Category: Morning Markets Brief

Summary and Price Action Rundown

Global risk assets are rebounding this morning after yesterday’s swoon as investors struggle for clarity on the US political and policy outlook amid mixed messages from President Trump over the pandemic relief negotiations. S&P 500 futures point to a 0.7% higher open after the index lost 1.4% yesterday on the President’s apparent pullout from stimulus talks. The late afternoon decline erased solid intraday upside and cut the S&P 500’s year-to-date gain to 4.0%, which is more than 6% below early September’s record high. Equities in the EU and Asia were gently mixed overnight. Amid garbled messaging on the fiscal stimulus front, the dollar is steady while longer-dated Treasury yields are turning higher, with the 10-year yield at 0.78%. Brent crude prices remain choppy, falling back below $42 per barrel ahead of US stockpile data.

President Trump Sends Conflicting Signals on Stimulus

Yesterday, in his first full day back at the White House following his recent hospital stay for Covid-19 treatment, President Trump halted negotiations with House Democrats over the pandemic relief bill and then took to Twitter to push piecemeal stimulus measures. After apparently pulling out from negotiations yesterday afternoon, President Trump sent a barrage of tweets calling for House Democrats to offer support for airlines, renewed funding for the Paycheck Protection Program (PPP), and $1,200 stimulus checks for individuals. Analysts are awaiting a response from Speaker Pelosi, but House Democrats have refused similar White House offers of segmenting relief measures over a series of bills. For context, President Trump yesterday announced over Twitter his rejection of the recently passed $2.2 trillion stimulus package from the House and halted further negotiations until after the November election. He concluded his tweet with upbeat messaging on the economy and a call for the Senate to prioritize confirmation of Amy Coney Barrett to the Supreme Court. Both the S&P 500 and the Nasdaq dropped 2% from their intraday highs after the announcement as investors’ recently rising hopes for further near-term economic support from the government were extinguished. President Trump’s decision seemed to contrast with his tweet from Walter Reed hospital on Saturday in which he stated that the economy “wants & needs stimulus” and pushed for both sides to “work together” toward swift agreement on a package. The newfound push over the weekend from both sides on the stimulus followed the grim announcements from both American Airlines and United Airlines of nearly 32,000 upcoming furloughs between the two companies absent direct government stimulus. Speaker Pelosi has issued statements to both airlines assuring that relief will come either in the standalone form of Rep. DeFazio’s (D-OR)  bill, which extends Paycheck Protection Program (PPP) to the airlines for six months, or as part of the comprehensive package still to be agreed upon.

Fed Minutes to Provide Additional Insight as Monetary Stimulus Bets Rise

The spotlight now shifts back to the Fed, as recent communications indicate that their already downbeat economic projections had assumed additional fiscal support. The minutes from the September FOMC meeting, which are being released today, are expected to feature some incremental details regarding the Fed’s revised interest rate projections with its new and more ambitious inflation targeting and full employment mandates. However, attention is already shifting to the potential for additional stimulus, likely in the form of augmented asset purchases, after the apparent breakdown in negotiations between the White House and House Democrats over the pandemic relief bill. In a speech yesterday, Fed Chair Powell redoubled his calls for more fiscal stimulus to shore up the recovery, stating that fiscal and monetary policy responses have so far underpinned a “strong but incomplete recovery in demand,” and emphasized that the Fed’s current economic outlook assumes additional government support measures. His strong and continued advocacy of more fiscal spending has been echoed almost unanimously by the other members of the FOMC.

Additional Themes

US Political Uncertainty in Focus Ahead of Veep Debate – With the polls showing Joe Biden extending his lead over President Trump, the stakes for tonight’s Vice Presidential debate are high for both sides. Lingering health concerns and the Covid-19 containment measures on display in the debate will amplify the tension in the venue, particularly given the news in recent days that more White House staff are testing positive for the virus.

House Democrats Push Big Tech Antitrust – The House Antitrust Subcommittee issued a report yesterday recommending a sweeping new approach to regulating the US IT giants that it describes as “the kinds of monopolies we last saw in the era of oil barons and railroad tycoons” with “too much power.” Recommendations included limits on the areas of business in which each company can operate, which could require a breakup of the giants. Amazon, Apple, Facebook, and Google shares underperformed yesterday, though not dramatically, and are broadly positive again this morning, suggesting that investors remain broadly unconcerned over these ongoing inquiries into anticompetitive practices by these firms.

Summary and Price Action Rundown

Global risk assets are mixed this morning after yesterday’s rally as investors struggle to gain greater clarity on the US political and policy outlook. S&P 500 futures indicate a 0.2% lower open after the index soared 1.8% yesterday, lifting its year-to-date gain to 5.5%, which is less than 5% below early September’s record high. Equities in the EU and Asia were gently mixed overnight. After yesterday’s burst of optimism on the fiscal stimulus front sharply weakened the dollar and hoisted longer-dated Treasury yields, both are settling down this morning, with the 10-year yield at 0.77%. Brent crude prices are continuing to recover a portion of last week’s steep downtrend, bouncing back toward $42 per barrel.

Tentative Easing of US Political Uncertainty

President Trump’s return to the White House from Walter Reed hospital last night has somewhat moderated US political uncertainty, as an increasing number of analysts suggest that recent development may be adding a degree of clarity to the political and policy outlook. As concerns over a worst-case health outcome for the president have eased, the focus has shifted to the ramification for the election. For context, the locus of US political risk centers on the prospect of a tight presidential race leading to a lengthy, litigated, and disorderly dispute over the outcome. Now, with investors generally assuming that the West Wing Covid cluster will prove to be a meaningful setback to President Trump’s reelection odds, and a WSJ/NBC poll released over the weekend showing Joe Biden extending his lead following Tuesday’s debate, there has been an incremental shift toward expectations of a clear-cut Biden victory and perhaps even a Democrat sweep. Though some analysts are focused on the potential for higher taxes under a Biden administration and Democrat-led Congress, the prospect for significantly augmented fiscal spending in such a scenario is seen as a stimulative counterbalance. A closely-followed prediction market has reflected rising odds of a Biden win over the past week and is now near its highest level for this election cycle after registering a peak 66% likelihood late last week. Biden thus far has tested negative for Covid-19. The next major campaign event is tomorrow’s Vice Presidential debate, which is scheduled to take place despite safety concerns.

Fed Communications in Focus

Chair Powell is set to speak this morning ahead of tomorrow’s release of the minutes from the consequential September FOMC meeting. Fed Chair Powell will deliver remarks this morning, kicking off the second day of the National Association for Business Economics’ (NABE) 62nd annual conference. He is expected to continue to make the case for more fiscal stimulus amid a cloudy outlook for the economy and may discuss various aspects of the Fed’s shift to average inflation targeting of 2% and the corresponding interest rate projections that were revealed at last month’s FOMC meeting. The minutes of those proceedings will be released tomorrow and they will be closely parsed for any additional insights on the thinking behind the new policy formulation. For context, analysts have been focused on the areas of ambiguity such as the approximate length of time over which the Fed would be averaging the inflation figures, what degree of price pressure over 2% they would be willing to accept, and how the Fed would react to backsliding away from its targets with interest rates already pinned at the zero lower bound. In his speech yesterday at the NABE Conference, Chicago Fed President Evans took an aggressive stance, stressing that overshooting the 2% inflation target is critical and that “the FOMC needs to have an ‘in it to win it’ attitude toward our inflation objective.”

Additional Themes

Pelosi and Mnuchin Set to Meet on Stimulus – With persistent gaps remaining between the House Democrats’ $2.2 trillion version of the next round of pandemic relief spending, which they passed last Thursday, and the roughly $1.5 trillion package supported by the White House, face-to-face talks between House Speaker Pelosi and Treasury Secretary Mnuchin are set to take place today. This morning, Speaker Pelosi reportedly characterized the negotiations as going “very slowly.” From the hospital over the weekend, President Trump redoubled his support for a pandemic relief bill via Twitter, calling for both side to “get it done” but did not offer any compromise to break the deadlock. Even if the two sides were to agree, the Senate might pose a final obstacle to bill, given that Majority Leader McConnell has warned that he will only bring a vote to the floor if a majority of his Republican caucus supports it.

ECB President Lagarde Talks Stimulus – In an interview with the Wall Street Journal, European Central Bank (ECB) President Lagarde reiterated her warnings about the durability of the EU economic recovery amid pockets of Covid-19 resurgence. She emphasized that the ECB stood ready to “use all the tools,” including interest rates and asset purchases, to counter the risk of a double-dip recession. Recently, ECB officials, including President Lagarde, have focused on the strength of the euro as a headwind in their reflationary efforts. The euro is flat this morning following Lagarde’s remarks but remains near more than two-year highs versus the dollar.

Summary and Price Action Rundown

Global risk assets are rising this morning as investors ponder the ramifications of President Trump’s Covid-19 infection for the US political and policy outlook. S&P 500 futures point to a 0.6% higher open after the index sold off sharply on Friday but bounced from the lows of the morning to close at  -1.0%, paring its year-to-date gain to 3.6%, which is 6.4% below early September’s record high. Equities in the EU and Asia were also generally higher overnight. Ebbing demand for safe haven assets is seen in a weaker dollar and slightly higher longer-dated Treasury yields this morning, with the 10-year yield at 0.71%. Brent crude prices are recovering a portion of last week’s steep downtrend, bouncing back above $40 per barrel.

Political Uncertainty Eases on President Trump’s Covid-19 Prognosis

Indications over the weekend that President Trump is on the path to recovery from his coronavirus infection are slightly moderating investor anxieties over the political and policy outlook. Despite garbled messaging over the timeline of President Trump’s diagnosis alongside varied indications of his condition and a lack of full transparency, investors are broadly assuming that the risk of a worst-case outcome have diminished. A statement over the weekend by his doctors that President Trump may be released from the hospital as early as today have also eased some concerns, though commentators suggest that this may be an aspirational possibility rather than a realistic one. President Trump has continued to tweet and is not stepping away from his campaign, though it is unclear when he might be able to return to full activities such as rallies and fundraisers. Analysts are pondering the ramifications of this episode for the election, as a WSJ/NBC poll released over the weekend showing Joe Biden extending his lead following Tuesday’s debate was taken before President Trump’s diagnosis. A closely-followed prediction market has reflected rising odds of a Biden win over the past week and is now near its highest level for this election cycle after registering a peak 66% likelihood late last week. Biden thus far has tested negative for Covid-19. A Vice Presidential debate is currently scheduled for Wednesday.

Narrow Hopes Remain for Fiscal Stimulus

The Senate is out of session now until October 19^th and gaps remain between the terms offered by House Democrats and the White House, but glimmers of hope persist as both sides highlight the need for a deal. From the hospital over the weekend, President Trump redoubled his support for a pandemic relief bill via Twitter, calling for both side to “get it done.” However, gaps remain between the House Democrats and the White House, particularly in the area of aid to states. However, the tone may have improved as House Speaker Pelosi noted that the illness of the President and other GOP figures “changes the dynamic” and stated that negotiators “have to find a path.” She also called on US airlines to hold off on planned layoffs and furloughs, indicating that a forthcoming deal would provide payroll support. NEC Director Kudlow also sounded relatively optimistic notes in his commentary on Friday. For context, the House passed the Democrat-drafted $2.2 trillion version of the bill last Thursday night and went on recess, but would be recalled in the event of an agreement. Even if House Democrats and the White House agree, passing the Senate may be difficult, with the Republican-led caucus primarily focused on confirming Judge Amy Coney Barrett to the Supreme Court once it reconvenes mid-month.

Additional Themes

Euro Holds Up Despite Mixed Data – The euro is continuing its rebound against the dollar this morning, re-approaching the more than two-year highs of August, after a reading of regional retail sales for August handily topped estimates. The 4.4% month-on-month acceleration bettered expectations of 2.5% and July’s -1.8% pace, yielding a 3.7% year-on-year expansion versus a forecast of 2.2%. However, more contemporaneous data in the EU has been less encouraging, and the recent signs of a second wave of Covid-19 in various continental hotspots may already be weighing on economic activity in the bloc. September service sector purchasing managers’ indexes (PMIs) for Spain and France, where outbreaks are recurring, have moved back into sharply contractionary territory.

Brexit Negotiations Intensify – Ahead of UK Prime Minister Johnson’s self-imposed October 15^th deadline to forge a trade deal with the EU ahead of its exit from the block at year-end, the wrangling is continuing over key sticking points. Chief negotiators for the EU and UK both characterized the challenges remaining in their statements late last week, with the EU’s Barnier noting “persistent serious divergences” and the UK’s Lord Frost cautioning that the fishing rights dispute may be “impossible to bridge.” PM Johnson spoke over the weekend with European Commission President von der Leyen and negotiations will be ongoing until the EU summit at the end of next week.

Summary and Price Action Rundown

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

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

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

US Nonfarm Payrolls Due

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

Additional Themes

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

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

Summary and Price Action Rundown

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

Hopes for a US Pandemic Relief Bill Reverberate in Markets

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

US Labor Market Data in Focus

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

Additional Themes

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

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

Summary and Price Action Rundown

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

Testy and Chaotic Debate Underscores US Political Risks

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

US Fiscal Stimulus Talks Down to the Wire

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

 

Additional Themes

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

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

Summary and Price Action Rundown

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

Intrigue Continues Over US Fiscal Stimulus Deal

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

US Political Uncertainty Remains in Focus

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

Additional Themes

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

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

Summary and Price Action Rundown

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

Hopes Rise for US Fiscal Stimulus Deal

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

Unwelcome Coronavirus Trends

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

Additional Themes

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

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

Summary and Price Action Rundown

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

Faint Glimmers of Fiscal Stimulus Hopes Amid the Murky Growth Outlook

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

Investors Ponder Fed Policy Communications

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

Additional Themes

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

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

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

Summary and Price Action Rundown

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

US Policy Uncertainty Deepens Amid a Barrage of Communications

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

US Labor Market Data in Focus Amid Recovery Concerns

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

Additional Themes

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

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