Author: marketsp

Summary and Price Action Rundown

Global risk assets are mixed this morning as investors continue to digest the monetary policy shift announced by Fed Chair Powell yesterday. S&P 500 futures point to a 0.3% higher open after the index held gains of 0.2% in yesterday’s seesaw trading session, increasing its year-to-date gain to 7.9% and registering its fifth straight all-time high. Equities in the EU are muted, while Asian stocks were mixed overnight, with the Nikkei underperforming after the resignation of Prime Minister Abe (more below). The dollar is sinking to a new multi-year low, while longer-dated Treasury yields are steady after yesterday’s rise, with the 10-year yield hovering at its highest level since June at 0.75%. Brent crude is holding above $45 per barrel.

Fed Monetary Policy Shift Announcement Leaves Questions

Markets have exhibited somewhat mixed reactions after the unveiling of a moderately more dovish formulation for inflation targeting and added nuance to the Fed’s stance on full employment left a meaningful degree of ambiguity. In his virtual Jackson Hole conference speech yesterday morning, Fed Chair Powell unveiled a new framework of price stability for the central bank that will tolerate inflation “moderately” above its target so that it averages 2% over time, referencing core personal consumption expenditures prices (which excludes volatile components like energy and food prices). Although analysts note that this new strategy will to some degree restrain the practice the Fed has followed for more than three decades of pre-emptively lifting interest rates to head off higher inflation, the exact interplay between the new target and interest rate or asset purchase policy was left unclear. St. Louis Fed President Bullard suggested that 2.5% inflation would be an acceptable level of overshooting, though Powell warned that “excessive inflationary pressures” would elicit Fed tightening. Meanwhile, Powell also indicated that its full employment mandate would be viewed going forward with particular reference to the lower-income segment. The Fed also committed to reviewing this policy every five years. These alterations to the Fed’s stance highlight that interest rates and other policy settings will remain exceptionally accommodation for the foreseeable future, though markets had already been pricing in an extended period of zero interest rates based on prior Fed guidance. At the September meeting, analysts expect that the Fed may more directly link their policy outlook to these revised mandates, known as “enhanced guidance.” Dallas Fed President Kaplan, however, indicated that there would be “no formula” for hitting the inflation target and suggested in his remarks today that extraordinary Fed easing programs should “sunset.”

Prime Minister Abe Resigns Due to Health

Japan’s longest serving Prime Minister will stay in office until a successor is determined by his party, but his impending departure weighed on Japanese equities and lifted the yen. The Nikkei underperformed regional peers overnight, closing 1.4% lower after initially falling over 3% on headlines regarding the upcoming move by Prime Minister Abe. Meanwhile, the yen, which tends to appreciate in times of market turmoil, is trading 1.2% higher versus the dollar. This news follows months of building concerns over Abe’s health, as he suffers a chronic digestive condition that had forced him to resign the premiership once already in 2007. As the architect of so-called “Abenomics,” an expressly reflationary combination of fiscal and monetary stimulus coupled with a reform program, analysts note some uncertainty over the continuation of his eponymous policy prescription, though reports today indicated that the Bank of Japan would persist with its current ultra-accommodative monetary policy program and Abe’s successor is expected to make few alterations to his blueprint. Nevertheless, Abe’s nearly 8-year tenure represented political stability and policy continuity that had been lacking after Prime Minister Koizumi ceded power in 2006, after which there were a revolving door of six premiers over six years, the first of which was Abe in his first truncated term. Abe also enjoyed a relatively stable relationship with President Trump, with Japan avoiding much of the trade policy friction and currency drama that has been leveled at other US trading partners. No timeline for choosing his successor has been announced and the next general election is not due until October 2021.

Additional Themes

Stalemate Continues of US Pandemic Stimulus – House Speaker Pelosi yesterday indicated that her call with White House Chief of Staff Meadows, which was their first contact in nearly three weeks, yielded no progress toward agreement on the latest pandemic stimulus bill. For context, this fiscal relief package has been in limbo after talks broke down earlier this month with the White House and House Democrats roughly $1 trillion apart, with no consensus on contentious issues like aid to states, the magnitude of unemployment benefits, and pandemic liability limitations for employers.

US Politics in Focus – Last evening on the closing night of the Republican National Convention, President Trump officially accepted his party’s nomination, touting his economic program in his acceptance speech and casting Joe Biden as a “Trojan horse for socialism.” US equity volatility futures and certain rates and currency derivatives convey a considerable degree of investor concern over potential turbulence surrounding the election date

Summary and Price Action Rundown

Global risk assets are mixed this morning after yesterday’s price action extended market trends associated with Fed accommodation ahead of this morning’s highly anticipated speech by Chair Powell, while last week’s US initial jobless claims data will also be in focus. S&P 500 futures indicate a 0.2% lower open after the index advanced 1.0% yesterday, increasing its year-to-date gain to 7.6% and registering its fourth straight all-time high. Equities in the EU are retracing some recent gains, while Asian stocks were mixed overnight. The dollar continues to fluctuate near two-year lows, while longer-dated Treasury yields are steady, with the 10-year yield in the middle of its recent range at 0.68%. Brent crude is holding near multi-month highs of $46 as Hurricane Laura lashes the Gulf of Mexico.

Investors Lean into Heightened Expectations for Fed Dovishness

Yesterday’s price action reflected doubling down on bets that this morning’s speech by Fed Chair Powell will deliver another historically accommodative pivot in monetary policy. Later this morning, Fed Chair Powell will be delivering his “Monetary Policy Framework Review,” a yearlong retrospective and projection of how policy will evolve going forward. He is expected to outline what could be the central bank’s most proactive posture in recent history to spur inflation back to the Fed’s target level. Specifically, market participants are expecting Powell to clarify the Fed’s express tolerance for overshooting the 2% price growth goal with a novel formulation of average inflation targeting. Along with the reassessed posture toward inflation, the Fed also, as indicated by the minutes from its July meeting, appears likely to reinforce its commitment to full employment. Powell’s speech could more formally link the Fed’s interest rate policies and asset purchase programs to the inflation target and full employment mandate, a policy approach known as “enhanced guidance.” Some analysts are characterizing this shift as an inversion of the anti-inflation campaign of famed Fed Chair Paul Volcker. Where Chair Volcker enacted inflation-busting measures, Chair Powell and his colleagues are committing to eliciting price-inflation after a decade of mostly falling short of their inflation target.

This speech comes after some market participants expressed disappointment at the lack of clarity on these expected policy shifts in the July FOMC meeting minutes, which were released last Wednesday. The minutes also suggested that the FOMC may not be as close as expected to consensus over enhanced guidance. Specifically, analysts seized on the characterization that a pivot to enhanced guidance would be appropriate “at some point” rather than the June minutes’ more specific timeframe “at upcoming meetings.” The minutes also related continued skepticism about using bond purchases for purposes of yield curve control.

Ahead of Powell’s speech, initial hesitancy across financial markets yesterday morning gave way to rising bets on another exceptionally dovish performance by Chair Powell. The dollar sank back toward two-year lows, helping propel precious metals prices higher, while longer-dated Treasury yields hovered in the middle of the current, exceptionally low, trading range, as US equities continue to register new all-time highs. This morning’s price action is more subdued.

Investors Alert for Signs of Slippage in US August Data

Last week’s tally of initial jobless claims will be in focus today after the prior reading showed a degree of backsliding. New filings for unemployment benefits are forecast to settle slightly lower to 1.0 million in the week ending August 22^nd. For context, initial jobless claims for the week of August 15^th rose by 1.1 million, above market expectations of 925,000 as the persistent impact of the Covid-19 pandemic weighed on the labor market recovery. The 4-week moving average eased to 1.18 million, the lowest since March, while continuing claims decreased to 14.84 million for the week of August 8^th, marking the lowest claims reading since April. While the averages across the pandemic period are still in an improving trend, the unexpected jump back up to over one million new claims raised concerns about the state of the economy amidst a bitter partisan divide over stimulus support for unemployed workers. Reports indicate that President Trump’s executive order offering $300 per week in augmented unemployment benefits, down from $600 under the CARES Act, is being taken up in a broad number of states but that implementation may take three to six more weeks, depending on the state.

Additional Themes

Oil Prices Steady as Hurricane Laura Lashes the Gulf – Though US production and refining in the Gulf region has been disrupted, crude prices have halted their pre-landfall rally as traders pause to assess the impact of the powerful storm as it moves inland.

US-China Tensions Percolate – Analysts noted China’s firing of test missiles in the South China Sea yesterday, characterizing this show of force as a warning to US carrier groups and bases in the region. Though financial markets have been broadly sensitive to US-China trade friction, and have reacted selectively to some other facets of the ongoing confrontation like the Huawei and TikTok/WeChat controversies, geostrategic posturing of this variety is generally discounted by market participants.

Summary and Price Action Rundown

Global risk assets are mixed and muted this morning as market trends pause ahead of tomorrow’s highly anticipated speech by Fed Chair Powell, while more signs of easing US-China friction contribute to an upbeat tone this week. S&P 500 futures point to a flat open after the index climbed 0.4% yesterday, increasing its year-to-date gain to 6.6% and registering another all-time high. Equities in the EU are advancing, with a boost from German fiscal news, while Asian stocks were mixed overnight, though Chinese indexes lagged again. The dollar continues to fluctuate near two-year lows, while longer-dated Treasury yields having been rising in tandem with German bund yields, with the 10-year yield climbing to 0.71%. Brent crude is holding at multi-month highs near $46 as storms in the Gulf of Mexico hit US output.

Markets Pause Ahead of Fed Chair Powell’s Remarks Tomorrow

Amid placid late summer market conditions, the focus this week is squarely on tomorrow’s speech by Fed Chair Powell, which is expected to detail an incrementally accommodative pivot in monetary policy. Tomorrow morning, Fed Chair Powell will be delivering his “Monetary Policy Framework Review,” a yearlong retrospective and projection of how policy will evolve going forward. He is expected to outline what could be the central bank’s most proactive posture in recent history to spur inflation back to the Fed’s target level. Specifically, market participants are expecting Powell to clarify the Fed’s express tolerance for overshooting the 2% price growth goal with a novel formulation of average inflation targeting. Along with the reassessed posture toward inflation, the Fed also, as indicated by the minutes from its July meeting, appears likely to reinforce its commitment to full employment. Powell’s speech could more formally link the Fed’s interest rate policies and asset purchase programs to the inflation target and full employment mandate, a policy approach known as “enhanced guidance.” Some analysts are characterizing this shift as an inversion of the anti-inflation campaign of famed Fed Chair Paul Volcker. Where Chair Volcker prominently enacted inflation-busting measures, Chair Powell and his colleagues are committing to eliciting price-inflation after a decade of mostly falling short of their inflation target.

This speech comes after some market participants expressed disappointment at the lack of clarity on these expected policy shifts in the July FOMC meeting minutes, which were released last Wednesday. The minutes also suggested that the FOMC may not be as close as expected to consensus over enhanced guidance. Specifically, analysts seized on the characterization that a pivot to enhanced guidance would be appropriate “at some point” rather than the June minutes’ more specific timeframe “at upcoming meetings.” The minutes also related continued skepticism about the usefulness of using bond purchases for purposes of yield curve control.

Ahead of Powell’s speech, there is likely to be hesitancy across financial markets, particularly in fixed income and currency, but heightened expectations of an exceptionally dovish performance by Chair Powell are evident in overall price levels. The dollar is hovering near two-year lows, while longer-dated Treasury yields are in the middle of the current, exceptionally low, trading range, as US equities continue to register new all-time highs.

Easing US-China Tensions Contribute to Mellow Market Mood

Positive atmospherics this week around the Phase One US-China trade deal are contributing to a perception of easing tensions. With reports overnight noting accelerating Chinese purchases of US soybeans, White House policy advisor Navarro, a noted China hawk, affirmed yesterday that the Phase One trade deal is “alive and well,” and lauded Chinese purchases of US commodities under the agreement. National Economic Council Director Kudlow also noted that the focus is shifting toward the intellectual property, technology transfer, and other structural aspects of the deal, indicating acceptable progress. This comes after the US Trade Representative (USTR) struck an upbeat note on the Phase One deal earlier this week following a high-level call to review its status, indicating that “[b]oth sides see progress and are committed to taking the steps necessary to ensure the success of the agreement.” No mention has been made of a Phase Two negotiation. Hopes for a thaw in relations were raised late last week on news that the impending US ban against popular Chinese app WeChat is less impactful than feared. Still, at the Republican National Convention, President Trump has focused on continuing his tough stance toward China and characterizing Joe Biden as weak on Beijing.

Additional Themes

German Fiscal Support in Focus – German equities are moderately outperforming their regional peers this morning after Chancellor Merkel’s government extended employment support funding to the end of 2021, which is expected to total roughly €10 billion in additional spending. This adds to the €1.2 trillion in fiscal support already marshalled by Berlin to see the German economy through the economic impact of the pandemic after the “black zero” policy of no national budget deficits was suspended.

Hurricane Laura Intensifies in the Gulf – With traders citing the disruption to oil drilling and shipping in the Gulf of Mexico as helping contribute to this week’s rally in crude prices, Hurricane Laura is expected to be classified as a Category 4 as it bears down on Texas-Louisiana coast. Reports suggest that 12% of US oil refining capacity could be impacted for months following landfall.

Summary and Price Action Rundown

Global risk assets were mostly higher overnight amid further signs of easing US-China friction, while encouraging German economic data is supporting EU assets. S&P 500 futures point to a 0.4% higher open after the index closed 1.0% higher yesterday, increasing its year-to-date gain to 6.2% and registering another all-time high. Equities in the EU are advancing, while Asian stocks broadly rallied overnight, though Chinese stocks lagged. The dollar continues to fluctuate near two-year lows, while longer-dated Treasury yields are being dragged higher by the selloff in EU sovereign debt following the solid German economic data, with the 10-year yield climbing to 0.69%. Brent crude is rallying back above $45 as storms in the Gulf of Mexico hit US output.

More Positive US-China Atmospherics Support Sentiment

US officials praised progress on the Phase One US-China trade deal following a call with their Chinese counterparts, contributing to a perception of easing tensions. US Trade Representative (USTR) Lighthizer and Treasury Secretary Mnuchin spoke with Vice Premier Liu He, the top Chinese trade negotiator, on Monday night to review the status of the Phase One trade deal, which was signed earlier this year. Although China’s purchases of US manufactured goods, energy, and agricultural products are lagging the year-one targets set forth in the accord, the statement released by the USTR struck an upbeat note, indicating that “[b]oth sides see progress and are committed to taking the steps necessary to ensure the success of the agreement.” The USTR statement also highlights that China’s efforts toward protection of intellectual property rights, prevention of forced technology transfer, and structural reform were discussed but provided no further details. No mention is made of a Phase Two negotiation. This comes after reports late last week that that the impending US ban against a popular Chinese app is less impactful than feared. Specifically, the Trump administration has apparently told US companies, including Apple, that they may continue to work with the WeChat app in China despite the impending ban in the US, significantly easing concerns that the prohibition will put US companies at a disadvantage in Chinese markets. Meanwhile, at the Republican National Convention, President Trump aired criticism of Joe Biden’s stance on China, characterizing him as weak on Beijing (more below).

Solid EU Economic Data

The euro is finding support this morning from an upbeat German business survey, alongside a slightly upgraded GDP reading. The Ifo Institute’s closely-followed survey of German businesses for August showed a greater-than-expected improvement in confidence from the prior month. The Business Climate gauge climbed to 92.6 from 90.5 in July, topping a forecast of 92.1, with the report characterizing business sentiment as “markedly more positive.” Assessment of the current situation improved more than the outlook, but that brightened moderately as well from July. Although the trends are in a positive direction, corresponding with the economic recovery, the overall levels remain significantly depressed relative to pre-Covid readings. Also, the final print of German second quarter (Q2) GDP was revised slightly higher than expected, registering an annualized 9.7% rate of contraction versus the prior estimate of 10.1%, following a -2.0% reading for Q1. This comes after last week’s preliminary estimates of August purchasing managers’ indexes (PMIs) for the EU and its major economies generally surprised to the downside, denting the euro’s outperformance versus the dollar. Still, the single currency remains near its strongest level versus the dollar since May of 2018 and positioning data shows speculative positioning as heavily betting on more euro upside.

Additional Themes

Republican National Convention Keeps Politics in Focus – After last week’s Democratic National Convention provided investors with glimpses of the policy priorities in a potential Biden administration, the Republican National Convention has kicked off with a critical focus on the Democratic agenda, characterizing it as radical, while lauding President Trump and his accomplishments. President Trump received his party’s official nomination yesterday and the convention will conclude on Thursday evening.

Oil Advances as Storms Threaten the Gulf – Traders are citing the disruption to oil drilling and shipping in the Gulf of Mexico as helping contribute to this week’s rally in crude prices, which has also been supported by the combination of heightened Covid-19 vaccine hopes and cooling US-China friction. Although the first named storm this week, Tropical Storm Macro, lost force as it approached land, Tropical Storm Laura is building intensity with landfall expected late tomorrow or early Thursday. This comes after last week’s OPEC+ meeting failed to produce any notable new upside catalysts for oil prices, leaving additional supply from Libya and the global demand outlook as key swing factors over the coming months. For context, both international benchmark Brent crude and US benchmark WTI have been trading in a narrow $4 per barrel trading range around the low $40’s.

Summary and Price Action Rundown

Global risk assets posted gains overnight amid the tantalizing prospect of Covid-19 treatments and easing US-China friction, while investors look ahead to Fed Chair Powell’s speech later this week. S&P 500 futures indicate a 0.9% higher open after the index extended its gains last week, increasing its year-to-date gain to 5.2% and registering another all-time high on Friday. Equities in the EU are outperforming, while Asian stocks were more muted overnight. The dollar continues to fluctuate near two-year lows, while longer-dated Treasury yields are slightly higher, with the 10-year yield in the middle of its recent trading range at 0.64%. Brent crude is rising back toward $45 per barrel as traders monitor storms in the Gulf of Mexico.

Covid-19 Treatment Hopes Spur Reflexive Equity Upside

Following a familiar pattern, US stocks are set to open higher following headlines regarding potential therapeutics and vaccines. In a speech on Sunday, President Trump touted a plasma-based treatment method that has been approved for wider utilization by the FDA, though the full range of clinical trials are yet to be completed. This came alongside a report that the White House is considering a fast-tracked approval of the vaccine being developed in the UK by AstraZeneca and Oxford University. Markets evidenced a similar initial reaction to news on Tuesday August 11^th that the Russian Health Ministry had approved a vaccine for use, though the price reactions waned over the course of the trading day. For context, the latest vaccine trackers indicate that 17 contenders have advanced to Phase 2 trials, which move beyond individual persons testing to groups, while 7 more have made it to Phase 2/3, an accelerated hybrid step combining traits of a Phase 2 and Phase 3 trial to expedite a ready vaccine that involves large groups of people. Phase 3 is the “final phase trial” and will require 30,000 healthy participants, and follows them for infection rates over months. In June, the FDA said that a coronavirus vaccine would have to protect at least 50% of vaccinated people to be considered effective. Three leading Western-based research trials, including Moderna and NIH, Pfizer, and AstraZeneca in collaboration with University of Oxford, have each made it to testing among thousands of people in accelerated expanded trials. All are part of the US government’s Operation Warp Speed, which has set the goal of producing, manufacturing, and distributing an effective vaccine against the novel coronavirus by 2021.

Signs of Restraint in US-China Confrontation Ease Concerns

Though the White House continues to pursue a “tough on China” posture, which President Trump features as an election campaign issue, taking a softer line on WeChat evidences a continued degree of moderation. After markets closed on Friday, headlines indicated that the Trump administration has told US companies, including Apple, that they may continue to work with the WeChat app in China despite the impending ban in the US. The details of how the app will remain available to non-US users are still being finalized. This comes after news last week that China’s Commerce Ministry expects to soon participate with their US counterparts in a review of the US-China Phase One trade deal that was delayed earlier this month. Initially the cancellation had been blamed on scheduling issues but President Trump indicated that he had halted the meeting, saying “I don’t want to talk to China right now” given the grievances over Beijing’s handling of the pandemic. Still, White House officials remain broadly upbeat on the trade deal, with a focus on agricultural commodity purchases. Nevertheless, tensions continue to percolate and reports indicate that TikTok is preparing to sue the Trump administration over its upcoming US ban, even as US tech companies including Microsoft and Oracle scramble to craft a deal for the social media company’s US business.

Additional Themes

Fed Policy in Focus Again This Week – After last week’s release of the minutes from July’s FOMC meeting clouded the outlook for the Fed’s expected pivot to an incrementally more accommodative framework to guide policy, market participants await clarification from Fed Chair Powell at his speech on Thursday. His remarks will be part of the virtual 2020 version of the annual retreat in Jackson Hole, at which past Fed Chairs, most notably Chair Bernanke, have unveiled significant policy shifts.

Looking Ahead – This week’s macro calendar is varied, with Fed Chair Powell’s speech on Thursday and US economic data in focus as analysts scour reports for signs of backsliding. Initial jobless claims for the week ending August 15^th will be the most potentially impactful reading, though July personal income, spending, and (most importantly) core PCE prices, the Fed’s preferred inflation metric, will also be scrutinized. Politically-minded investors will also monitor the Republican National Convention, though few surprises are expected and the election remains beyond the investable time horizon for many market participants, who prefer to wait until closer to the polling day before positioning their portfolio to account for political risks and uncertainties.

Summary and Price Action Rundown

Global risk assets were mixed overnight amid some moderately discouraging global economic data that is raising more questions about the durability of the recovery. S&P 500 futures point to a 0.2% lower open after the index drifted higher yesterday, led by more tech stock outperformance, upping its year-to-date gain to 4.8% but falling slightly short of another all-time high. Equities in the EU and Asia were mixed overnight. The dollar is gaining from two-year lows on disappointing EU data drags down the euro, while longer-dated Treasury yields are continuing to settle back to recent lows, with the 10-year yield at 0.63%. Brent crude is slipping back toward $44 per barrel amid a gloomier demand outlook.

Global Economic Surveys Suggest Backsliding

After yesterday’s US initial jobless claims for the week ending August 15^th relapsed back above one million, preliminary EU and Japan purchasing managers’ indexes for August indicated a slackening pace of recovery. The early estimates of August PMIs for the EU undershot estimates nearly across the board, with the regional manufacturing gauge slipping to 51.7 versus estimates of 52.7 and 51.8 the prior month and services even more disappointing at 50.1 versus a forecast of 54.5 and 54.7 in July. For context, PMI readings above 50 denote expansion of activity in the sector. Analysts pointed to some renewed travel restrictions and Covid-19 resurgences around the bloc for the pronounced weakness in services, while a surprise return to contraction for French manufacturing dragged down the EU-wide factory reading. Japan’s preliminary August PMIs told a similar story of an increasingly challenged recovery. Though the manufacturing PMI improved to 46.6 from July’s 45.2, it remained in contractionary territory, while the service sector worsened, sliding to 45.0 from 45.4. UK PMIs were an unexpected bright spot, with manufacturing and services handily topping both expectations and the prior month’s levels at 55.3 and 60.1, respectively. UK July retail sales also topped estimates, rising 3.1% on the year. Later this morning, US PMIs are expected to show that activity is continuing to improve in both the manufacturing and services sectors, although investors are wary of potential disappointment amid warnings of backsliding in the economic recovery this month from high frequency data, Fed officials, and corporate management.

Ever More Extreme Tech Stock Outperformance Drags US Stock Indexes Higher

With light summer volumes perhaps magnifying the imbalances, analysts are noting the increasingly drastic divergence between IT sector performance and the rest of the index. An index of mega-cap tech companies rose 2.0% yesterday, extending its year-to-date upside to an eye-watering 66.7% and its degree of outperformance versus the broader S&P 500 to its most extreme level yet. The tech-heavy Nasdaq is now at another record high and up 25.6% year-to-date versus a decline of 6.2% for the mid-cap Russell 2000 and a 4.8% gain for the S&P 500. This reassertion of tech sector dominance in US equity markets comes amid seasonally depressed trading volumes and narrowing leadership, with nearly three times the number of stocks falling versus those rising yesterday in the S&P 500, which still eked out 0.3% upside to nearly recapture Tuesday’s record high. Despite the new record highs being rung up this week, the VIX index of US equity volatility has crept higher and VIX futures reflect expectations of a notable pickup in turbulence around the timeframe of the US election. In addition to US political uncertainty, analysts are citing the risk of large-scale school closures after a brief re-opening, as well as a broadly backsliding economic recovery, and the possible failure of Congress and the White House to agree on the latest pandemic relief bill as impending headwinds.

 

Additional Themes

US Politics in Focus – Last evening, the Democratic National Convention closed with Joe Biden’s acceptance speech as the party’s nominee for president, as analysts continue to ponder the potential ramifications of the election for the economy and markets. However, investors not only have to contend with uncertainty over the result but the risk that the result will be delayed or disputed. Equity volatility (VIX) futures reflect a steep increase in anticipated market chop approaching the election and a multi-month period of elevated market turbulence thereafter.

Gloomy Brexit Outlook – Despite the upside surprises in UK economic data today, the pound is 0.5% lower versus the dollar after EU chief Brexit negotiator Barnier deemed a deal “unlikely” after the latest round of talks failed to make progress. Barnier pointed to the lack of any UK concessions on fishing rights and unwillingness to accept EU “level playing field” condition for favorable access to the single market. Regarding timing, an agreement is expected to be needed by late October to ensure smooth implementation by the Brexit date of December 31.

Summary and Price Action Rundown

US equities slipped from yesterday’s new record highs as Fed minutes painted a grim picture of the recovery, while the lack of details on upcoming monetary stimulus backed up Treasury yields and the dollar. The S&P 500 declined 0.4% today, paring its year-to-date gain at 4.5% and retreating from its all-time high. Equities in the EU and Asia were broadly mixed. The dollar bounced from its recent multi-year trough, while longer-dated Treasury yields edged higher, with the 10-year yield closing at 0.68%. Today’s OPEC meeting failed to boost Brent crude, which dipped back toward $45 per barrel.
 

Dour Tone of Fed Minutes Weighs on Sentiment

Scant details on the upcoming policy shift provided little positive offset for the Fed’s downbeat assessment of the economic recovery outlook. Stocks turned lower, Treasury yields edged higher, and the dollar popped from over two-year lows after minutes from the Federal Reserve’s last meeting on July 28-29 suggested that an expected shift to a more dovish “enhanced guidance” formulation may not occur at the September meeting as expected. For context, so-called enhanced guidance would more formally link interest rate policies and asset purchase programs to the existing 2% inflation target and full employment mandate. Meanwhile, Fed staff lowered their growth forecast and expect the rate of recovery in GDP and the pace of declines in the unemployment rate to be “somewhat less robust than in the previous forecast.” Furthermore, FOMC members “agreed that the ongoing public health crisis would weigh heavily on economic activity, employment, and inflation in the near term and was posing considerable risks to the economic outlook over the medium term.” Therefore, the FOMC expects to hold the current overnight borrowing rate to a range of 0%-0.25% until they are “confident that the economy had weathered recent events and was on track to achieve the Committee’s maximum employment and price stability goals.” While there was agreement that Fed policy should remain extremely accommodative for the foreseeable future, officials continued to voice skepticism about the usefulness of using bond purchases for purposes of yield curve control.

 

Republicans Retest Narrower Version of Pandemic Relief

House Speaker Pelosi has rejected previous attempts to take a piecemeal approach to the latest stimulus bill but with the stalemate continuing, Senate Republicans are revisiting this approach.  As stimulus negotiations between White House officials and Democratic Leadership remain stalled, Senate Republicans are preparing the groundwork for a skinny stimulus package at about half of the original $1 trillion HEALS proposal from last month. The new proposal, according to sources, will include $300 weekly federal unemployment benefits through December and establishes liability protection, provides $29 billion in health care funding, $105 billion for schools, and would forgive a $10 billion loan to the US Postal Service. The effort is an attempt at shoring up party unity in the face of several Republican Senators who have been reticent to support any additional fiscal stimulus. Senate Majority Leader McConnell mentioned on a call with lawmakers on Tuesday that the bill will likely not be voted on until after the GOP convention, leaving time to accrue support but also further extending the gap in benefits. Fractures in the Democratic line have also taken shape as several House Democrats have circulated a letter to Speaker Pelosi and Democratic leadership to vote on legislation extending the federal jobless benefits on Saturday, citing the need to continue providing support to the American people who are being impacted by partisan brinksmanship over the bill. The House is scheduled already to vote Saturday on additional funding and protections for the US Postal Service, a point that both WH Chief of Staff Meadows and Treasury Secretary Mnuchin have cited as the first step in Democrats’ willingness to provide more targeted economic support. Meadows stated that if Democrats are willing to help the postal service (an already agreed upon provision from negotiations), then both sides should simply be able to add in things that they agree upon, but it is unclear whether Democrats will accept such an approach.

 

Additional Themes

Mortgage Bankers Association Reflects Rate Sensitivity – While housing data has been a bright spot in the US economy the last few months, last week saw Treasury rates moved higher which also dragged mortgage rates along with them and saw total mortgage applications fall 3.3% from the previous week according to data from the MBA. The average rate on the popular 30-year mortgage rose from 3.06% to 3.13%. The increase also saw refinance demand drop 5% on the week, however they are still up 38% from last year. New mortgage applications to purchase a home increased 1% for the week but are similarly up 27% annually.

OPEC+ Meeting Offers Little New Support – Crude oil prices dipped modestly today, with Brent crude hovering above $45 per barrel, as the cartel meeting yielded nothing beyond the expected outcome. Saudi and Russia again aligned to push for continued compliance with the agreed levels of supply discipline and compensatory cuts by laggard members like Nigeria and Iraq to cushion the impact of the broader membership tapering their curbs. Meanwhile, the resurgent pandemic is crimping the demand picture, with analysts citing concerns over higher-than-expected estimates of US gasoline inventories. The offsetting supply cuts and weak demand has left oil prices trading in a narrow and sideways range for the past two weeks.

Summary and Price Action Rundown

Global risk assets are mixed and muted this morning after the S&P 500 registered a new record high yesterday, as analysts await Fed meeting minutes, monitor results from US retail giants, and await the outcome of an OPEC meeting. S&P 500 futures point to a 0.1% higher open after the index edged above February’s all-time high yesterday and upped its year-to-date gain at 4.9%. Equities in the EU and Asia were directionless overnight. The dollar is hovering at more than two-year lows while longer-dated Treasury yields are retracing more of their recent upside ahead of today’s 20-year auction, with the 10-year yield at 0.65%. Brent crude is slipping back toward $45 per barrel as OPEC and its allies meet today to enforce supply discipline.

Federal Reserve Meeting Minutes in Focus

Although the July meeting produced no meaningful monetary maneuvers and few additional insights into the Fed’s coming policy shift, analysts will scour the minutes for further details. The main focus in the FOMC Minutes from their July 29^th meeting will be on any hints over the expected pivot to “enhanced guidance,” which may be enacted as early as next month’s meeting and is expected to link  interest rate policy and asset purchase decisions more formally to the Fed’s 2% inflation target and full employment mandates. Chair Powell made vague references to this formulation in his accompanying press conference but declined to provide specifics, stating that the Fed was still in the process of evaluating its options. Overall, the July meeting was relatively uneventful and the Fed left the target range for its federal funds rate unchanged at 0-0.25% as unanimously expected. FOMC members reiterated their commitment to using their full range of tools to support the US economy and repeated that the pandemic poses considerable risks to the economic outlook over the medium term. Accordingly, the federal funds rate is expected to remain near zero until the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals. Policymakers also pledged to maintain the bond purchases and the array of lending and liquidity programs at least at the current pace. Meanwhile, the central bank announced the extension of its dollar liquidity swap lines and the temporary repurchase agreement facility for foreign and international monetary authorities through March 31st, 2021.

More Strong Earnings from US Retail Giants

Like Walmart and Home Depot yesterday, Target and Lowe’s issued impressive second quarter (Q2) figures this morning, though the US consumer outlook remains cloudy amid the lingering pandemic impact and stalled talks over additional federal government relief spending. Target posted the strongest growth in comparable sales ever at 24.3%, with a 195% increase in digital sales, easily beating earnings and revenue estimates for Q2 and sending its stock price up over 5% in pre-market trading. Lowe’s also handily topped comparable sales estimates at 35.1% versus a consensus forecast of 16.3%, lifting its shares over 2% higher in pre-market trading. Yesterday morning featured some similarly impressive results from Walmart and Home Depot. Walmart shares rose over 4% in pre-market trading after the company nearly doubled its online sales but closed 0.7% lower on the day as stalling stimulus negotiations and a reduction of unemployment paychecks overshadowed the Q2 recovery in consumer demand. Home Depot also saw pre-market gains fade, resulting in a 1.1% drop in the share price yesterday as investors seemingly extrapolated Walmart’s concerns with decreased fiscal stimulus to other retail outlets as well. Also yesterday, Kohl’s posted better-than-expected earnings but the embattled retailer’s shares plummeted 14.7% as it posted a net loss and a 23% contraction in revenue while continuing to lose market share.

Additional Themes

OPEC+ Meets Today – Crude oil prices are slipping this morning on estimates of elevated US gasoline inventories, with Brent crude sliding back toward $45 per barrel, as the cartel and its allies meet today with a focus on maintaining discipline in their gradual easing of coordinated supply cuts. At the prior meeting, Saudi and Russia united to extract compensatory cuts by laggard members like Nigeria to cushion the impact of the broader membership tapering their curbs. Meanwhile, wariness over the demand outlook has left oil prices trading in a narrow and nearly sideways range for the past two weeks.

Pandemic Relief Bill Negotiations Drag On – Republican aides have reported that Senate Republicans are soon to publish a stripped-down relief bill to ease the stalemate over stimulus. This skinny version would include the $300 in federal unemployment benefits until Dec. 27^th, PPP funding, and $10 billion for the US Postal Service alongside longstanding Republican provisions for schools and liability protections, and is possibly to be attached to a continuing resolution to fund the government past the Sept. 30^th deadline. Notably, stimulus checks appear to be absent from the new Republican package. Speaker Pelosi delivered mixed messages on the state of negotiations yesterday.

Summary and Price Action Rundown

Global risk assets are mostly higher this morning despite continued US-China friction as US retail bellwethers issue strong earnings results and OPEC meets on efforts to support oil prices. S&P 500 futures point to a 0.2% higher open after the index inched closer yesterday to February’s all-time high. Equities in the EU are outperforming while Asian stocks were mixed overnight. The dollar is breaking below its recent two-year low while longer-dated Treasury yields are retracing more of their recent upside, with the 10-year yield at 0.67%. Brent crude is hovering above $45 per barrel as OPEC and its allies (OPEC+) meet today.

US-China Tensions Remain Elevated

With a new potential suitor for TikTok’s US business and Chinese criticism of tighter restrictions on Huawei, fraught relations between the world’s two largest economies continue to make headlines but markets reflect scant concern of destabilizing escalation. A day after reports indicated that Microsoft would struggle to complete a deal for embattled Chinese social media app TikTok’s US business within the 90-day window mandated by President Trump, headlines overnight indicate that Oracle is exploring a potential offer. The reports note that this would be Oracle’s first major foray into the social media and app space and also that co-founder Larry Ellison is a supporter of President Trump. For context, the impending US bans on Chinese social media apps TikTok and WeChat were set to be raised by China in the Phase One trade deal review that was scheduled for this week but has been delayed indefinitely. This comes a day after the US Commerce Department further tightened restrictions on Chinese tech giant Huawei’s US business dealings, a move which a spokesperson for China’s Foreign Ministry decried as “bullying.” The Commerce Department had already passed restrictions in May that prevented Huawei from purchasing semiconductors developed and produced with US software and technology without first obtaining a special license. The most recent restriction will subject 38 new Huawei affiliates in 21 countries to the requirements, raising the total to 152 restricted affiliates since 2019. Meanwhile, President Trump reiterated concerns that should Huawei dominate the growing 5G market, there will be heightened concerns of Chinese spying on rival nations and companies.

Retail Giants Post Strong Earnings

Walmart and Home Depot issued impressive second quarter (Q2) figures, though analysts are pondering the US consumer outlook amid the lingering pandemic impact and stalled talks over additional federal government relief spending. Walmart issued strong second quarter (Q2) figures that beat estimates by a wide margin on sales and profit, with a 97% increase in e-commerce sales among the most impressive results for the retail bellwether. Management commentary cited the important role of fiscal stimulus in supporting consumer activity last quarter. Walmart shares had hit an all-time high yesterday and are over 5% higher in early trading. Home Depot also registered a record high for its stock price yesterday before issuing Q2 figures that handily outpaced analysts’ estimates of its key metric of same-store sales Q2, sending shares of the home improvement giant up 2.7% in pre-market trading. Year-to-date, shares of Walmart and Home Depot are up 14.1% and 32.0%, respectively. Kohl’s also reported results this morning, showing a narrower-than-expected loss, although sales fell 23%. Shares of Kohl’s are 4.4% higher in the pre-market but are down 54.0% on the year. This comes after data showed that US retail sales rose 1.2% from a month earlier in July, missing market expectations of 2.1% advance and slowing from an 8.4% month-on-month (m/m) surge in June.

Additional Themes

OPEC+ Set to Meet – Crude oil prices are holding most of yesterday’s rally, which brought Brent crude back above $45 per barrel, ahead of the meeting between the cartel and its allies today. Saudi and Russia aligned to bullish effect at the prior meeting, using compensatory cuts by laggard members like Nigeria to cushion the impact of the broader membership tapering their curbs. Meanwhile, the resurgent pandemic is crimping the demand picture, rendering their task of balancing the market more challenging, though analysts note that declining investment in production will support prices over the medium to longer term.

US Housing Market Remains Hot – The NAHB housing market index rose 6 points in August to a composite of 78, beating market expectations of a marginal rise to 73. The reading is the highest since 1998 as sentiment rebounded due to the continued easing of coronavirus lockdowns and rock bottom mortgage rates that are boosting new housing demand. The NAHB has indicated that, while the outlook remains positive, significant concerns over the future of housing prices are going to provide strong headwinds, particularly as the price of lumber has risen more than 80% since mid-April of this year. Data for July housing starts and building permits will be released this morning.