Category: Morning Markets Brief

Summary and Price Action Rundown

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

Global Economic Data Reflects a Degree of Backsliding

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

More Congressional Testimony for Fed Chair Powell

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

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

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

Summary and Price Action Rundown

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

Coronavirus Resurgence Risk in Focus

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

Powell and Mnuchin Set to Testify

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

Additional Themes

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

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

Summary and Price Action Rundown

Global risk assets are continuing their recent downtrend this morning, as investors cite concerns over a Covid-19 resurgence and deepening US political frictions among the headwinds on sentiment. S&P 500 futures point to a 1.6% lower open after the index slid 1.1% on Friday, paring its year-to-date gain to 2.8%, which is over 7% below early September’s record high. The tech-heavy Nasdaq is set to decline over 1% for a fourth consecutive session today, which would cut its robust year-to-date gains to below 20%. Equities in the EU are underperforming amid uncertainty over central bank policy (more below) and Asian stocks declined as well overnight. A broad dollar index is finding support from safe haven demand near its recent 28-month low, while longer-dated Treasury yields are moving lower, with the 10-year yield at 0.66%. Brent crude prices are sinking back below $43 per barrel.

Equity Selloff Deepens

The return of elevated stock market volatility after a placid summer of seemingly inexorable upside is being attributed to an array of catalysts rather than a single trigger. US stocks are set to extend their recent downside, which is taking them roughly 10% below the recent peaks, a magnitude of decline that fits the classic definition of a correction. High-flying tech stocks, which had been among the winners of the pandemic, are leading the declines but nevertheless generally retain significant year-to-date gains. Analysts have generally characterized this correction as healthy and overdue following the gaudy gains over the past few months, though more fundamental downside catalysts are also in play. First, the upside of the “stay-at-home” stocks is challenged by the potential for a vaccine announcement over the coming months, which might serve to undermine their advantage. But the rotational dynamic by which investors might reallocate their investments from the over-extended tech and other pandemic winners into more traditional economy sectors, like banks and industrials, is being impeded by concerns about the growth outlook. With the risk of a Covid-19 resurgence in the fall coming into focus, highlighted by the accelerating second wave outbreaks in the EU and UK, doubts about the sustainability of the uneven economic recovery are deepening. Recent US economic data has been muddled, with weekly jobless remaining elevated and retail sales showing signs of backsliding, and the next round of US fiscal stimulus remains deadlocked on Capitol Hill. With the death of Supreme Court Justice Ginsburg deepening the partisan rancor and further raising the stakes in an already fraught political environment, prospects for a deal on the pandemic relief bill have fallen and the odds of a disorderly and drawn-out election outcome have risen.

Central Banks in the Spotlight

The People’s Bank of China held its key policy rate steady, while the European Central Bank announces a review of its pandemic asset purchase program. As expected, the People’s Bank of China (PBoC) held its benchmark interest rates steady for the fifth straight month, amid signs that the economy is recovering from the pandemic shutdown. Specifically, the one-year loan prime rate (LPR) was left unchanged at 3.85% while the five-year remained at 4.65%. For context, the PBoC has maintained a relatively conservative monetary policy approach throughout the Covid-19 crisis and encouraging economic data, including an acceleration in previously lagging retail sales in August, suggests that it will remain in wait-and-see mode. The currency has responded to the widening divergence between steady monetary conditions in China and increasingly accommodative Fed policy. The renminbi has gained 5.7% versus the dollar since late May and is at its strongest level in roughly two and a half years. Meanwhile, the European Central Bank (ECB) has announced that it will be reviewing its Pandemic Emergency Purchase Program (PEPP). This follows some mixed messages from ECB officials regarding the €1.35 trillion program amid internal debate over the degree to which the program should be skewed in favor of countries like Italy with weaker sovereign creditworthiness and more significant impact from the pandemic, and whether the full €1.35 trillion should be deployed. EU stocks are selling off sharply while peripheral EU bonds are underperforming only slightly, while the euro is retreating 0.5% versus the dollar.

Additional Themes

Trump OK’s TikTok Deal – Over the weekend, President Trump announced that he had approved the Oracle deal with TikTok in concept and asserted that Oracle and Walmart, its junior partner in the deal, would be in total control of the new entity despite ownership stakes of 12.5% and 7.5%, respectively. ByteDance, the Chinese owner of TikTok, disputed President Trump’s characterization of corporate control, emphasizing its full control of the algorithms and continued majority stake, while describing the $5 billion payment as an advance tax payment rather than a deal fee to the US government. The Commerce Department deferred its threatened ban on the app. Meanwhile, the ban on Chinese social media app WeChat was put on hold by a federal judge over the weekend.

Trade Data Perks Up – South Korean export data for the first 20 days of September is showing a continued rebound, expanding 3.6% year-on-year (y/y) versus -7.0% for August. Meanwhile, Taiwan export orders outpaced expectations at 13.6% y/y, topping July’s 12.4% reading. Investors await this week’s releases of preliminary global purchasing managers’ indexes (PMIs) for September for further insights on the state of the global economic recovery.

Summary and Price Action Rundown

Global risk assets are attempting to stage a rebound after two days of generally downside price action which followed a dovish Fed meeting and mixed US economic data. S&P 500 futures indicate a 0.1% higher open after the index lost 0.8% yesterday, paring its year-to-date gain to 3.9%, which is 6.3% below early September’s record high. The tech-heavy Nasdaq declined over 1% for a second consecutive session yesterday, shaving its robust year-to-date gains to 21.6%. Equities in the EU and Asia were mostly higher overnight. A broad dollar index is finding support near its recent 28-month low, while longer-dated Treasury yields are slipping lower, with the 10-year yield at 0.67%. Brent crude prices are hovering above $43 per barrel.

Capitol Hill Moves Forward on Spending Deal but Stimulus Package Remains in Limbo

Reports indicate that a bipartisan agreement on a government funding plan to avert a shutdown at month-end is nearly complete, though the parties remain at loggerheads over the pandemic relief bill despite this week’s renewed efforts at a compromise. Headlines overnight indicate that Congressional lawmakers are in the process of finalizing a deal, likely to be announced sometime later today, that will extend authorization to fund the government into mid-December. The news has suggested that Democrats had pushed for a longer Continuing Resolution (CR), into next year, but under the circumstances, ahead of an election and during a pandemic, there has been little apparent appetite on either side for brinksmanship over this issue. Two weeks ago, House Speaker Pelosi and Treasury Secretary Mnuchin jointly pledged their intention to seek a clean CR and not muddy the negotiations by attempting to append pandemic relief measures onto the bill. This leaves the pandemic relief negotiations still in limbo, though this week featured some progress in the form of a $1.5 trillion compromise proposal from the Problem Solvers Caucus, a bipartisan group in the House, which has drawn support from President Trump and other senior White House officials, though Congressional Democrats and Republicans have expressed wariness and dissatisfaction with the split-the-difference approach of the centrists.

 

Focus on Fed Policy Shifts to Bank Oversight

After Wednesday’s historically dovish FOMC decision drew a mixed reaction from analysts and a muted response in financial markets, market participants are now pondering the Fed’s next move on bank dividends and share buybacks. In late June, the Fed released its Stress Test results for the “Too Big to Fail” banks in the US, which issued all passing grades but called on banks to halt share buybacks and put dividends under review on a bank-by-bank basis, based on strength of capital in a severely adverse economic situation caused by the coronavirus. In that case, Well Fargo was a standout underperformer. Now, the Fed is embarking on another stress test exercise, having released its two highly adverse scenarios yesterday against which banks will evaluate the resiliency of their balance sheets. Specifically, one of the hypotheticals features a global financial market shock and the other posits a less acute but longer lasting economic dislocation. Results will be published by the end of the year. The Fed is also pondering extension of the restrictions it announced in June on bank stock buybacks and dividend payouts, which have drawn significant interest from lawmakers and are set to lapse at month-end. Financials have been among the worst performing US equity sectors this year, with an ETF of major bank stocks languishing at -32.4% year-to-date performance versus a gain of 3.9% for the broader S&P 500 and 64.9% upside for a basket of leading tech stocks. However, dismal stock performance has not been linked to credit stress, with market-based gauges of financial sector creditworthiness at placid and favorable levels.

Additional Themes

Trump to Decide on TikTok – Amid indications that Beijing will accept the current formulation of the deal between Chinese parent ByteDance and US tech giant Oracle, which would result in the creation of a new US entity, President Trump has indicated that he will issue his decision within the coming day. He expressed some reservations about Oracle’s status as a minority shareholder in the new US entity.

Looking Ahead – Next week’s calendar of events is sparser than the past couple of weeks, which were packed with meetings of major central banks and OPEC, alongside much consequential data. The focus will be on preliminary global purchasing managers’ indexes (PMIs) for the US, EU, Japan, and UK for September, some of the first mainstream data readings to give insights on the pace of activity in the current month. Notable US economic releases also include durable goods orders and new and existing home sales for August, along with another weekly jobless claims tally. From overseas, China’s central bank decision and EU consumer and business climate survey data will be in focus.

Summary and Price Action Rundown

Global risk assets mostly retreated overnight as yesterday’s Federal Reserve decision spurred mixed market reactions, while investors await key US jobs data. S&P 500 futures point to a 1.2% lower open after the index lost 0.5% yesterday, retracing the prior session’s upside and paring its year-to-date gain to 4.8%, which is around 5.5% below early September’s record high. The tech-heavy Nasdaq returned to underperformance yesterday, sinking 1.2% and paring its year-to-date gains to 23.2%. Equities in the EU and Asia also posted losses overnight. Despite yesterday’s resolutely dovish messaging from the Fed, a broad dollar index is finding support near its recent 28-month low, while longer-dated Treasury yields are slipping lower, with the 10-year yield at 0.67%. Brent crude prices are back above $42 as OPEC+ meets today.

Federal Reserve Decision Continues to Reverberate in Markets

Investors are still digesting yesterday’s Fed decision, which featured increasingly accommodative guidance on rates, though the FOMC declined to enact the most dovish potential formulations that some had predicted. Analysts are pondering the nuanced and muted reaction in financial markets to what was a historically dovish Federal Reserve meeting. In yesterday’s decision, the FOMC unsurprisingly left interest rates unchanged at 0-0.25% and projected that it would maintain this ultra-low rate range through at least 2023 in order to facilitate the US economy recovery from the fallout of the coronavirus pandemic. Specifically, the accompanying statement indicated that this accommodative rate would likely be maintained “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.” Analysts are noting that the US economy has very seldom achieved this highly favorable economic scenario during the modern era. Dallas Fed President Kaplan dissented in favor of a more flexible formulation, allowing for more proactive monetary tightening, while Minneapolis Fed President Kashkari expressed his preference to steer policy toward 2% inflation “on a sustained basis.” The statement also reiterated a commitment to continue buying Treasuries and mortgage backed securities at least at the current pace of $80 billion and $40 billion, respectively, over “coming months.” In his press conference, Chair Powell declined to invoke the strictest form of “enhanced guidance,” which would formally tie policy decisions to inflation and unemployment targets. He did mention that the Main Street Lending Program, which has now deployed a paltry $2 billion of its $600 billion total firepower, is being tweaked in an effort to improve uptake.

Jobless Claims in Focus Amid Questions Over the Recovery Trajectory

After yesterday’s US retail sales figures for August undershot expectations, analysts will parse today’s release of last week’s initial jobless claims for any further indications of economic backsliding. Initial jobless claims for the week of September 12^th are expected to improve to 850K after the prior week’s tally remained unchanged from the previous reading at 884K, missing market expectations of 850K. Continuing claims are expected to improve slightly after the reading for the week of August 29^th rose nearly 100K to 13.38 million, topping expectations of 12.904 million. Alongside the disappointing initial claims last week, claims for Pandemic Unemployment Assistance (PUA) rose by 91K, marking the fourth straight increase. Combining the standard claims with PUA continuing claims means that 27.8 million people are receiving unemployment insurance payments, up from 25.7 million in early August. Analysts will be highly attuned for any downside surprise after retail sales showed a loss of momentum in August, rising 0.6% after the downward revision of July’s number to 0.9% and missing the consensus forecast of a 1.0% increase. The deceleration of retail sales over recent months has been blamed on the expiration of federal unemployment benefits, the drying up of support for small businesses, and the persistence of the pandemic. Meanwhile, flickers of hope on the US fiscal front continued brightening yesterday following of weeks of stalemated negotiations as the White House expressed support for the compromise $1.52 trillion proposal put forth by the House “Problem Solvers Caucus,” a group of 50 centrist Representatives.

Additional Themes

Bank of Japan (BoJ) Holds Steady – As widely expected, the BoJ left its policy settings fixed at its meeting overnight, though its economic projections were upgraded modestly. Amid the abrupt change in government leadership, with longtime Prime Minister Abe stepping down for health reasons, Governor Kuroda’s press conference emphasized policy continuity.

Oil Steady as OPEC+ Meets – After some whipsaw price action over the past week, oil prices are stable this morning in the middle of their recent ranges as OPEC and its allies (OPEC+) meet today to review their ongoing production cuts. Although the output curbs have been tapered since their tightest levels over the summer, Saudi and Russia have been pushing laggard cartel members for compensatory cuts over the fall.

Summary and Price Action Rundown

Global risk assets are mostly higher this morning ahead of a pivotal Federal Reserve decision and key US economic data. S&P 500 futures indicate a 0.6% higher open after the index gained 0.5% yesterday as it continues to retrace last week’s downside, upping its year-to-date gain to 5.3%, which is around 5% below early September’s record high. The tech-heavy Nasdaq jumped 1.2% yesterday, taking its robust year-to-date gains to 24.7%, and is pointing higher this morning as well. Equities in the EU are flat while Asian stocks were mixed overnight. Ahead of the Fed, a broad dollar index is revisiting its recent 28-month low, while longer-dated Treasury yields are edging lower, with the 10-year yield at 0.67%. Brent crude prices are back above $41 per barrel as US oil inventories are expected to show a sharp draw this week.

Federal Reserve Guidance in the Spotlight

Uncertainty lingers over the prospects for the Fed to unveil enhanced guidance today in support of its recently reformulated employment and inflation mandates. Since Fed Chair Powell announced the Fed’s new framework for average inflation targeting and emphasis on full employment, specifically among lower income workers, at the virtual Jackson Hole conference last month, analysts have been pondering whether enhanced guidance will be rolled out at this month’s FOMC meeting in an effort to better achieve those goals. Messaging from Fed officials over enhanced guidance has been mixed in recent weeks, with some FOMC members suggesting that current guidance is sufficiently credible, being anchored in the increasingly dovish “dot plot,” strong statements from Chair Powell characterizing rate hikes as a distant prospect, and almost no apparent dissent within the ranks of the board. Futures markets imply no expectation of rate hikes until 2023 and a recent CNBC investor survey reflected expectations that the policy rate would stay at the zero lower bound until February 2023. The prospect of an incrementally dovish Fed tends to feed upside in tech stocks, which have been rebounding smartly this week after a rare bout of underperformance in early September. Meanwhile, the dollar and longer-dated Treasury yields have remained indecisive in recent weeks, as uncertainty over the overall economic picture as well as the Fed’s degree of commitment to rekindling inflation have impeded clear directionality.

 

US Retail Sales Expected to Slow

Recent US economic data has been noisy and uneven, and investors are looking to August retail figures to gauge the impact of expiring enhanced jobless benefits on consumers. On a month-on-month (m/m) basis, August retail sales are expected to decelerate to 1.0% from 1.2% in June. Analysts cite competing dynamics of back-to-school demand and the sunset of enhanced $600 per week unemployment benefits from the CARES Act as factors that could swing the number to the upside or downside of estimates. This follows a set of muddled US industrial production and manufacturing data series, as well as recent labor market data that has hinted at a degree of backsliding. Economists and Fed officials have been broadly encouraged by the recovery so far but have cited an apparent loss of momentum in recent weeks, with the prospect of no further fiscal support heightening the downside risks. Flickers of hope on the US fiscal front brightened yesterday following of weeks of stalemated negotiations as Speaker Pelosi issued a statement on CNBC vowing that the House will not go into recess for the November election until an additional round of stimulus is passed. Her comments were followed shortly afterward by the released details of a new bipartisan proposal from about 50 Representatives dubbed the “Problem Solvers Caucus” that would offer roughly $1.5 trillion in stimulus before the upcoming election. The plan would include $120 billion for unemployment assistance at $450/week in mid-October and then $600/week from December through January 2021, a second round of stimulus checks, about $500 billion in state aid, and liability protections for employers. On Monday, Treasury Secretary Mnuchin urged action on economic stimulus during his appearance on CNBC.

Additional Themes

Facebook Faces Antitrust Action – Reports indicated that the Federal Trade Commission may bring an antitrust case against social media giant by year-end, alongside indications that Google may be the subject of similar litigation. Facebook shares are down 1.9% in pre-market trading, with some downside also being ascribed to a temporary celebrity boycott of the platform, along with Instagram, in opposition to hate speech and misinformation disseminated thereon.

House Report Faults Boeing – Shares of the aerospace giant are 1.5% lower in pre-market trading after publication of a report by the House of Representatives’ Transportation and Infrastructure Committee excoriating the company for failures and deception resulting in the 737 Max debacle. House Democrats are preparing legislation to overhaul FAA oversight.

Summary and Price Action Rundown

Global risk assets are rising again this morning as upbeat economic figures and some hopeful news on US fiscal stimulus prospects help brighten the market mood as investors await tomorrow’s Federal Reserve decision. S&P 500 futures point to a 0.8% higher open after the index advanced 1.3% yesterday, retracing around half of last week’s downside and upping its year-to-date gain to 4.7%, which is 5.5% below last Wednesday’s record high. The tech-heavy Nasdaq is set to extend yesterday’s 1.9% bounce, which also nearly halved last week’s losses and took its robust year-to-date gains to 23.2%. Equities in the EU are rising this morning while Asian stocks were mostly higher overnight. A broad dollar index is turning back toward its recent 28-month low, while longer-dated Treasury yields are edging upward, with the 10-year yield at 0.68%. Brent crude prices are back above $40 per barrel despite more bearish forecasts.

Encouraging Global Economic Data

Upbeat growth readings from China and rising sentiment indicators in the EU point to a continuing economic recovery overseas, sending the dollar back toward multi-year lows. The euro is edging back toward its recent 28-month highs versus the dollar, while the renminbi hit its strongest level since May 2019 following solid economic data that points to a continuing recovery from the pandemic-induced recession. China’s August reading of industrial production (IP) growth printed 5.6% year-on-year (y/y), topping a consensus forecast of 5.1% and July’s 4.8%. This follows yesterday’s better-than-expected IP readings from the EU and Japan, while analysts are awaiting the US IP print for August later this morning, with expectations for the month-on-month pace of growth to slacken to 1.0% from 3.0% in July. China’s August retail sales also surprised to the upside, expanding 0.5% y/y versus expectations for a flat reading after lagging at -1.1% in July. Analysts had pointed to the tepid recovery of the Chinese consumer as one of the lingering economic headwinds from the pandemic. Fixed asset investment for August also outpaced estimates, although only slightly, improving to -0.3% year-to-date from -1.6% in July, bettering a forecast of -0.4%. Meanwhile, EU data this morning also reflected a brighter growth picture, with Germany’s ZEW survey of economic expectations for September perking up to 77.4 versus an expectation of 69.5 after registering 71.5 in August. The current situation assessment also improved to -66.2 from -81.3, topping estimates of -72.0. For the whole EU, the ZEW outlook also improved markedly to 73.9 from 64.0 in August.

Flickers of Hope on the US Fiscal Stimulus Front

A group of moderate House Democrats are set to unveil their plan for a compromise $1.52 trillion pandemic relief bill today, potentially breathing some life back into the deadlocked negotiations. Reports indicated that the group is pressing Speaker Pelosi to restart talks with the White House in continued pursuit of an elusive deal on the next round of fiscal support for the pandemic-impacted US economy. Their draft bill is scheduled to be released later this morning. Although Speaker Pelosi has thus far held to her current $2.2 trillion position, which is more than $1 trillion below the initial size of the HEROES Act passed by House Democrats, she has continued to indicate that further compromise would be possible. Meanwhile, past communications from the White House have suggested that $1.5 trillion may be an acceptable figure. The bipartisan House Problem Solvers Caucus, comprised of 50 relatively centrist lawmakers, also arrived at a roughly $1.5 trillion compromise figure. Yesterday, Treasury Secretary Mnuchin urged action on economic stimulus during his appearance on CNBC, saying “[n]ow is not the time to worry about shrinking the deficit or shrinking the Fed balance sheet” and indicating that he is prepared to continue working toward a deal on the stalled bill.

Additional Themes

More Dire Oil Forecasts – Following yesterday’s downbeat assessment of the oil market outlook by OPEC, the monthly report from the International Energy Agency (IEA) painted a similarly grim picture. The IEA flagged increasing fragility in oil markets, calling the outlook “treacherous” due to the continued dampening of demand due to the ongoing impact from the pandemic. Notably, oil giant BP expressed an even more dismal view on the future of crude markets this week, projecting that demand will remain “broadly flat” for the next two decades as energy transitions will reshape the world away from traditional sources. CEO Bernard Looney indicated that he would shrink oil and gas output by 40% over the next decade and spend nearly $5 billion a year investing in renewable power.

TikTok Deal Under Review – Following reports early yesterday that Oracle had won the bidding for TikTok’s US business, with the tech giant confirming this later in the day, the Treasury Department is said to be initiating a review of the arrangement, which is not an outright sale.

Summary and Price Action Rundown

Global risk assets were mostly higher overnight as tech stocks attempt to stage a comeback from their recent underperformance, while investors monitor political developments in Japan and the UK, as well as the latest in the TikTok saga. S&P 500 futures indicate a 1.3% higher open after the index closed nearly flat on Friday, holding performance at -2.5% on the week and its year-to-date upside at 3.4%, which is nearly 7% below the record high of September 2^nd. The tech-heavy Nasdaq is set to reverse some of its recent downside, which has brought it 10.0% below its early September peak. Equities in the EU are flat this morning while Asian stocks were mostly higher overnight. A broad dollar index is turning back toward its recent 28-month low, while longer-dated Treasury yields are rangebound, with the 10-year yield at 0.67%. The euro is up versus the dollar despite more commentary from EU officials, including European Central Bank President Lagarde over the weekend, about the strength of the single currency being a factor in their policymaking. Brent crude prices are hovering below $40 per barrel.

Oracle Wins Bidding for US TikTok Operations

As Washington and Beijing remain at odds over the controversial app, Oracle moves forward after it bests Microsoft in vying for the social media platform’s US business. Overnight, headlines indicated that Microsoft’s bid had been rejected and Oracle’s competing offer was accepted, though considerable uncertainty remains as to the precise terms. The reports note that the structure of the deal is less clear-cut than a full sale of the US business to Oracle, with the IT giant instead acting as a “technology partner” and taking a minority stake in a reorganized US TikTok corporate entity. Shares of Oracle are up 6.7% in pre-market trading, while Microsoft is down 0.8%. ByteDance, TikTok’s Chinese parent company, is reportedly set to propose the deal to the Trump administration before the September 15^th deadline and it is unclear if the arrangement will satisfy the privacy concerns that spurred the initial White House move to ban the app. This follows reports on Friday indicating that Beijing is leaning toward blocking any prospective deal to sell TikTok’s US operations, though a spokesman for ByteDance stated that no such indication had been made. Chinese official commentary remains critical of the deal, likening the process to theft.

Japanese Markets Steady as Abe Ally Picked as Successor

Following the announced resignation of longstanding Prime Minister Abe for health reasons, his party opted for a continuity candidate, Yoshihide Suga. The Nikkei performed in-line with regional peers, Japanese government bonds were steady, and the yen is appreciating mildly but within recent ranges as the ruling Liberal Democratic Party elected outgoing PM Abe’s former Chief Cabinet Secretary as the new head of the party. Suga’s official ascension to the premiership will follow later this week. Suga has been a strong proponent of the reflationary fiscal and monetary policy combination championed by his former mentor, so-called “Abenomics,” and has pledged to continue and build upon this framework. He has also emphasized the maintenance of PM Abe’s relations with the Bank of Japan and cited the importance of additional monetary easing to meet potential economic challenges going forward. Suga has also opined that growth should be prioritized over concerns regarding Japan’s elevated sovereign debt levels. Analysts are now focused on his cabinet choices, which are expected over the next few days, as an indication of any potential intent to reform certain facets of the economic program. Meanwhile, Suga addressed speculation over the potential for a general election, noting that the pandemic makes voting more challenging and suggested that he may be leaning toward waiting to implement various policies before dissolving Parliament, as polls are not officially due for another year.

Additional Themes

Brexit Drama Whipsaws the Pound – Debate is beginning in Parliament today over Prime Minister Johnson’s gambit to undermine aspects of the withdrawal deal with the EU, with some high-profile Conservatives noting their opposition. The EU has warned that it will fight the Internal Market Bill, which would abrogate UK obligations toward Northern Ireland agreed with the EU in the Brexit Withdrawal Agreement and could provide a conduit for UK goods to reach the single market across the border between Ireland and Northern Ireland. The pound, which has acted as a barometer for risks surrounding Brexit, is up 0.6% versus the dollar today as debate over the bill begins, but is still down 3.8% for September.

Vaccine News Remains in Focus – Pfizer’s CEO indicated that a Covid-19 vaccine could be available by year-end, while AstraZeneca and Oxford resumed their phase three trials, which had been halted due to a health issue for a participant. Although considerable uncertainty remains over the timing for approval, the efficacy of the vaccine, the timeline for rollout, and public reception, investors are pondering whether the anticipation of a vaccine announcement has been a driver of countertrend price action over recent weeks.

Summary and Price Action Rundown

Global risk assets are attempting to stage a rebound from yesterday’s renewed selloff this morning as equity price action remains choppy, while investors continue to monitor currency messaging by the European Central Bank and fiscal stimulus prospects in the US. S&P 500 futures point to a 0.8% higher open after the index fell 1.8% yesterday, retracing most of Wednesday’s rebound to pare its year-to-date upside to 3.4%, which is nearly 7% below last Wednesday’s record high. The tech-heavy Nasdaq has reverted to its recent underperformance trend, falling 2.0% yesterday to shave its robust year-to-date gains to 21.7%. Equities in the EU are flat this morning while Asian stocks were mostly higher overnight. A broad dollar index is turning back toward its recent 28-month low, while longer-dated Treasury yields are rangebound, with the 10-year yield at 0.69%. Brent crude prices are hovering below $40.

ECB Officials Continue to Refine Messaging on the Euro

The European Central Bank (ECB) Chief Economist has reemphasized currency strength as a headwind to reflation in the EU after yesterday’s policy meeting sent mixed messages on the currency. Earlier today, Chief Economist Lane tweeted his assessment that the ongoing appreciation of the euro has “significantly muted” inflationary pressures in the EU, seemingly taking a more forceful stance on the currency than ECB President Lagarde expressed in her post-meeting remarks yesterday. For context, Lane first emphasized euro appreciation as a headwind to reinflation on September 1^st, just as the single currency was nearing the closely-watched level of $1.20, which is more than a two year high. From its March lows, the euro has gained more than 10% against the dollar and inflation is set to be negative for the first time in four years. Lane’s strong emphasis on the link between currency strength and disinflation contrasts with President Lagarde’s more tepid statement yesterday that “clearly to the extent that the appreciation of the euro puts negative pressure on prices, we have to monitor carefully such a matter, and this was extensively discussed.” Then she stressed that the ECB does not target the exchange rate and will likely not adopt a targeting strategy, though it remains cognizant of its movements. The euro moved higher during the ECB meeting, gaining nearly 1% versus the dollar before settling back in later trading, but is now moving higher again. Analysts cite continued strength in the euro as a potential catalyst, among a resurgence of Covid-19 and backsliding inflation metrics, as the likely catalysts for the ECB to expand the €1.35 trillion Pandemic Emergency Purchase Program (PEPP) as early as the December meeting.

Questions Linger Over the US Rebound as Stimulus Negotiations Sputter

The negotiations over the latest pandemic stimulus remain in limbo after yesterday’s failure of Senate Republicans’ “skinny” version of the bill, while recent US economic data has shown some hints of further backsliding. Recent US labor market data, in particular, has been somewhat mixed. Yesterday’s release of initial jobless claims for the week of September 5^th registered a modest disappointment, remaining unchanged at 884K and missing market expectations of 850K, while continuing claims for the prior week rose nearly 100K to 13.38 million, also above expectations of 12.904 million. Alongside the disappointing initial claims, claims for Pandemic Unemployment Assistance (PUA) rose by 91K, marking the fourth straight increase. Combining the standard claims with PUA continuing claims means that 27.8 million people are receiving unemployment insurance payments, up from 25.7 mil in early August. For context, the Labor Department changed the seasonal adjustment procedure last week that flattered the headline initial claims figure, which would have been over 1 million using the prior formulation. This comes as the prospects for additional fiscal support continue to darken. The latest iteration of the pandemic relief bill, a roughly $500 billion package crafted by Senate Republican, failed in a procedural vote broadly along party lines yesterday. Senate Majority Leader McConnell has accused the Democrats of stonewalling for political gain while Senator Schumer expressed hope that blockage of the so-called “skinny” bill could entice Senate Republicans and the White House back to negotiations.

Additional Themes

TikTok Deadline Reaffirmed – President Trump has stated that his deadline for arranging a sale of the controversial Chinese app’s US operations before his ban on its use takes effect will not be extended. Regarding the timing, September 15^th has been the stated deadline, though some analysts suggest that the actual deadline is September 20^th, which is when the ban would become official. With Microsoft and Oracle among the suitors for the social media platform’s US operations, and Beijing likening the process to theft and asserting its right to veto any potential deal, this episode has become a focal point of US-China friction in recent months. Yesterday, reports emerged that the Chinese owner of TikTok, ByteDance, was in talks with US government officials in an effort to continue US operations absent a complete sale of the business, though it was not clear how data security could be assured in such an arrangement.

Looking Ahead – Next week’s calendar features a Fed meeting, as well as decisions from the Bank of England and Bank of Japan. Japan’s ruling party will also vote on the successor to outgoing Prime Minister Abe. US retail sales and industrial production data for August will be in the spotlight, alongside another weekly initial jobless claims tally, while China and the EU will also be issuing key industrial and consumer data for last month

Summary and Price Action Rundown

Global risk assets are moving lower this morning as choppy equity price action continues, while investors await today’s European Central Bank decision and more US labor market data. S&P 500 futures point to a 0.6% lower open after the index rallied 2.0% yesterday to retrace a portion of its recent decline and improve its year-to-date upside to 5.2%, though it remained below last Wednesday’s record high. The tech-heavy Nasdaq is set to slide anew after snapping its streak of underperformance yesterday, jumping 2.7%, which took its year-to-date gains to 24.2%. Equities in the EU are also down while Asian stocks were mixed overnight. A broad dollar index is hovering above it recent 28-month low, while longer-dated Treasury yields are also steady, with the 10-year yield at 0.70%. Brent crude prices are sinking back toward $40.

Euro Heading Higher Ahead of ECB Decision

A Bloomberg report yesterday suggesting a more optimistic tone among European Central Bank (ECB) officials arrested the euro’s September slide, but analysts await further details after the conclusion of today’s meeting. In the leadup to today’s decision, the article cited some unnamed ECB officials already voicing their growing confidence in an improving forecast for the region’s economic recovery. The latest projections for output and inflation will likely resemble those presented in the June meeting, during which the ECB predicted a record 8.7% contraction for the 2020 year, though one unnamed official suggested that the GDP outlook may be upgraded, driven by better-than-expected private consumption. Recent economic data could support such an upward revision, as retail sales have shown a full recovery from the pandemic’s economic fallout. However, recent inflation figures in the EU undershot estimates, with some metrics falling into negative territory, and the strength of the euro has been in focus recently. The euro posted gains after the report’s release and is now 0.7% higher versus the dollar from yesterday’s intraday low, recovering a portion of the past week’s declines that were spurred in part by ECB Chief Economist Lane’s commentary on September 1^st, which some perceived as jawboning the currency lower. Traders are awaiting the full announcement on the ECB’s policy and forecasts at 7:45am ET, followed by a press conference with ECB President Christine Lagarde at 8:30am ET. For context, at the July meeting, the economic outlook was slightly more optimistic, yet the use of all the bank’s stimulus measures was deemed necessary to underpin growth and reinflation. Policymakers have agreed that the flexibility of the central bank’s €1.35 trillion Pandemic Emergency Purchase Program (PEPP) should be considered a ceiling rather than a target, suggesting some officials are not keen on another stimulus package.

Initial Jobless Claims Expected to Incrementally Improve

After a series of noisy labor market figures over the past week, the data remains consistent with continued recovery but underlying details are more nuanced. The number of initial jobless claims for the week ending September 5^th are expected to decline to 850K, representing further improvement on the prior week’s tally, which fell to 881K. That reading was well below consensus estimates of 950K and maintained the improvement trend from the prior report’s 1.011 million. Continuing claims also fell to 13.254 million from 14.492 million for the week ending August 22^nd, bettering expectations of 14.000 million. This latest data now marks the lowest reported level of jobless claims since the pandemic took hold in early March, and is seen as a continuation of the broader trend of recovery since nationwide restrictions were eased in May. While the positivity is largely attributable to steadying trends of non-essential business re-openings, a new seasonal adjustment methodology took effect in last week’s report, deflating what would have been a much higher tally. For context, the Labor Department changed the seasonal adjustment procedure last week, siding with an additive, rather than a multiplicative, explaining that results will be more reliable as raw data remains astray from previous norms. Last week’s report would have been 1.020 million if the previous calculation methods were employed. While the adjusted state claims data suggests further recovery, the same indications are not portrayed by initial claims for Pandemic Unemployment Assistance (PUA), which rose again for a third consecutive week. PUA claims came in at 759K, up from 607K last week, and from 489K in early August. The report highlights that layoff numbers are still a prevalent concern, and state and PUA claims now total to 28 million. Moving forward, analysts will have to additionally consider PUA and Pandemic Emergency Unemployment Compensation (PEUC) numbers to get a full picture of the heath of the labor market.

Additional Themes
Oil Prices Under Pressure – Brent crude is turning back toward Tuesday’s multi-month low after the American Petroleum Institute forecast a jump in US stockpile data today, which would break the late summer streak of weekly drawdowns. The official inventory data from the Energy Information Administration is due at 11am.

Senate to Vote on Republican “Skinny” Stimulus Bill – Before the roughly $500 billion package can reach the Senate floor, it will face a procedural vote in which Senate Minority Leader Schumer indicates that it may fail. Senate Majority Leader McConnell accused the Democrats of stonewalling the deal for political gain while Schumer indicated that blockage of the so-called “skinny” bill today could entice Senate Republicans and the White House back to negotiations.