI for September at 50.1, lagging forecasts of continuity with August at 51.9. The PMI readings for France and Germany mirrored the trends of the broader EU reading, with manufacturing prints surprising on the upside while services registered marked disappointment. Meanwhile, Germany’s gauge of the consumer climate for September was similarly discouraging, remaining subdued at -1.6% versus a projection of -0.8%, though slightly better than August’s revised -1.7%. Still, the euro is holding steady versus the dollar this morning after retracing some overnight weakness. The pound is also steady as UK preliminary PMIs for September remained in expansionary territory. Manufacturing came in at 53.4, services at 55.1, and the composite at 55.7, though the latter two slightly missed estimates and the gauges were down across the board from the prior month. Contrastingly, Japan’s September PMI previews all remained sub-50, signaling a similar pace of contraction with August, as the composite reading languishes at 45.5 versus 45.2 the prior month. Nevertheless, the yen is placid this morning as well. US preliminary PMIs for this month are due later this morning, and are forecast to remain solidly expansionary, with manufacturing estimated at 53.5 and services at 54.5.

More Congressional Testimony for Fed Chair Powell

After appearing yesterday alongside Treasury Secretary Mnuchin before the House Financial Services Committee, Chair Powell heads back to Capitol Hill today to testify for the House subcommittee on the coronavirus crisis. Market participants will monitor Chair Powell’s commentary, though his remarks yesterday provided little insight on monetary policy. Instead, he and Treasury Secretary Mnuchin focused on fiscal policy responses to the pandemic, emphasizing the urgency to pass another pandemic relief package. “Both employment and overall economic activity… remain well below their pre-pandemic levels, and the path ahead continues to be highly uncertain,” Powell stated. He urged lawmakers to focus fiscal support on the hardest hit businesses and unemployment benefits, and stressed support for state and local governments, something that Republican lawmakers have broadly opposed. Mnuchin highlighted similar needs, including a focus on supporting restaurants and the travel industry. Prospects for a deal have risen and fallen over the past few weeks, with the controversy over replacing Supreme Court Justice Ruth Bader Ginsburg worsening the partisan standoff. Powell also fielded questions on the Fed’s Main Street Lending Program, of which $1.5 billion of $600 billion has been tapped. Chair Powell stated adjustments were being made, though stated that some businesses would not benefit from these loans “in part because the CARES Act states clearly that these loans cannot be forgiven,” and “in these cases, direct fiscal support may be needed.” Powell and Mnuchin will speak before the Senate Banking Committee on Thursday.

Additional Themes
Beijing Hardens Rhetoric on TikTok – With the potential deal still up in the air as President Trump and Chinese leaders mull their stances, Chinese state media is expressing a more strident tone in characterizing the arrangement.

Government Funding Bill Heads to the Senate – Last evening, the House of Representatives passed a bipartisan spending bill, which pushes the deadline out past the election to December 11^th. A deal between Speaker Pelosi and Secretary Mnuchin saw the farm aid pushed by Republicans and a low-income meal program supported by Democrats both being included. The bill is expected to pass the Senate over the coming week.

Summary and Price Action Rundown

Global risk assets are attempting to stabilize this morning, as investors ponder the ramifications of a potential Covid-19 resurgence and grapple with heightened US policy and political uncertainty. S&P 500 futures point to a 0.1% higher open after the index sank 1.2% yesterday, retracing most of its gains since late July and paring its year-to-date upside to 1.6%, which is 8.4% below early September’s record high. The tech-heavy Nasdaq outperformed, as renewed Covid-19 concerns gave a lift to tech and other “stay at home” stocks, holding year-to-date gains at over 20%. Equities in the EU are rebounding but Asian stocks retreated overnight. A broad dollar index is finding support from safe haven demand just above its recent 28-month low, while longer-dated Treasury yields are stable, with the 10-year yield at 0.67%. Brent crude prices are staging a moderate rebound toward $42 per barrel after supply jitters hit prices.

Coronavirus Resurgence Risk in Focus

Amid the confluence of headwinds on US equities, including signs of economic backsliding, dwindling prospects for more fiscal support, rising US political risk, and lingering uncertainty over Fed policy, investors are also pondering the potential for a second wave of Covid-19 this fall. US stocks extended their recent downside yesterday, which is taking them roughly 10% below the recent peaks, a magnitude of decline that fits the classic definition of a correction. High-flying tech stocks, which were among the winners of the pandemic, had been leading the declines but also staged a notable intraday rebound yesterday. Since early September, the outlook for these “stay-at-home” stocks, such as Netflix, Apple, Amazon, and Zoom, has been challenged by the potential for a vaccine announcement over the coming months, which might serve to undermine their advantage. However, the risk of a Covid-19 resurgence in the fall, highlighted by the accelerating second wave outbreaks in the EU and UK, may now limit their downside, particularly relative to rest of the index. For context, the UK government is expected to announce a significant reimposition of Covid-19 containment measures today amid a spike in new cases, focusing on bars and restaurants. This comes as some of the more optimistic timelines for rollout of a viable vaccine have begun to fall by the wayside.

Powell and Mnuchin Set to Testify

After last week’s FOMC decision was met with an uninspiring market reaction and political developments appear to have undermined the remaining chance of a fiscal stimulus bill, Fed Chair Powell and Treasury Secretary Mnuchin may face some pointed questions in their appearance before the House Financial Services panel. Chair Powell’s prepared remarks echo his oft repeated calls for more fiscal stimulus to support the recovery, which he had reiterated last week in his post-decision press conference. However, lawmakers are expected to quiz him on the Fed’s Main Street Lending and Municipal Lending Facility programs, which have been seeded by significant fiscal outlays of $110 billion but have been under scrutiny for lack of uptake. For context, the Main Street Lending Program (MSLP) has only utilized $1.5 billion of the possible $600 billion allocation, and only one loan has been made under the $500 billion Municipal Lending Facility (MLF) scheme. Chair Powell noted last week that the MSLP is in the process of being recalibrated in an effort to increase its useability, but has sought to deflect blame for the inertia by indicating that demand for loans may be low in this uncertain economic environment and that federal grants are more appropriate, an argument repeated in his prepared testimony. Meanwhile, Secretary Mnuchin is likely to be pressed on the amount of stimulus that the administration deems appropriate for this potential next round, given President Trump’s vague endorsement last week of “higher numbers” for the stimulus package. For his part, Secretary Mnuchin last Monday urged action on economic stimulus during an appearance on CNBC and said “now is not the time” to be concerned over the size of the deficit.

Additional Themes

Prospect of Libyan Supply Hits Oil – Yesterday, oil prices were roiled by the prospect of a measure in détente in Libya that could see a significant portion of that country’s potential output coming back into global markets. Russian-backed warlord Khalifa Haftar announced that he would lift his blockade on certain portions of the country’s oil infrastructure. Libya has capacity of up to 1.1 million barrels per day but analysts expect only half to return by year-end.

Government Funding Negotiations in the Spotlight – With political rancor deepening over the fight to replace Justice Ginsburg, the odds of agreement on a stimulus bill have dwindled and the prospect of a clear path to an agreement on funding the government past month-end has been clouded as well. House Democrats released their spending bill yesterday, which pushes the deadline out past the election to December 11^th, but in keeping with the rising partisan passions in Washington DC, strips out $30 billion in farm aid sought by Congressional Republicans and the White House. Senate Majority Leader McConnell decried the omission but did not indicate he would block a vote on the bill, which is likely to pass the House today.