Category: Afternoon Markets Brief

Summary and Price Action Rundown

US equities were mixed and Treasuries remained under pressure as economic uncertainty deepens ahead of next week’s consequential US inflation, retail sales, and industrial production data. The S&P 500 recouped early losses to gain 0.2% today, upping its gain on the year to 6.5%, though the Nasdaq lost 0.6% to cut its early 2023 rally to 12.0%. Overseas, the Euro Stoxx Index underperformed, erasing yesterday’s outperformance, while Asian equities were mostly lower overnight. Longer-dated Treasury yields continued to climb, with the 10-year rising to 3.74%, while the policy-sensitive 2-year yield ascended to 4.52%. The growth-sensitive 2/10 Treasury yield became less inverted, but is still sending an alarming recession signal. The broad dollar hovered above seven-month lows, fluctuating well below its recent multi-decade peak of late September. Oil prices jumped as Russia cut production, with Brent crude climbing above $86 per barrel.

US Consumers Cheer Up but Sentiment Remains Subdued Overall

With investors pondering the crosscurrents and contradictions in US growth and inflation figures, a prominent survey showed some positive signals, but overall conditions remain challenging. The University of Michigan consumer sentiment for the US jumped to a thirteen-month high of 66.4 in February from 64.9 in January, beating market forecasts of 65, preliminary estimates showed. The gauge for current economic conditions improved to 72.6 from 68.4 in the previous month, but the expectations subindex fell to 62.3 from 62.7. After three consecutive months of increases, sentiment is now 6% above a year ago but still 14% below two years ago, prior to the current inflationary episode. Meanwhile, inflation expectations for the year ahead went up to 4.2% from 3.9% while the five-year outlook remained steady at 2.9%. Overall, high prices continue to weigh on consumers despite the recent moderation in inflation, and sentiment remains more than 22% below its historical average since 1978. Combined with concerns over rising unemployment on the horizon, consumers are poised to exercise greater caution with their spending in the months ahead. – MPP view: Growth data around the world has been mixed but we think the trend is to the downside, despite very noisy and idiosyncratic US labor market data. Our base case has been that risk assets will remain in a relatively placid period into Q1 this year as inflation peaks while growth is still positive, but the risk is that the recession arrives more quickly than we have anticipated. Global recession is our base case for 2023 with the lagged effects of the current tightening and US dollar spike really beginning to bite with a 6-12 month lag. We are more concerned about length of the recession and lack of stimulus and support for the recovery than we are about the severity of the retrenchment.

Rent Eases Ahead of Key Inflation Data Next Week

The median US rent increased by 2.4% annually to $1,942 in January, representing the smallest annual rise since May of 2021 and cheapest level in about a year. January’s number reflected the eighth consecutive decline in rent growth rate, and median rent also decreased by 1.9% from the previous month. Signs of increasing supply and reducing demand have possibly contributed to the fall in rent growth. On the demand side, broader economic pressure makes renters hesitant to sign leases. On the supply side, the increase in the number of real estate projects and homeowners deciding to rent out their properties has oversupplied the market. Additionally, the nationwide rental vacancy rate has reached near bottom in the fourth quarter of 2022 and is projected to increase in 2023. The cooling in rent prices is expected to help reduce inflation in the US. – MPP view: We think inflation continues to improve but the moderation tapers off through midyear and price pressures remains sticky, eventually driving home the point that the Fed keeps trying to make that it is not going to be in a position to cut rates later this year even if growth is weak and a recession is underway.

Additional Themes

Canadian Labor Markets Also Post an Upside Surprise in January – The Canadian economy created 150 thousand jobs in January, the most since February last year and much more than the market expectations of a 15 thousand increase. Gains were driven primarily by people aged 25 to 54, split evenly between women and men in this group. Additionally, the unemployment rate held steady at 5%, just shy of the record-low 4.9% observed in June and July 2022, and below market forecasts of 5.1%, signaling that the Canadian labor market remains stubbornly tight. The total number of unemployed people stood at 1.0 million, similar to the level observed since the summer of 2022. Meanwhile, employment increased by 150,000 and the size of the labor force has continued to grow, as an additional 153,000 people joined the labor force, boosting the participation rate to 65.7%.

 

Adidas Suffers from a Promotional Disaster – Adidas, the German sportswear giant, said late Thursday that it is assessing what to do with the Yeezy inventory, adding it has already accounted for the “significant adverse impact” of not selling the products. Operating profit would drop by about 500 million euros if the company fails to shift the products, and Adidas expects sales to decline at a high single-digit rate in 2023. The company also forecasted one-off costs of up to 200 million euros, leaving Adidas’ worst-case scenario for the year as a 700 million euro loss for 2023. Based on unaudited numbers, Adidas’ revenues increased by 1% in 2022, while operating profit dropped from almost 2 billion euros in 2021 to 669 million euros in 2022. Meanwhile, the company could lose around 1.2 billion euros ($1.3 billion) in revenue in 2023 if it is unable to sell its existing Yeezy stock. Shares sank 11% Friday morning as traders reacted to the announcements. “The numbers speak for themselves. We are currently not performing the way we should,” Adidas CEO Bjørn Gulden said in a press release.

Looking Ahead – Next week’s macro calendar centers around the highly-anticipated US Consumer Price Index figures for January, with the Producer Price Index also due. US retail sales and industrial production data for last month will be scrutinized for any signs of additional slowing. UK inflation and retail sales are also on the calendar, along with EU industrial production, Australian business and consumer confidence, and Japan GDP.

 

Latest Macrocast: America runs on trucking – On today’s Macrocast, hosts Meghan Pennington and John Fagan are joined by Loren Smith of Skyline Policy Risk Group to discuss the latest on the IRA and infrastructure spending, permitting reform and its impact on energy production, the debt ceiling, and more. Tune in here! https://marketspolicy.com/podcast-2/

Summary and Price Action Rundown

US equities retraced a modest bit of their recent rally as investors digested more Fed commentary and signs of intensifying growth fears in Treasury markets, while oil prices slid amid rising demand fears. The S&P 500 declined 0.3% today, deepening the index’s year-to-date loss to 13.6%, while the Nasdaq also edged lower, taking its 2022 performance to -20.9%. Overseas, the Euro Stoxx Index closed flat, while Asian stocks were mostly higher overnight. Longer-dated Treasuries extended their rally, with the 10-year yield dropping to 2.58%, the lowest level since April, while the growth-sensitive 2/10 yield curve deepened its inversion, continuing to convey a classic recession signal. The broad dollar continued to retreat below last month’s cycle high, which was its strongest level in twenty years. Oil prices were hit by demand fears ahead of this week’s OPEC+ meeting, with Brent crude sinking below $100 per barrel. – MPP upgraded US equities / downgraded the dollar: Our base case for topping inflation and slowing (but not crashing) growth with a downshifting Fed is the recipe for a second half 2022 tradable risk asset rally. With this past week’s developments increasingly aligning with this view, **we are upgrading stocks from neutral to 70% overweight and downgrading the dollar to a tactical sell, though we are still neutral on the Treasury market and curve. ** We still believe that summer markets will be choppy, and we just had a very positive week and a meaningful July rally, hence we are leaving some headroom to go further overweight if upside catalysts, like peaking CPI figures, materialize between now and the September FOMC decision.

Recession Warning from the Treasury Market Grows Louder

Longer-dated Treasury yields extended lower today, further inverting the yield curve as investors weighed the prospects of a recession and the path for future Fed rate hikes. While Fed Chair Powell said last week that the pace of rate increases could slow “at some point,” hawkish comments from Minneapolis Fed President Neel Kashkari on Sunday indicated that the economy still has a long way to go before inflation comes down to the bank’s target of 2%. Kashkari said the central bank will do whatever is necessary to bring inflation down, even if it leads to a recession, although they will try to avoid it. “Whether we are technically in a recession or not doesn’t change the fact that the Federal Reserve has its own work to do, and we are committed to doing it,” he said. Kashkari’s comments imply that he is willing to continue supporting an aggressive path for rate hikes, which also raises the likelihood of the Fed overtightening and inducing a recession. The 10-year Treasury yield fell to 2.58% today, as investors likely reacted in part to the hawkish stance from the Fed official in addition to the ISM manufacturing data for July that showed a bigger-than-expected drop in the prices paid component. Bank of America analysts believe that the 10-year yield could reach 2% in the next 6-12 months amid a “globally synchronized slowdown” that could exacerbate demand for US Treasuries. Meanwhile, the policy-sensitive 2-year Treasury yield fluctuated on Monday and finished roughly flat at 2.89%. The inverted 2-year/10-year yield curve, which is a classic signal of an impending recession, reached its most extreme negativity in decades of -0.32 at one point. – MPP view: While we are sympathetic to the view that the global synchronized slowdown will keep longer-dated Treasury yields capped, we think there is only so much downside possible given our expectation that the Fed will ease off its rate hike trajectory and help re-steepen the yield curve to some degree. This push-pull dynamic is behind our reasoning for staying neutral on Treasury markets at these levels (for context, we turned neutral on Treasuries in mid-May, which has been insufficiently bullish).

Increasing Signs of Deterioration in US Housing Market Metrics

Rising mortgage rates and inflation in the broader economy caused housing demand to drop sharply in June, forcing home prices to cool down. Home prices are still higher than they were a year ago, but the gains slowed faster in June, according to Black Knight, a mortgage software, data, and analytics firm that began tracking this metric in the early 1970s. The annual rate of price appreciation fell from 19.3% to 17.3%. Price gains are still substantial because of an imbalance between supply and demand. The housing market has had a severe shortage for years. Strong demand during the coronavirus pandemic exacerbated it.

Prices are not expected to fall nationally, given a stronger overall housing market, but higher mortgage rates are taking their toll. According to Mortgage News Daily, the average rate on the 30-year fixed mortgage crossed over 6% in June. It has since dropped back to the lower 5% range, but that is still significantly higher than the 3% range rates at the start of this year. “25% of major U.S. markets saw growth slow by three percentage points in June, with four decelerating by four or more points in that month alone,” said Ben Graboske, president of Black Knight Data & Analytics. Still, while this was the sharpest cooling nationally, the market would have to see six more months of this deceleration for price growth to return to long-run averages, according to Graboske. He calculates that it takes about five months for interest rate impacts to be fully reflected in home prices. So far, markets seeing the sharpest drops are those that previously had the highest prices in the nation. Average home values in San Jose, California, have fallen 5.1% in the last two months, the biggest drop of any of the top markets. That chopped $75,000 off the price. Seattle, San Francisco, San Diego, and Denver round out the top five markets with the most significant price reductions.

The cooling in prices coincides with a sharp jump in the supply of homes for sale, up 22% over the last two months, according to Black Knight. Inventory is still, however, 54% lower than 2017-19 levels. Price drops will not affect the average homeowner as much as they did during the Great Recession because homeowners today have considerably more equity. Tight underwriting and several years of strong price appreciation caused home equity levels to hit record highs. – MPP view: As we have noted, increasingly manifest weakness in US economic indicators and housing data is a necessary condition for the Fed downshift, making bad news (though not too bad) on the growth front good news on the monetary outlook. In short, the new Goldilocks macro formulation is “weak but not too weak,” which we think will be the story of the second half of this year. This data only generally fits this Goldilocks formulation, and we think more economic readings will fall into this Goldilocks category over the current quarter and into Q4.

Additional Themes

Crude Hit by Demand Fears – Oil prices fell sharply on Monday, as poor manufacturing data from key markets trigger demand concerns. Specifically, the latest manufacturing datapoints from China and Japan both indicated a slowdown in economic expansion. China’s Caixin/Markit PMI index dropped to 50.4 in July from 51.7 in June, well below market forecasts of 51.5. Japan’s Jibun Bank PMI index decreased slightly to 52.1 in July from 52.7 in the previous month.  Japan’s slowdown in manufacturing activity was mainly caused by inflation and supply chain disruptions; China’s weak factory data was mainly due to domestic Covid-19 lockdowns. Other key markets, such as South Korea and some members of the Euro Area, also reported discouraging manufacturing numbers. Not only do global PMI results drag oil prices down, but recessionary pressures from major economies are also making oil prices drop. The US economy shrank for a second quarter, which is traditionally a key indication of an economic recession. Additionally, a rise in Libyan oil production has also helped drive oil prices down. The North African nation is now producing 1.2 million barrels per day, up from 800,000 bpd on 22 July, after the lifting of a blockade on several oil facilities. Furthermore, the amount of rigs in the US was also climbing to help increase US oil production. Meanwhile, OPEC+ will meet on Wednesday to determine the output target for September. Output policy is likely going to remain unchanged, although US President Biden called for more production during his trip to Saudi Arabia. Currently, the OPEC+ group is actually almost 3 million bpd short of its quotas due to sanctions and a lack of investment. OPEC’s new secretary general, Haitham al-Ghais, said during an interview ahead of Wednesday’s meeting that “OPEC doesn’t control oil prices, but it practices what is called tuning the markets in terms of supply and demand.” – MPP view: Our view is that slowing growth and correspondingly weakening demand for crude will cap Brent/WTI upside but not result in significant price relief. We have seen pre-OPEC+ declines in crude oil quickly priced out after the meeting and we doubt this week will be any different. Persistently elevated oil prices despite other disinflationary impulses will allow a Fed downshift in its tightening cycle and a peak in rates by year-end but, further out, will keep the bar very high for FOMC rate cuts, even as growth continues to deteriorate in 2023, which we think is the recipe for a rebound for risk assets in 2H2022 and relapse to the downside in 1H2023.

Concerns Surround Speaker Pelosi’s Planned Taiwan Visit – House Speaker Nancy Pelosi arrived in Singapore today, where she is set to kick off a planned tour of Asia that has raised tensions between Washington and Beijing over reports that it will include a stop in Taiwan despite increasingly sharp warnings from Chinese authorities that a visit to the island could provoke a military response. The People’s Liberation Army “won’t sit idly by,” said Chinese Foreign Ministry Spokesman Zhao Lijian in a regular press conference last Friday. “Her stature as the No. 3 US official means a trip would be highly sensitive… As to what measures, let’s wait and see whether she insists on this visit.” For context, Speaker Pelosi’s official trip itinerary made no specific mention of Taiwan, but reports from CNN and Taiwanese media outlets citing both US and Taiwanese officials say that she is planning to meet with Taiwanese President Tsai Ing-wen on Wednesday and that several hotels in downtown Taipei had been booked in advance of her arrival. The Biden administration has reportedly voiced some opposition to the trip, but aides said the President is declining to directly ask Pelosi to cancel the visit out of respect for the independence of Congress.

In response to the Chinese threats, US officials have cautioned China against escalating the situation. “There is no reason for Beijing to turn a potential visit consistent with longstanding US policy into some sort of crisis or use it as a pretext to increase aggressive military activity in or around the Taiwan Strait,” said Pentagon spokesman John F. Kirby at a White House briefing. “Our actions are not threatening and they break no new ground. Nothing about this potential visit — potential visit — which by the way has precedent, would change the status quo.” American officials are reportedly betting that China will not risk a direct confrontation by interfering with Speaker Pelosi’s ability to land safely on the island, but they say that Chinese planes may “escort” her Air Force plane as a demonstration of their control over air routes, and yesterday, a spokesman for the Chinese air force said the country’s fighter jets would fly around the island to showcase its ability to defend what Beijing considers to be Chinese territory, although he did not specify dates for the exercise. “The Chinese side has repeatedly made clear to the US side our serious concern over Speaker Pelosi’s potential visit to Taiwan and our firm opposition to the visit,” Zhao said. “If the US side challenges China’s red line, it will be met with resolute countermeasures. The US must bear all consequences arising thereof.” The New Taiwan dollar fell to a two-year low on the news. – MPP view: This seems like an unfavorable risk/reward for the Speaker’s trip, and presents a “small probability but potentially major impact” event that is basically impossible to hedge.

Latest Macrocast: Breaking Down the Fed’s Big Week with Howard Schneider – On today’s Macrocast, Tony, John, and Brendan welcome Howard Schneider, Federal Reserve reporter at Thomson Reuters, to the show. As an expert on all things Fed and monetary policy, Howard breaks down the Fed’s latest rate hike and inflation’s impact on food consumption. Plus, the group analyzes the concerning PCE and GDP data released this week. Tune in here! https://marketspolicy.com/podcast-2/

Read Howard Schneider’s recent piece on food prices and rising hunger here.

Find more of Howard’s work here.

Read HPS’ Q2 GDP Fact Sheet here.

Macrocast Special: A Conversation with Megan Greene on the Anti-Inflation Toolkit – In this special edition of the Macrocast, Tony and John welcome Megan Greene, Harvard Kennedy School Senior Fellow and Kroll Institute Global Chief Economist, to the show. Megan expands on her recent column in the Financial Times, where she makes an important point few pundits have acknowledged: There’s not much policymakers outside the Federal Reserve can do about inflation. The group walks through various policy responses to inflation and the supply- and demand-driven forces behind rising prices. Plus, the group discusses energy prices, the methodology for measuring inflation, and more. Tune in here! https://marketspolicy.com/podcast-2/

Read Megan’s Financial Times column here.

Read the rest of Megan’s FT columns here.

Read Megan’s bio and check out her site here.

Looking Ahead – Next week’s macro calendar features the US nonfarm payroll figures for July, which is expected to reflect continued resilience in the US labor market with 250k jobs and steady unemployment at 3.6%. Other notable data includes global Purchasing Managers’ Indexes (PMIs), EU and Australian retail sales, German factory orders and industrial production, and Turkish inflation figures. The Bank of England and Reserve Bank of Australia have decisions. OPEC+ conducts its monthly meeting on supply curbs and earnings reporting season continues with results from Aflac, Caterpillar, Cigna, ConocoPhillips, CVS Health, Electronic Arts, Eli Lily, Lyft, Marathon Petroleum, Marriott, MetLife, PayPal, Prudential, Starbucks, and Yum! Brands.

 

 

Summary and Price Action Rundown 

Global risk assets are steadying this morning after two days of losses as Treasury market volatility eases in the wake of increasingly hawkish guidance from the Federal Reserve. S&P 500 futures indicate a 0.2% higher open after the index lost 1.0% yesterday, deepening year-to-date downside to 6.0%, while the Nasdaq underperformed to extend 2022 losses to -11.2% thus far. EU equities are retracing a portion of this week’s losses, while Asian stocks were broadly lower overnight. Longer-dated Treasury yields are stabilizing after two days of incrementally hawkish Fed signals, with 10-year Treasury yield wavering below yesterday’s cycle highs at 2.66%, which was the loftiest level since spring of 2019. The broad dollar index is holding slightly below its recent 2022 peak, which was its strongest level since July 2020. Oil prices are rebounding after yesterday’s losses that followed the announcement of further strategic supply releases, with Brent crude rising back above $103 per barrel as EU leader contemplate more action against Russian energy (more below).  

Mixed Signals from Chinese Markets Amid Redoubled Pledges of Stimulus from Beijing 

Despite the State Council reiterating its intent to counteract downside economic risks, which have been exacerbated by renewed COVID lockdowns, Chinese and Hong Kong stocks are struggling to find support though the renminbi remains solid versus the dollar. The communique from the State Council indicated that an array of monetary policy measures would be enacted at the “appropriate time,” citing the “complexity and uncertainty” of the economic landscape on the mainland and abroad. Similar statements have preceded Reserve Requirement Ratio (RRR) cuts by the People’s Bank of China (PBoC) in July and December. Analysts are also anticipating further reductions in benchmark lending rates in the coming months.  

For context, statements from key officials with the State Council, PBoC, Financial Stability and Development Committee in the middle of last month promising to “actively introduce policies that benefit [Chinese] markets” spurred a steep rally in mainland and Hong Kong stock markets. These communications suggested that the campaign against Chinese IT companies would be concluded, support for beleaguered property developers would be forthcoming, and additional monetary stimulus would be enacted. Since that bounce, however, greater Chinese share prices have struggled to make further headway, as the rhetoric does not appear to have been matched by policy action. – MPP view: We have retained our longstanding negative posture on Chinese assets as we suspect that Beijing’s expressions of market/economic support are more rhetorical than substantive and China’s backing of Russia opens it to higher risk of being caught up in the sanctions. There was also no indication that PCAOB or the Biden administration in general would be favorably disposed to compromise with China on this audit disclosure / delisting issue, or do Beijing a favor on any other count either. After such steep losses, there is always a temptation to buy the dip but we continue to think that Chinese stocks are, from an index perspective, dead money at best over the medium term, despite the likelihood of tactical bounces this year ahead of the Party Congress in the fall at which President Xi will assume an unprecedented third term.        

Sanctions in Focus as Russia’s Invasion Strategy Shifts 

With Russian troops reportedly massing in eastern Ukraine for a renewed offensive, western leaders are evaluating the impact of sanctions and ability of Russia to skirt them. Reports this morning indicate that Russia has sold the full complement of its Sokol crude in the east of the country for next month and that Chinese buyers are using renminbi for coal transactions. Meanwhile, ongoing gas and oil exports to the EU and elsewhere are helping support the ruble, which is trading back to pre-invasion levels, though US officials, including Treasury Secretary Yellen, have warned that capital controls and other measures taken by the Kremlin have artificially supported the currency, suggesting an outlook for renewed depreciation. This comes as the US expanded sanctions yesterday on Russian financial institutions and individuals and EU leaders are meeting today to discuss the potential to ban Russian coal, with consensus remaining elusive to take similarly strict measures on Russian gas imports. The benchmark price of EU natural gas remains historically elevated but roughly half the level of the super-spike peak early last month. – MPP view: Our base case is that the US administration policy is to force Russia into sovereign default, if possible. Meanwhile, the EU has come further and faster than many had expected on Russia sanctions, but a full embargo on Russian energy is still a bridge too far. But this is a case of mutual dependence – therefore, we do not think Russia will cut off EU gas if the EU doesn’t pay in rubles, as keeping this flow is probably almost as import to the Kremlin as it is to the EU. But with the conflict grinding on and potentially turning even more grim (chemical weapons, further atrocities), the embargo will be revisited repeatedly and there is a significant chance that the Kremlin’s brutality in Ukraine will leave the EU with little option, with this upside risk skew keeping a floor under energy prices.        

Additional Themes 

German Industrial Production Holds Up in February but Signs of Weakness Mount – Though yesterday’s more forward-looking factory orders data for February reflected significant deterioration and a darkening economic outlook, this morning’s release of February industrial production data for German was only slightly weaker than anticipated. The 0.2% month-on-month (m/m) pace matched estimates but the downwardly revised January reading, to 1.4% m/m from the previous 2.7%, dragged the annualized rate to 3.2% for February and 1.1% in January versus a forecast and preliminary reading of 3.7% and 1.8%, respectively. The Bundesbank has been issuing increasingly dire warnings of downside growth risks over the coming months in the face of a commodity supply shock and stagflationary dynamics.    

 

Summary and Price Action Rundown

US equities extended their streak of new record highs as upbeat corporate earnings provide further support alongside more positive atmospherics around President Biden’s infrastructure bills. The S&P 500 added 0.4%, registering another all-time high and upping year-to-date returns to 23.3%, while the Nasdaq kept pace despite a drag from Tesla (more below). The Euro Stoxx Index also gained while Asian stocks mostly retreated overnight. Longer-dated Treasury yields held steady while the short end rallied ahead of tomorrow’s consequential Fed decision, with the 10-year Treasury yield closing at 1.55%, which is still on the high side of its 2021 trading range. Meanwhile, a broad dollar index continued its rebound but remained below recent multi-month highs. Oil prices slipped slightly ahead of this week’s OPEC+ meeting, with Brent crude still holding above $84 per barrel.

Latest Headlines Suggest More Progress on Biden Bills

Congressional Democrats continue to make progress on the intricately coordinated two-track infrastructure legislation, with ongoing uncertainty over the prospects for a near-term House vote on both bills. An ETF of US infrastructure-related stocks climbed 0.9% to hit a record high today and extend its gains on the year to 32.3% as optimism over the prospects for the Biden administration’s physical and social infrastructure bills continues to build among equity investors. In a press conference at the climate summit in Glasgow Scotland, President Biden expressed his confidence that centrist Senator Manchin will support the Dems-only reconciliation bill after verifying certain specifics. This comes after Senator Machin asserted yesterday that more time is needed to review the $1.75 trillion social infrastructure package. He again called for the House to vote on the bipartisan infrastructure package, which the liberal wing of the caucus has held up in an effort to get consensus and unequivocal Senate support on the reconciliation bill. Also today, Senate Majority Leader Schumer indicated that Congressional Democrats have worked out a compromise on prescription drug pricing terms that cap out-of-pocket spending at $2,000 per year and outline industry reforms, noting that centrist Senator Sinema is on board. Meanwhile, political commentators are awaiting results in the Virginia governor’s election, which is being cast as something of a litmus test for Democrats’ political fortunes against a Trump-linked candidate. – MPP view: Still no clarity on the timing of the vote, and today’s latest deadline may give way again, but there is a sense of momentum and we think the odds of near-term passage remain relatively high – however, if timeline for a vote slips into mid-November or later, the odds worsen markedly.

Solid Earnings Continue to Buoy Stocks

Third quarter (Q3) results remain broadly upbeat, with the bulk of the reporting concluding this week. Pfizer shares jumped 4.2% today after reporting better than expected profit and revenue for the third quarter. The pharma giant earned $1.42 per share topping estimates and issued an improved full-year forecast on strong demand for both the covid vaccine and other non-covid related treatments. Management reported revenues of $24.1 billion, reflecting 130% operation growth excluding Comirnaty (vaccine) revenue. Pfizer raised full-year guidance for revenues to a range of $81 to $82 billion and adjusted diluted EPS to a range of $4.13 to $4.18, reflecting 94% and 84% year over year growth at the midpoints, respectively. It anticipates Comirnaty revenue of approximately $36 billion, reflecting 2.3 billion doses expected to be delivered in 2021.

Dr. Albert Bourla, Chairman and CEO stated, ““While we are proud of our third quarter financial performance, we are even more proud of what these financial results represent in terms of the positive impact we are having on human lives around the world. For example, more than 75% of the revenues we have recorded up through third-quarter 2021 for Comirnaty have come from supplying countries outside the U.S., and we remain on track to achieve our goal of delivering at least two billion doses to low- and middle-income countries by the end of 2022 — at least one billion to be delivered this year and one billion next year, with the possibility to increase those deliveries if more orders are placed by these countries for 2022.”

Pfizer’s earnings reflect strong growth with and without the Comirnaty revenue. The short-term outlook for vaccine revenue is high as 58% of the US are fully vaccinated and many from the rest of the world, especially in low- and middle-income countries awaiting their doses. Pfizer CFO Frank D’Amelio stated that the company is increasing guidance excluding Comirnaty for the second consecutive quarter, demonstrating the ability to execute on other segments beyond the vaccine.

“We continue to make progress on advancing our internal pipeline across all therapeutic areas while also prudently deploying our capital through partnerships and bolt-on acquisitions to gain access to cutting-edge platforms, science and technologies that could potentially bolster our growth in the latter half of this decade. I am proud of what we have accomplished so far in 2021 and look forward to finishing the year strong.”

Car rental stock Avis Budget surged 108.3% after the company reported a stronger-than-expected third quarter that sparked massive trading volume. The company reported $10.74 in per-share earnings for the third quarter, which was more than $4 above expectations. Avis Budget’s board also authorized an additional $1 billion in share buybacks. Vague comments on the conference call by executives about increasing purchases of electric cars for its fleet appeared to add juice to the rally, as chief executive officer Joseph Ferraro said the company would play a “big role” in the growth of electric cars in the US. Ahead of the earnings report, 20.5% of the float of Avis Budget’s stock was sold short, which is extremely high. When a stock rises, short-sellers are forced to cover their positions by buying shares, creating more upward pressure on the stock price. This is called a “short squeeze.”

With 346 of the S&P 500 companies having issued Q3 results, the figures have been impressive, with reporting companies beating sales and earnings estimates at rates of 67.5% and 81.8%, respectively. – MPP view: With Q3 earnings season pretty much in the books, the margin squeeze/bottleneck/input costs/labor shortage dogs didn’t do as much barking as feared and we expect increasing signs of easing some of the snags and shortages over the coming months.

Additional Themes

Sobering Signs from an Economic Sentiment Gauge – The IBD/TIPP Economic Optimism Index in the US fell for the 5^th straight month to 43.9 in November, the lowest since September of 2015, and just undercut the prior pandemic low of 44 in July 2020, as the second Covid wave was hitting. With the Delta variant slowing the jobs recovery and inflation fears mounting, household financial stress is spiking and faith in federal economic policies is sinking. The six-month economic outlook index sank 2.7 points to 38.6, the lowest since July 2020. Inflation worries weighed on the personal finances subindex, which fell 2 points to a 14-month low of 51.9, despite the S&P 500 closing the month at a record high. Dimming faith in federal economic policies was the biggest drag, as the federal policies subindex fell 4.2 points to 41.1. That was the lowest since January 2016.

Tesla Shares Dented by Hertz News – In contrast to today’s continued upswing in US equity markets, Tesla shares slid 3.0% today after CEO Elon Musk disclosed on Twitter that no contract had been signed with rental car company Hertz after reports of its intent to buy 100,000 electric vehicles from the carmaker. Musk also downplayed the potential impact of the deal due to demand for Tesla EVs consistently outstripping supply prior to the Hertz news.

 Summary and Price Action Rundown

US equities hit new records today as disappointing US jobs data eased overheating fears and reinforced the accommodative policy posture of the Federal Reserve, keeping Treasuries tame and sinking the dollar. The S&P 500 advanced 0.7% today to surmount last week’s record high, taking year-to-date gains to 12.7%. The tech-heavy Nasdaq outperformed as a hint of doubt crept in over the growth outlook following the lagging nonfarm payroll data. The Euro Stoxx Index also registered solid gains while Asian bourses were mixed overnight. Longer-dated Treasury yields fluctuated but closed little changed, with the 10-year edging up to 1.58%, while the dollar fell back to a more than two-month low. Oil prices continued to chop near the top of their recent range, with Brent crude closing just above $68 per barrel.

April Jobs Figures Miss Estimates by a Country Mile

After a series of economic readings earlier this week that were strong but slightly below expectations and encouraging initial jobless claims yesterday, the nonfarm payroll tally for last month was a major disappointment, lending further credence to the Fed’s cautious guidance. The US economy added 266 thousand jobs in April, following a downwardly revised 770 thousand rise in March and well below market expectations of 978 thousand, as employers face worker shortages. Job gains were centered in leisure and hospitality, with 331 thousand and local government education with 31 thousand. However, these gains were partially offset by losses in temporary help services, losing 111 thousand and in couriers and messengers, losing 77 thousand. Jobs also fell 18 thousand in manufacturing and 15 thousand in retail trade and were unchanged in construction. In April, nonfarm employment is down by 8.2 million, or 5.4%, from its pre-pandemic level in February 2020. Furthermore, the unemployment rate rose to 6.1%, from 6.0% in March and well above market expectations of 5.8%, as more workers began looking for work and re-entered the labor market. The number of unemployed people increased by 102 thousand to 9.81 million and the number of employed was up by 328 thousand to 151.2 million, while the activity rate rose to 61.7% from 61.5%. Unemployment levels were down considerably from their recent highs in April 2020 but remained well above their levels prior to the coronavirus pandemic.” – MPP view: We’re going to see a lot of fluky numbers like this over the coming months but this downside surprise was consequential. Our base case had been that the market eventually would come around to believing the Fed’s guidance but not until the FOMC had been forced to get more explicit about the taper timeline – we may have to reassess this as today’s data is making more market participants true believers (like we are) in the Fed’s staunchly accommodative posture.

Fed Communications Focus on the Long Path to Recovery

Sagging payrolls underscore the Fed’s cautious messaging, as markets reprice policy expectations to align more closely with the dovish guidance. During a call with reporters earlier this morning, Minneapolis Fed Chair, Neel Kashkari, said it was essential to maintain the current ultra-accommodative monetary policy stance following the dramatically substandard monthly gain in US jobs. The regional Fed president noted that today’s subpar jobs report is an example of just how far the economy remains from the Fed’s employment goals, and he doesn’t “see any reason right now to change something that is working.” Kashkari expressed that the most important step right now is “to rebuild this labor market and put them back to work,” and in the future, “there will be plenty of time to normalize monetary policy,” he said. In a separate speech this morning, Richmond Fed President, Thomas Barkin, speculated that today’s disappointing jobs figure might be attributable to the growing challenges of matching unemployed job-seekers to available positions. He additionally conjectured that the stimulus checks deployed earlier this year are allowing low-wage workers to be “a little choosy” when selecting from available positions.

Elsewhere, Treasury Secretary Yellen spoke during today’s White House press briefing, and stated that while “today’s jobs report underscores the long haul climb back to recovery,…the 266,000 jobs added in April represent continued progress,” and “we should also be encouraged by the ongoing expansion of the labor force.” She continued on to state that “we will reach full employment next year.” Nonetheless, Yellen noted the unevenness present within the labor market recovery, and tied the Biden administration’s $4 trillion fiscal plans to invest in American families and workers to achieving “a strong, prosperous economy this year and in 2022,…[and to] our country’s long-term economic health.” President Biden additionally delivered remarks today and firmly defended his $1.9 trillion pandemic relief package. “When we passed the American Rescue Plan, I want to remind everybody, it was designed to help us over the course of a year, not 60 days,” he said. Markets reacted accordingly to today’s overall discourse, broadly improving as the continuation of fiscal and monetary support was again firmly acknowledged by lead policymakers. Yields on the benchmark 10-year Treasury fell below 1.5% this morning, though bounced back to 1.58%, with futures markets repriced rate expectations to incrementally push back the anticipated timing of hikes. – MPP view: Please see our Market Viewpoint this weekend for a deeper dive into the Federal Reserve outlook.

Additional Themes

MPP Video – Brendan and John discuss the Biden administration and its proposed $1.8 trillion American Families Plan, which is the more social and softer infrastructure-focused. The all-important Fed communications and what a massive earnings season. Enjoy the weekend! MPP Macro Video

MPP Video: The Crypto Dome – Markets Policy Partners enters the Nucleus195 Crypto Dome, joining Adam Blumberg from Interaxis to discuss the shifting regulatory environment for cryptocurrencies, how the Treasury is likely to work in conjunction with the SEC, and what it all means for RIA’s and the individual investor. MPP Crypto Video

Latest Podcast – Well That Number Was Unexpected – Tony, John, and Brendan are joined by Stratton Kirton, Managing Director at HPS, to break down the surprising April jobs numbers. The gang discusses why predictions may have missed the mark and what the numbers mean for the state of economic recovery. They also discuss Treasury Secretary Janet Yellen stepping on the Fed’s toes and the implications of the Biden administration’s COVID-19 vaccine patent decision. Latest Macrocast

First Quarter (Q1) Earnings Season Wraps Up with Stellar Headline Numbers and Muted Market Reactions – The overarching theme of Q1 earnings season was the lack of apparent investor enthusiasm over blockbuster headline results, suggesting that much good news was already priced into stocks. A key subplot was management commentary on rising input costs and the potential for those increases to abate over the coming quarters as supply chains are reassembled. Overall, among the 438 of the S&P 500 companies that have reported, 70.7% have topped sales estimates and 87.0% have beaten earnings forecasts, which are historically high rates of upside surprises. Nevertheless, reporting companies have, on average, experienced a 0.2% decrease in share price in the trading session following the release of their results, and while the S&P 500 is up 2.2% since the start of earnings season.

Looking Ahead – Next week will be a major week of economic data, with the US consumer price index (CPI), the producer price index (PPI), retail sales, and industrial production, initial jobless claims, consumer sentiment, and small business optimism all due. Global inflation readings will also be in focus, with China’s CPI and PPI, along with CPI for Germany and France. Industrial production data for the EU is also on the calendar, amid a recent trend of upside surprises for regional economic figures. The barrage of Fed communications will continue, with Vice Chair Clarida, Fed Governor Brainard, and hawkish outlier Dallas Fed President Kaplan all delivering remarks. OPEC will also issue its monthly oil report with crude prices fluctuating at recent highs.

Summary and Price Action Rundown

US equities were mostly higher today as Treasuries rallied amid today’s key inflation data and adverse Covid-19 vaccine news, while investors await tomorrow’s unofficial start to first quarter earnings reporting. The S&P 500 rose 0.3% today, posting a new record high and upping year-to-date gains at 10.3%. The Euro Stoxx Index closed slightly higher while Asian equities were mixed overnight. Longer-dated Treasuries rallied after today’s inflation print delivered only a modest upside surprise and the 30-year auction was well-received (more below), with the 10-year yield declining to 1.62%, which is on the lower side of the recent trading range. Meanwhile, the dollar extended its recent reversal from multi-month highs. Oil prices gained but remained well shy of recent highs, with Brent crude rising toward $64 per barrel after an upbeat OPEC report.

Treasuries Sail Through Today’s Challenges

With a highly-anticipated inflation data release and a 30-year note auction on the calendar, traders were wary of the potential for renewed volatility in Treasuries but the actual price reaction was encouragingly favorable. The Consumer Price Index rose 0.6% month-on-month in March, up from 0.4% in February and above consensus expectations of 0.5%. Gasoline prices were the biggest contributor to the monthly gain, surging 9.1% in March and responsible for about half the overall CPI increase. Gasoline is up 22.5% from a year ago, part of a 13.2% increase in energy prices. Food was up 0.1% overall, with food away from home the largest contributor at 3.7%. The shelter component also came in above expectations at 0.3%. This pushed the annual rate up to 2.6%, above expectations of 2.5% and well above February’s 1.7%, as the base effects of the pandemic take hold. Furthermore, Core CPI, which excludes the more volatile food and energy components, rose 0.3% m/m and 1.6% y/y, both above expectations of 0.2% and 1.5%.

Despite headline CPI growth of 0.6% marking the fastest increase in consumer prices since 2012, investors were seemingly cognizant of base-effect distortions in the data, as both equity and sovereign bond markets were notably indifferent. Traders instead focused on the announcement from US federal health officials calling for a suspension of Johnson & Johnson’s Covid-19 vaccine amid the rare formation of blood clots in a handful of inoculated individuals. The statements rattled market confidence in the nation’s vaccination campaign, as the Dow Industrials opened lower following the announcement. Shares of J&J dropped 3% in premarket but closed only 1.3% lower in today’s trading. Jeff Zients, the White House Covid-19 response coordinator, assured the public that “this announcement will not have a significant impact on our vaccination plan.” Vaccine production from Pfizer and Moderna currently comprise 95% of weekly allocated vaccines with J&J accounting for the remaining 5%. The White House stated the US expects to have enough vaccine supply to meet demand by May despite the suspension.

Meanwhile, longer-dated Treasuries yields declined this morning amid broad market circumspection, and further descended following today’s auction of $24 billion in 30-year debt. The US Treasury offered the 30-year notes at an auction high-yield of 2.32%, falling below the when-issued rate of 2.34%, and the bid-to-cover ratio of 2.47 outpaced the six-month average of 2.28. The benchmark 10-year rate headed to 1.62% after the sale, which is its lowest level since late March. – MPP view: Nice win for the Fed here, with the data very much adhering to their story of a transient boost and market participants clearly looking for an upside surprise that exceeded today’s magnitude. We still believe that the current equanimity will run into questions about a taper over the summer unless the Fed begins to message more forcefully about the continuation of QE over the coming months rather than focusing on rate hikes, as the two are inextricably linked and the taper fires the starting gun on the process of accommodation withdrawal.

OPEC Conveys Upbeat Signals

As some of the world’s wealthiest nations continue to struggle with resurgent Covid-19 rates, the Organization of the Petroleum Exporting Countries reported that a brightening outlook ahead and historic stimulus packages will boost both economic activity and oil demand this year. OPEC increased its 2021 global demand forecast by 100,000 barrels a day and raised its forecast for global economic growth by 0.3 percentage points to 5.4%. The increased demand forecast driven by a better than expected second half of the year forecast is credited to stimulus programs, ease of pandemic lockdowns, and an acceleration in the vaccination rollout mainly in wealthy nations. For context, OPEC and its allies (OPEC+) have maintained disciplined supply cuts that helped support oil prices since the crash last spring but announced a taper of the curbs at their most recent meeting earlier this month. Also, Iran, which is exempt from the cuts of the OPEC+ alliance, increased its output by 137,000 barrels a day in March. China has been importing more oil from Iran in recent months, with Tehran circumventing US sanctions. Investors have been closely monitoring indirect talks between Iran and the US as the two sides consider reviving the 2015 nuclear deal that could possibly have Washington lift those sanctions that currently prevent Tehran from exporting oil at will. Additionally, the cartel slightly reduced its forecast for the 2021 supply growth from outside of OPEC, decreasing its forecast by 30,000 barrels a day. – MPP view: Since they just announced a taper of output curbs, the cartel is certainly incentivized to put the best face on the demand outlook and it is hard to tell whether they are tapering because they can’t keep their members disciplined or whether they really see demand improving so much, we suspect that this report contains some meaningful element of wishful thinking.

Additional Themes

US Small Businesses Grow More Confident – The NFIB Small Business Optimism Index increased to 98.2 in March, the highest in 4 months, from 95.8 in February. While seven of the ten components increased in a positive sign, the uncertainty index increased to 81 from 75 which was the lowest since April last year, as owners struggle if it is a good time to expand their businesses. NFIB Chief Economist Bill Dunkelberg added, “Main Street is doing better as state and local restrictions are eased, but finding qualified labor is a critical issue for small businesses nationwide. Small business owners are competing with the pandemic and increased unemployment benefits that are keeping some workers out of the labor force. However, owners remain determined to hire workers and grow their business.”

SPACs in Focus– Following the SPAC (Special Purpose Acquisition Company) boom of the last few years, the SEC issued new guidance that warrants, which are issued to early investors in the deals, might not be considered equity instruments and may instead be liabilities for accounting purposes. This is likely to disrupt filings for new SPACs until the issue is resolved. The SEC has been raising concerns that investors are not being properly informed on risks related to what are often described as blank check companies. The SEC has been reaching out to accountants last week and the judgment is that it is unlikely the SEC will declare any registration statements effective until they rule on the warrant issue. More than 550 SPACs have filed to go public in 2021, seeking to raise a combined $162 billion, which exceeds the total for all of 2020, during which SPACs raised more than every prior year combined. In an April 8 statement, John Coates, the SEC’s top official for corporate filings, warned against viewing SPACs as a way to avoid securities laws.

However, deals are still getting done through existing SPACs, evidenced by Southeast Asia’s ride-hailing giant Grab announcement that they will go public through a SPAC merger with Alimeter Growth Corp. The deal values that company at $39.6 billion, which would be the largest blank-check merger to date. As part of the deal, SoftBank-backed Grab will receive about $4.5 billion in cash, which includes $4 billion in a private investment in public equity arrangement, managed by BlackRock, Fidelity, T. Rowe Price, Morgan Stanley’s Counterpoint Global fund and Singapore’s sovereign wealth fund Temasek.

Summary and Price Action Rundown

US equities chugged higher today as January’s highly-anticipated jobs report evidenced modest improvement but missed estimates, pulling the dollar off its recent multi-month highs. The S&P 500 added 0.4% to register its second consecutive record close, bringing the ascent for the index to 4.7% on the week and 3.5% year-to-date. The Euro Stoxx Index posted similar gains, while Asian equities were mostly higher overnight. A broad dollar index retreated from its strongest level since early December after the moderately disappointing payroll figure, while longer-dated Treasuries remained under slight pressure, with the 10-year yield climbing to 1.17%. Brent crude advanced above $59 per barrel, spurred on by continued OPEC+ supply curbs and growing optimism over the demand outlook.

 

Nonfarm Payrolls Show a Tepid Jobs Rebound

After upside surprises in ADP payrolls and initial jobless claims data earlier this week, hopes had been raised for a more upbeat January jobs number. In January, the US economy added 49K jobs, missing the consensus estimate of a 100K rise. In December, COVID restrictions on businesses started to ease as case numbers and hospitalizations decreased and vaccine distribution increased. Last month saw notable job gains in professional and business services and both public and private education were offset by losses in leisure and hospitality, retail trade, health care, as well as transportation and warehousing. However, it is a small gain leaving the economy about 10 million jobs short from the peak in February 2020. Additionally, the change in total nonfarm payroll employment for November was revised down by 72K to 264K, and the change for December was revised down by 87K to -227K. With this, employment in November and December combined was 159,000 lower than previously reported.

Average hourly earnings rose by 6 cents to 29.96 or 0.2% after a 1% increase in December, below market expectations of a 0.3% gain. Average hourly earnings of private sector production and nonsupervisory employees did not change much at $25.18. The large employment fluctuations over the last few months complicate the analysis of recent trends in average hourly earnings, especially in industries with lower-paid workers. Year-on-year average hourly earnings have increased by 5.4%, the same as in the month before and above market expectations of 5.1%. – MPP view: This modest downside miss does little to dispel the overall impression that the US economy is leaning into the recovery before the double doses of stimulus are even really making much of an impact. The outsized move in the dollar seems to be more about trading dynamics after its sharp bounce rather than broader doubts about the US growth rebound, as the Treasury yield curve continued to steepen and the growth-sensitive Russell 2000 small caps outperformed meaningfully today, rising 1.4% to put year-to-date gains at a gaudy 13.1%.  

Progress Toward Super-Sized Pandemic Relief Bill

The Biden administration and Congressional Democrats move ahead with unilateral approach to the American Rescue Act. After a night-long slog of partisan amendments, the Senate approved 51-50 a measure, with minor amendments, allowing Democrats to pass Biden’s relief plan through budget reconciliation. Votes for the measure fell strictly along partisan lines, with Vice President Harris casting the tie-breaking vote. Small amendments, including holding off on minimum wage increases and ensuring that wealthy Americans do not receive the $1400 stimulus payments, were added during the session, though none remain binding. The measure now returns to the House for a vote on the amended measure and, if passed, will proceed to the indicated committees for finalization by March. President Biden plans to meet with House Committee Chairs today to discuss the timeline of his rescue plan. The President spoke today emphasizing that the COVID-19 relief bill stands as a higher priority than bipartisanship, offering his strongest criticism of Republican lawmakers since taking office and indicated that the Democrats would go it alone. if necessary, to get needed aid to struggling Americans. Speaker Pelosi has stated that the budget resolution will be brought to the floor later today and that committees will begin working on the specifics of the bill starting Monday. Democratic leadership is pushing aggressively for the bill’s speedy passage in the wake of poor unemployment figures from December and standstill numbers in January. The US economy remains 9.9 million jobs below its pre-pandemic level. – MPP view: Though not every penny is likely to make it through, the Biden administration has strongly committed to the upper end of its stimulus spending range and put the marker down that it will aggressively pursue its legislative agenda, and so far it appears that Dem moderates like Senator Manchin are disinclined to stand in the way, all of which is positive for stocks and growth.

Additional Themes

Earnings Season Continues to Provide Little Direction for Stocks – Fourth quarter (Q4) corporate results continue to be overshadowed by overarching market themes, like the GameStop episode and the brightening growth outlook, and today’s calendar is light. Next week features the last major concentration of reports, with Twitter, GM, Coca-Cola, Disney, and Expedia among the most high-profile. With 292 of the S&P 500 companies having reported Q4 results so far, 74.7% have topped sales expectations and 81.2% have beaten earnings estimates, continuing the pandemic trend of overly conservative analyst forecasts. To this point, however, upside surprises on these quarterly figures have provided scant support for stock prices, though this week featured broadly more upbeat price action amid the waning volatility in short-squeeze stocks and better-than-expected growth data.

Regulators Focus on GameStop – Yesterday, Treasury Secretary Yellen convened a group of regulators, including the heads of the SEC and CFTC, as well as the Federal Reserve and New York Fed, to consider the proper policy response to this high-profile episode of significant market anomalies. Though no specifics of the meeting were published, a statement released by the Treasury indicated that the group would work to ensure that the events around GameStop and other affected stocks “are consistent with investor protection and fair and efficient markets” while characterizing market functionality during the episode proved “resilient.” Meanwhile, the House Financial Services Committee and Senate Banking Committee are preparing to hold hearings on this issue later this month. – MPP view: We certainly do not expect any hasty conclusions from regulators but we do expect meaningful follow-though and a policy direction that takes a more encompassing look at the evolution of systemic risk in the system, as well as considers specific regulatory fixes for discrete market issues, such as IPO allocations and retail investor protection.

Latest Podcast – On this week’s Macrocast, we unpack the complicated jobs report, discuss the Biden stimulus package and its critics, and take a moment to review the Trump economy — including discussing how the jobs numbers would have played out in an alternate universe with no pandemic. We also chat about the potential for a pandemic-related baby bust and its economic impact. Latest Macrocast

Looking Ahead – Next week, the focus will be on efforts to pass the American Rescue Act through the narrow straits of the slim Democratic majorities in both houses of Congress. On the data front, US inflation figures will be in the spotlight as market-based gauges of inflation expectations advance to multi-year highs.

Summary and Price Action Rundown

US equities slipped from record highs today as wrangling continued today over the US pandemic relief package and UK-EU Brexit agreement. The S&P 500 declined 0.4% today to pare year-to-date gains to 14.8%, as the index adjusts to include Tesla on Monday (more below). The Fed’s announcement after markets closed for regular hours that it would be allowing US banks to resume stock buybacks, but not raise their dividends, lifted shares of JPMorgan 2.9% in after-hours trading as the megabank rushed to announce $30 billion in buybacks. The Euro Stoxx Index broke its four-day rally with modest downside while Asian equities also posted losses overnight. The dollar edged above yesterday’s most recent multi-year low, while longer-dated Treasury yields increased slightly, with the 10-year at 0.94%. Brent crude prices vaulted over $52 per barrel, reaching a new 9-month high, amid stimulus hopes.

 

US Fiscal Stimulus Negotiations Drag On

Pandemic relief talks appear to be grinding slowly toward a deal, perhaps as early as this weekend, but in the meantime, Congress will either need to pass an omnibus spending bill or another funding extension by midnight tonight or trigger a partial government shutdown. In the final hours ahead of tonight’s midnight deadline to pass a stimulus package alongside the omnibus spending bill, a push led by Republican Senator Toomey to include terms seeking to block the Federal Reserve’s pandemic lending facilities has stymied a final compromise. A provision to prevent the Fed from restarting any of the five lending programs, or create similar ones in the future, has become the main sticking point for Republicans now that the two controversial elements of direct funding for state and local governments and liability protections for businesses have been omitted. “It’s not acceptable for anybody to decide that they’re going to circumvent this law, restart these programs and turn them into something that they were never intended to be,” said Toomey on Thursday. While Senator Toomey asserted that the provision would exclusively target the five programs, Democrats have accused Republicans of specifically constricting the incoming Biden administration and limiting the ability of the Federal Reserve to respond to economic distress in the future. With Republican’s seemingly entrenched over this issue, it is likely lawmakers will fail to reach a compromise this evening, and will either trigger a partial government shutdown when the current spending authorities expire, or Congress will seek to approve another stopgap funding measure through the weekend, allowing more time to resolve the remaining differences. Should any pandemic relief bill fail to pass this weekend, Congress will have until the end of the month when nearly 12 million workers will lose their benefits, on top of the 4.4 million who have already exhausted their benefits, which would further pressure an already distressed economic backdrop. – MPP view: The New York Times reported yesterday that McConnell’s surprising reversal on individual payments and the overall size of the relief bill was spurred by indications that the two GOP candidates in the pivotal Senate runoffs in Georgia are taking heat over the delay of fiscal support. But even with rising economic and political urgency, a deal is still stalled – we see this as a preview of the extreme difficulty the Biden administration will face getting anything through a GOP-led Senate and do not buy the narrative that Majority Leader McConnell will morph into a dealmaker with his old friend Joe Biden in the White House. Our base case has been for something less ambitious than $748 billion lame duck session compromise stimulus (which could be tacked onto the omnibus spending bill) and a somewhat larger deal post-election, but this sequencing could be flipped and total amounts meaningfully larger.

Brexit Talks Enter Another Pivotal Weekend

With negotiations coming down the wire ahead of the year-end deadline for the UK to depart the EU, European officials are calling for a deal by Sunday or face a no-deal Brexit. The pound retreated from its recent highs against the dollar and euro as signals over the prospect for a deal turned more mixed today, with comments from a Bank of England official suggesting the possibility of negative interest rates adding to the downside impetus. EU chief negotiator Barnier expressed continued hope for a deal in remarks earlier today but highlighted the remaining challenges, saying “the path… is very narrow.” Last evening, UK negotiators characterized negotiations as stalled over the thorny issue of fishing rights, as Prime Minister Johnson called the EU position on the issue “not reasonable.” Meanwhile, the European Parliament indicated that Sunday would be the final day for an agreement that could be ratified by the December 31^st deadline. This comes after a burst of optimism earlier in the week amid reports that the UK and EU had ironed out most of their differences on the so-called “level playing field” issue involving state subsidies. – MPP view: We are retaining our out-of-consensus call for a hard and/or disorderly Brexit at year-end, as fishing rights remain intractable and the timeline is rapidly dwindling. In such a case, both sides appear to be steering toward the halfway house of a “friendly no-deal,” whereby promises to continue negotiating soften the blow to the pound and financial markets, even if the real-world economic consequences look more like a hard Brexit. Optimism for a deal is riding high, but we do not expect the EU to give much ground from here.

Additional Themes

Tesla Joins the S&P 500 – Electric carmaker Tesla is set to join the S&P 500 on Monday, but the shares of Tesla stock that will be needed to rebalance the index were purchased today at the close of trading in unprecedented volumes. The S&P 500 indexers bought around $85 billion worth of Tesla stock, but other investment funds that track the S&P 500 also purchased the stock, resulting in over 200 million shares traded on the day, as opposed to its normal volume of 40 million. Conversely the same amount of other stocks in the index was sold. Tesla is now the seventh largest stock in the S&P 500, making up 1.52%, which means that for every $11.11 dollar move in the price of Tesla, the S&P 500 will move one point. Shares closed up 0.37% on the day but are also up 65% since it was announced they were joining the index.

Our Latest Podcast! – On this week’s Macrocast, which we produce with our friends at Hamilton Place Strategies, we discuss the last-minute stimulus drama, what to expect in the bill, and the impact this will have on the economy. We also discuss the news coming out of the Fed’s recent FOMC meeting and what this means for its changing monetary mandate heading into 2021, the (continuing) Brexit drama, and the important consumer metrics to look for next week. Please remember to subscribe, rate, and share. Macrocast: “Bad Economics Is Never Good Politics” – Hamilton Place Strategies

Looking Ahead – Next week could feature 11^th hour negotiations over both the US pandemic support bill and Brexit, in the event that resolutions to both remain elusive. The holiday-shortened economic data calendar features November personal income, spending, and inflation figures, as well as durable goods orders, and a final reading of third quarter US GDP. Following today’s publication, our next Looking Ahead will be published on January 8^th and Sunday’s Market Viewpoints will be the final one of 2020, with the next installment due on January 10^th.

Summary and Price Action Rundown

US equities retrenched slightly today after a month of powerful gains that were spurred by positive vaccine news and a relatively clear and orderly US election process, followed by pro-growth cabinet nominations by the incoming Biden administration. The S&P 500 backed off from Friday’s record high, declining 0.5% to shave year-to-date upside to 12.1%. The tech-heavy Nasdaq outperformed as economic fundamentals weighed on the Dow Industrials, which still registered its best monthly performance since 1987. For context, the Dow, which tends to be more sensitive to economic fundamentals, has underperformed significantly during the pandemic but was revitalized by the announcements of effective vaccines throughout November. The Euro Stoxx Index and Asian equities also retreated to close the month. A broad dollar index edged above its multi-year low today, while Treasuries have remained steady, with the 10-year yield hovering at 0.86%. Brent crude prices retreated below $48 per barrel as the ongoing OPEC meeting kept traders in suspense (more below).

 

US Economic Data Shows More Hints of Softening   

With US economic figures providing some garbled signals over the past few weeks, and analysts bracing for further deterioration amid the ongoing resurgence in Covid-19, today’s releases added to the evidence of a renewed slowdown. The MNI Chicago Business Barometer fell to 58.2 in November from 61.1 in October. New Orders dropped 5 points to the lowest level since August, while Production fell 1.2 points. Inventories slipped 2 points to a three-month low. However, Supplier Deliveries jumped 4.9 points to the highest level since May as firms saw delivery delays, while Prices at the Factory Gate surged 9.8 points to the highest level in two years. A special question asked: “Does the outcome of the general election have any effect on your forecast? “A majority 73.2% said that the election results do not influence their forecasts, while 12.5% saw their forecasts increase and 14.3% reported a decrease.” Similarly, the Dallas Fed manufacturing gauge undershot expectations, printing 12.0 versus a consensus estimate of 14.3 and the prior month’s 19.8.

Also, the Small Business Confidence index sank to its lowest level on record at a reading of 48, one-point below the previous low reported in the second quarter (Q2) during the worst of the pandemic-driven economic turmoil. Though responses in the current fourth quarter (Q4) survey, conducted in the period between November 10-17, were impacted by the virulent resurgence in Covid-19, the reinstatement of targeted lockdowns, and the Congressional deadlock in providing additional fiscal relief, survey-data suggests that President-Elect Biden’s victory further compounded the decline in relation to the Main Street outlook on taxes and regulation. Of the 2,200 small business owners polled, 53% expect tax policy to have a negative impact on their business during the next 12 months, and 49% said government regulation will have a negative impact over the same period. While the decrease in outlook is notable, responses from small business owners are heavily skewed by their political affiliations, and the index overall leans conservative. Separated by political connection, 75% of Republicans believe tax policy will have a negative effect and 72% said regulations will be negative, while only 15% and 11%, respectively, of Democrats believe tax and regulatory changes will hinder business operations. Overall, the survey indicates 34% of owners believe Joe Biden will be good for small business, while 55% say the opposite. Though by political affiliation, 89% of Republicans are pessimistic of the Biden administration on small business and 86% of Democrats are optimistic. The stark contrast in business sentiment following the election “reveals how deeply politics has become embedded in the public’s assessment of the economy, and in particular how divided the country is,” stated Laura Wronski, research science manager at SurveyMonkey. She continued to note over the past several quarters that Republican respondents consistently reported a higher degree of confidence than Democrats did, and post-election, that trend has flipped. At the moment however, the feasibility of the Biden team’s tax and regulatory proposals are unclear, and contingent upon Georgia’s runoff Senate races, as a Republican-controlled Senate would surely constrain Biden’s policy agenda.

Lastly, pending home sales in November fell 1.1% month-on-month, well below market expectations of a 1% gain, and following a 2% drop in October. However, this still leaves sales up 20.2% year-over-year following a 20.8% rise in September. Contract activity was mixed among the four major US regions, with the only positive month-over-month growth happening in the South, although each region saw year-over-year gains in pending home sales transactions. Lawrence Yun, NAR’s chief economist said, “The housing market is still hot, but we may be starting to see rising home prices hurting affordability. Both the inventory of homes for sale and mortgage rates are now at historic lows.”

Today’s mixed economic readings follow last week’s pre-holiday data dump that also showed signs of backsliding in weekly jobless claims and October Personal Income.

Vaccine Developments in Focus

With trials showing impressive effectiveness of the various vaccines, investors are now pondering the remaining unknowns of the rollout timeline and public uptake. Moderna’s stock rose 20.2% today on news of its plans to apply for emergency authorization use for its vaccine, a move that could drastically change the course of the pandemic. The results of Moderna’s Covid-19 vaccine trial were released today showing 94.1% efficacy, bolstering hopes of initial vaccine deployment before year’s end. Out of 30,000 participants, only 11 of the 15,000 that received the vaccine developed Covid-19, compared with 185 from the 15,000 who received the placebo. No severe cases emerged in the subset receiving the vaccine compared to 30 in the placebo subset, implying a near 100% efficacy at preventing severe cases. Moderna stated it will file with the FDA on today for emergency authorization of the vaccine following Pfizer’s application on November 20^th. The FDA will review both Pfizer and Moderna’s filings on December 10^th and 17^th respectively, after which, if the panel grants emergency authorization, the process will escalate to the advisory committee from the CDC for recommendations on the first recipients of the vaccine. Once those recommendations are made, vaccines are cleared for distribution and use. Moderna has stated it expects to have 20 million doses by the end of 2020 and as many as 1 billion doses globally in 2021. – MPP view: Investors are still caught in the transition phase between the grim near-term public health reality and its economic consequences, and giddy optimism over the longer term view of widespread distribution of the effective vaccine delivering us from the pandemic.

Additional Themes

Oil Slides with OPEC+ Lacking Consensus – The conclusory cartel meeting was rescheduled from tomorrow to December 3^rd as reports suggest continued disagreement over the potential extension of price-supporting output restrictions beyond their scheduled expiry in January. Oil prices reversed a portion of their recent upside today, but remain close to multi-month highs, as caution sets in over the possibility of a less ambitious extension or even a deadlock. For context, prices of international benchmark Brent crude and US benchmark WTI both reattained levels from early March last week amid a confluence of bullish factors, including the brightening demand outlook stemming from the encouraging Covid-19 vaccine developments, a weakening dollar, and indications that Saudi and Russia were set to push their fractious OPEC+ allies to hold to their supply curbs well into 2021, with a three-month extension the consensus expectation. Reports now suggest that the timeframe could be limited to two months or feature a gradual tapering of the curbs over three to four months. The UAE is said to be one of the key holdouts and had reportedly threatened to withdraw from OPEC earlier this month over dissatisfaction with other members’ uneven compliance with the cartel supply cuts. Nigeria and Iraq are the two OPEC members that have struggled to implement the curbs and have been pushed for compensatory cuts. – MPP view: Like stocks, oil prices are in a transition phase as traders try to look past the dire near-term outlook to the post-vaccine demand surge. This will make cartel discipline harder to maintain into 2021, but Russia/Saudi should succeed in securing one last supply curb extension at their meeting this week. As we have expected, anticipation of this last OPEC boost will provide some short-term support to prices, and post-election US stimulus dynamics (when they materialize) should provide some additional lift, but we expect the dismal demand dynamics of the coming quarters to keep prices capped, though this short-term rally has exceeded our expectations. This burst of optimism in oil markets has increased the risk that OPEC fails to deliver meaningful additional support to the market in this week’s pivotal meeting, as member discipline will be questionable.

Reserve Bank of Australia Meeting – This evening the Reserve Bank of Australia (RBA) will hold an interest rate meeting. At the November meeting the RBA lowered its cash rate to an all-time low of 0.1% from 0.25%. Policymakers said they would buy A$100 billion of government bonds with maturities of around five to 10 years over the next six months. The RBA also cut its target for three-year bond yields to 0.1%, from 0.25%, to align with the cash rate, which, it pledged will remain unchanged until inflation is sustainably within its 2-3% target band. GDP growth is expected to be around 6% over the year to June 2021 and 4% in 2022 while the unemployment rate is expected to remain high, but to peak at a little below 8%, rather than the 10% expected previously. This meeting is not expected to see any significant change in policy or statement as the November saw significant loosening in policy. – MPP view: We shall see if the RBA mentions its currency during the meeting, which is at its highest level against its US counterpart since 2018, but even if so, there should be scant impact. We expect the Biden administration, when it takes over, to quietly make the case to US allies that now is a particularly inauspicious time for currency controversies as the US attempts to course-correct on pandemic containment and patch up its raw internal political and socioeconomic divisions.

Summary and Price Action Rundown

US equities climbed higher again today as more positive vaccine news kept investors focused on the encouraging medium-term outlook despite grim near-term pandemic developments. The S&P 500 posted a fresh record high today, gaining 1.2% today with growth-sensitive stocks remaining in the lead, to hoist its year-to-date upside to 12.3%. The Euro Stoxx Index and Asian stocks also registered robust gains. A broad dollar index slid back toward recent lows while Treasuries were little changed, with the 10-year yield hovering below multi-month highs of 0.89%. Brent crude slid back below $43 per barrel.

 

Vaccine Hopes Continue to Drive Markets Despite Dire Coronavirus Developments 

Pandemic outperformers lagged traditional economy stocks again today even as daily infections remained grimly elevated and containment measures in various areas were tightened further. US stock indices soared to record heights today after Moderna announced that its experimental coronavirus vaccine is 94.5% effective at preventing infection, according to recent results from its large-scale Phase 3 trial. Moderna is the second company to announce preliminary data on an apparently successful product, following Pfizer and BioNTech’s announcement last Monday that its experimental dose is 90% effective. Moderna’s trial, including more than 30,000 volunteers, appeared to prevent virtually all symptomatic cases of the virus. The vaccine’s effectiveness was tested by inoculating one study group and giving another placebos. Of the 95 participants who contracted coronavirus, only five received the vaccination beforehand. Statistically, the virus showed no difference in effectiveness in key subgroups, though the test results will still undergo independent analysis before the product is considered for release to the general public. Earlier this morning, Dr. Fauci, director of the National Institute of Allergy and Infectious Disease, stated “these are very impressive and very encouraging and exciting results,” though reasserted the need to continue wearing masks, social distancing, and maintaining Covid-cautiousness.

The virus has now affected more than 11 million Americans directly, with the latest million cases occurring in the last six days alone. Moncef Slaoui, chief scientist for Operation Warp Speed, suggested that should any early vaccine candidates receive permission for emergency use, doses could be distributed as early as this December. However, health officials specified that front-line health workers and those most at risk would receive the initial vaccine, while the general public would likely see expanded access by April 2021. After the announcement, “stay-at-home stocks” slipped, with shares of Zoom, Netflix, Logitech, and Teladoc down 1.1%, 0.8%, 0.3%, and 3.4%, respectively, with these price responses considerably milder than after Pfizer’s announcement last Monday. In contrast, those stocks that have struggled during the pandemic rose, with AMC, Norwegian Cruise Lines, and Royal Caribbean climbing 4.7%, 6.3%, and 6.9%, respectively, and all major airline carriers posted robust gains as well. – MPP view: With these exciting developments bolstering investors’ conviction that a vaccine will be effective and widely available at this time next year but near-term pandemic developments suggesting a virulent short-term economic impact, markets will be in transition mode for the coming quarters as investors attempt to navigate these complex public health and economic cross-currents. It had seemed premature to get really excited about cyclicals and the post-Covid growth story, but today’s estimates of widespread availability were earlier than Pfizer’s projections last week. Meanwhile, we continue to expect the ardor to cool for pandemic winner stocks, but for the moment, the positive tide seems to be lifting almost all boats. Re-upped QE by the Fed early next year, which we expect, will lend support to liquidity/momentum-driven upside in the short run.

Wall Street Ponders Candidates for SEC Head

Investors are speculating over future potential regulations under a Biden administration as Securities Exchange Commission (SEC) Chief Jay Clayton announced he will retire from his post before the end of 2020. An appointee of the Trump administration, Clayton pursued changes to regulations considered by some as burdensome and hindering corporate growth, often in the face Democratic opposition. Clayton’s SEC clipped off rules under the Dodd-Frank law meant to tighten control over Wall Street banks and eased rules for small cap companies to raise capital on the market. The SEC cited rules Clayton ushered in to simplify how information is presented to individual investors and his initiatives towards strengthening the agency’s inspection and enforcement programs.

Several names are currently being discussed as to who Biden will appoint as Clayton’s replacement. The two most concerning to banks and investment firms are Gary Gensler, the head of Biden’s transition team examining federal regulators, and former Manhattan federal prosecutor Preet Bharara. Gensler, former head of the Commodity Futures Trading Commission, has a history of clashing with Wall Street over issues including the manipulation of LIBOR, leaving investors concerned over the regulatory environment under his potential leadership. However, his consideration for other prominent cabinet posts keeps his appointment as SEC chairman far from certain. Bharara is also considered by investors as a worrisome option due to his contributions in the shutdown of SAC Capital Advisors in the wake of the 2008 crisis, though he is also being considered for top positions at the Justice Department. Other names progressives have pushed for include former SEC Commissioner Kara Stein, current SEC Commissioner Allison Lee, and Dodd-Frank contributor Michael Barr. Moderates have advocated for Robert Jackson Jr. who opposed many of the Trump-era rule cuts at the SEC and pushed, along with Preet Bharara, for clearer insider-trading rules to better protect investors.

Additional Themes

Regional Bank Mega-Deal – Regional banking giant PNC announced that it is purchasing Spanish financial group BBVA’s US business for $11.6 billion. The US division has $104 billion in assets under management, with banking subsidiary BBVA USA operating 637 branches in Texas, Alabama, Arizona, California, Florida, Colorado, and New Mexico. The combined bank will have a coast-to-coast presence in 29 of the 30 largest markets in the US. PNC’s all-cash deal is the second-largest US banking acquisition since the 2008 financial crisis, behind only the combination of SunTrust and BBT in December of 2019. The purchase price represents almost 50% of BBVA’s current market cap and is expected to close in mid-2021 and will create the fifth-largest US retail bank with more than $550 billion in assets. The deal is attractive to PNC because it accelerates PNC’s presence in the Southeast and West. Shares of PNC gained 2.2% while US-listed shares of BBVA vaulted 11.4% higher.

Empire State Manufacturing Slackens – The New York Fed’s regional factory gauge for November showed a slower-than-anticipated pace, printing 6.3 versus a consensus forecast of 13.5 and the previous month’s reading of 10.5. This is the slowest rate of expansion since August as the Empire State survey continues to lag other Fed regions in the manufacturing recovery. Although official data remains relatively resilient, tomorrow’s retail sales and industrial production data for October will be scrutinized for signs of backsliding. High-frequency indicators such as restaurant and travel bookings are showing incipient signs of rolling over in recent weeks, corresponding with the nationwide surge in coronavirus cases. – MPP view: Vaccine news this good has also inoculated markets against growth concerns, even if tomorrow’s retail sales data undershoots.