Category: Morning Markets Brief

Summary and Price Action Rundown

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

More Positive US-China Atmospherics Support Sentiment

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

Solid EU Economic Data

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

Additional Themes

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

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

Summary and Price Action Rundown

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

Covid-19 Treatment Hopes Spur Reflexive Equity Upside

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

Signs of Restraint in US-China Confrontation Ease Concerns

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

Additional Themes

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

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

Summary and Price Action Rundown

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

Global Economic Surveys Suggest Backsliding

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

Ever More Extreme Tech Stock Outperformance Drags US Stock Indexes Higher

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

 

Additional Themes

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

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

Summary and Price Action Rundown

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

Dour Tone of Fed Minutes Weighs on Sentiment

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

 

Republicans Retest Narrower Version of Pandemic Relief

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

 

Additional Themes

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

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

Summary and Price Action Rundown

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

Federal Reserve Meeting Minutes in Focus

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

More Strong Earnings from US Retail Giants

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

Additional Themes

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

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

Summary and Price Action Rundown

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

US-China Tensions Remain Elevated

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

Retail Giants Post Strong Earnings

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

Additional Themes

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

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

Summary and Price Action Rundown

Global risk assets are mostly higher this morning as monetary easing in China overnight set a positive tone to start the week, while investors continue to ponder the prospects for the US pandemic relief package amid deepening rancor in Washington. S&P 500 futures indicate a 0.3% higher open after the index closed flat on Friday, holding its year-to-date gain at 4.4% and hovering just short of February’s all-time high. Equities in the EU are little changed, while Asian stocks were mixed overnight amid outperformance by mainland Chinese markets. The dollar remains subdued near two-year lows while longer-dated Treasury yields are retracing a portion of their recent upside, with the 10-year yield at 0.69%. Brent crude is edging below $45.

US Postal Service Controversy Clouds Pandemic Relief Outlook

Speaker Pelosi called the House back to Washington over the weekend, cutting short summer recess in an effort to address concerns surrounding the Trump administration’s actions impacting the US Postal Service. With President Trump continuing to denigrate mail-in ballots and his administration pursuing changes at the Postal Service that could impede voting by mail, House Democrats are reconvening to push forward efforts to support the USPS and are calling Postmaster General DeJoy to testify on August 24^th. White House Chief of Staff Meadows indicated that President Trump would support and sign a bill offering additional $10 billion in funding for the USPS, and though Speaker Pelosi has previously rejected any piecemeal approach to passing elements of the broader pandemic relief bill, analysts note that this could be treated as a standalone given its highly-charged political nature. Analysts broadly note that the controversy over the USPS may remain compartmentalized from the broader negotiations of the pandemic relief package, as the gaps between the two sides persist over state aid and augmented jobless benefits. Meanwhile, financial markets continue to display scant reaction to the DC dramatics, with equity indexes poised to register new record highs this week.

Global Economic Data Remains Mixed with August PMIs in Focus

July’s reading of US retail sales reflected continued but moderating improvement, as investors shift their focus to income August data to gauge the health of the recovery. US retail sales rose 1.2% from a month earlier in July, missing market expectations of 2.1% advance and slowing from an 8.4% month-on-month (m/m) surge in June. In all, it still marked the third straight monthly gain for retail, which plunged 14.7% m/m in April then rebounded to 18.3% m/m in May as the strict lockdowns were eased. July purchases lifted retail sales 2.7% higher than the same month in the previous year, their highest level since the government started tracking the series in 1992. Excluding automobiles, gasoline, building materials and food services, retail sales increased 1.4% m/m in July, topping estimates of a 0.8% gain, after soaring 6.0% in June. Overnight, Japanese GDP data provided another reminder of the pain of the second quarter, with GDP contracting at a 27.8% annualized rate, the steepest drop on record and worse than the 26.9% forecast. The Nikkei underperformed overnight but the yen was stable within its recent trading range versus the dollar. Later this week, analysts will be focused on the first glimpses of global economic activity in August, with preliminary readings of purchasing managers indexes (PMIs) for the US, EU, UK, and Japan, which are expected to show an incrementally accelerating rate of expansion despite the stubborn persistence of the virus.

Additional Themes

People’s Bank of China (PBoC) Injects Liquidity – The Shanghai Composite bounced 2.3% overnight, re-approaching its multi-year high from early July, while the renminbi posted modest gains and local bonds rallied after the PBoC supplied the market with an unexpectedly generous 700 billion renminbi through its medium-term lending facility. This comes after last week’s net injection of funds through open market operations. The PBoC has been notably less aggressive with accommodation than other major global central banks during the ongoing pandemic and key Chinese economic data for July showed a slackening in the pace of recovery, particularly among consumers.

US-China Tensions Continue to Percolate – Reports this morning indicate that the Commerce Department is poised to tighten restrictions on controversial Chinese tech giant Huawei’s access to US technology. This comes after Friday’s news that the planned US-China Phase One trade deal review has been postponed indefinitely, with scheduling problems being cited for the delay. Vice Premier Liu had been set to engage in a video conference with US Trade Representative Lighthizer and Treasury Secretary Mnuchin. President Trump and National Economic Council Director Kudlow both spoke favorably of the Phase One deal last week despite Chinese agricultural goods and energy purchases meaningfully lagging their targets.

Summary and Price Action Rundown

Global risk assets are mixed this morning ahead of key US economic data after China’s growth readings for July broadly met expectations overnight. S&P 500 futures point to a 0.2% lower open after the index wavered yesterday, again falling a few points short of February’s all-time high. Equities in the EU are underperforming as the UK expands its quarantine requirements to more EU countries, while Asian stocks were mixed overnight. The dollar is hovering just above two-year lows while longer-dated Treasury yields are dipping ahead of US retail sales data but still near their highest level since late June, with the 10-year yield at 0.70%. Brent crude prices are edging below $45 per barrel.

 

Chinese Economic Data Tracks Expected Recovery Trajectory

July economic data out of China overnight reflected continued improvement mostly in-line with forecasts, though retail sales undershot expectations. China’s economy has returned to growth after a deep slump at the start of the year, but some unexpected weakness in domestic consumption weighed on momentum. China’s fixed-asset investment improved to -1.6% year-to-date (ytd) compared to a 3.1% ytd decline registered in June, matching consensus, as the economy continues to re-open and authorities loosen coronavirus-related restriction measures. Private investment, which accounts for 60% of total investment in China, decreased 5.7%, while public investments rose at a faster 3.8%. Investment was driven by acceleration of activity in the property sector, with analysts also expecting the rebound in infrastructure spending to continue over the coming months on the back of government support. Meanwhile, China’s industrial production rose by 4.8% year-on-year (y/y), matching June’s growth rate but below forecasts for a 5.2% expansion. This remained the steepest rise in industrial output in six months, amid ongoing recovery from the pandemic. While investment and industrial production were roughly in line with projections, retail sales registered a disappointing -1.1% y/y, missing expectations of a 0.1% rise but still improving from June’s -1.8% y/y pace. This was the seventh straight month of contraction in retail trade, suggesting a hesitance to return to crowded places like shops, restaurants, and cinemas amid the lingering impact of Covid-19. The decline in retail sales was broad based, with auto sales a key exception, surging 12.3%.

US Retail Sales in Focus

With high-frequency data suggesting a backsliding in US consumption, market participants will be attuned to today’s release of retail sales data for July. Consensus forecasts are for a more modest monthly gain of 2.1% after a 7.5% month-on-month (m/m) snapback in June that brought the gauge into positive year-on-year territory. This would mark the third straight month of upside in retail sales following a record 14.7% slide in April. For context, May’s record 18.2% m/m jump was cited by White House officials as indicative of a brisk economic recovery as states began reopening following lockdowns. The past two months have brought retail sales up to just 0.6% below February’s levels from before the coronavirus pandemic and control group sales, which exclude more volatile autos, gas and building materials, jumped 5% above February’s levels as of last month, underscoring a recovery in consumer spending as lockdown measures eased. Still, rising Covid-19 cases and stalled state re-openings could have deterred shoppers from visiting brick-and-mortar stores, as well as bars and restaurants. The figures may help confirm high-frequency credit card data showing that the consumer recovery has cooled. Other economic data set for release today includes industrial production for July, which is forecast to ease to a 3.0% m/m from 5.4% in June, and University of Michigan consumer sentiment gauge, with estimates for a slight softening to 72.0 from 72.5.

Additional Themes

US Stimulus Talks Remain Deadlocked – Congress has left town for August recess with no deal on the latest pandemic relief package, suggesting that any agreement might slide into September. House Speaker Pelosi stated earlier this week that the sides remain “miles apart” and National Economic Council Director Kudlow reiterated White House concerns that the Democrats’ compromise figure of $2 trillion, which includes a greater measure of state aid than the Republican version, was too high. Meanwhile, President Trump indicated that he would not veto the bill if it contains additional funding for the US Postal Service.

Looking Ahead – Next week features some of the first glimpses of global economic activity in August, with preliminary readings of purchasing managers indexes (PMIs) for the US, EU, UK, and Japan, which are expected to show an incrementally accelerating rate of expansion. Also, analysts will parse the minutes from the Fed’s July meeting, which may include additional insights on their anticipated policy pivot to “enhanced guidance” in September. Also, the US-China Phase One trade deal review is expected to make headlines.

 

Summary and Price Action Rundown

Global risk assets are mixed this morning after yesterday’s rally took US equity indexes nearly back to record highs, while investors look ahead to key economic data today and tomorrow. S&P 500 futures indicate a slightly lower open after yesterday’s 1.4% rally took the index’s year-to-date gain to 4.6% to come within a few points of February’s all-time high. Equities in the EU and Asia were mixed overnight. The dollar is slipping back toward two-year lows while longer-dated Treasury yields are steady ahead of initial jobless claims data, with the 10-year yield at 0.68%, its highest level since early July. Brent crude prices are fluctuating above $45 per barrel.

US Labor Market Data in Focus

Though last week’s reading of July nonfarm payrolls remained solid, investors are wary of further backsliding in the US recovery and will scrutinize this morning’s weekly jobless claims figures for any signs of weakness. Expectations are for a slight improvement in the figures for the week ending August 8^th, with 1.10 million new claims as the consensus forecast. For context, the number of Americans filling for unemployment benefits rose by 1.2 million in the week ended August 1^st, the least since the pandemic started and comparing favorably to prior estimates of 1.4 million. It was also the largest weekly drop in jobless benefits applications in almost two months. This follows a solid reading for last week’s highly-anticipated July nonfarm payrolls figures, which showed the US economy added 1.76 million jobs in July, down from a record 4.8 million in June but well above market expectations of 1.6 million. This put nonfarm employment 12.9 million below the pre-pandemic level and pushed the unemployment rate down to 10.2% from 11.1%, which bettered consensus expectations of 10.5%. The number of unemployed persons fell by 1.4 million to 16.3 million, putting the labor force participation rate 61.4%, down slightly from 61.5% in June. Tomorrow also features potentially market-moving US economic data, with July retail sales in the spotlight, along with industrial production for last month and consumer sentiment data for August.

Fed Communications Retain a Decidedly Dovish Tone

With analysts anticipating a policy shift by the Fed perhaps as early as the September meeting, commentary from FOMC officials remains highly focused on the downside risks. Boston Fed President Rosengren and Dallas Fed President Kaplan spoke separately yesterday, focusing on the need for redoubled efforts at pandemic containment alongside additional fiscal stimulus to prevent the economic recovery from backsliding. Rosengren said that “despite the sizeable interventions by monetary and fiscal policymakers, high-frequency economic data indicate that the recovery may be losing steam,” causing him to worry that an increasing number of temporary layoffs may turn into permanent job losses. Kaplan sounded a similar note, saying, “the rebound continues but, with the resurgence of the virus in a number of locations in the United States, that has muted the rebound…. A number of countries around the world have gotten the virus transmission rates to relatively low levels and are recovering at a very rapid rate.” For context, analysts are expecting the FOMC to pivot to a new policy of “enhanced guidance” at their September meeting, which would more formally link interest rate and asset purchase policies to their 2% inflation and full employment targets.
Additional Themes
Pandemic Relief Talks Remain Deadlocked – House Speaker Pelosi declared yesterday that the two sides remained “miles apart” after Secretary Mnuchin brought an offer of a bill that would be just above $1 trillion, representing little give from the administration’s previous position. Mnuchin indicated that another follow-on bill could be considered if the Democrats would first agree to this less-ambitious version. For context, the White House issued stopgap executive orders to provide some degree of stimulus in lieu of a Congressional spending package, though questions remain over the efficacy, enforceability, and timeframe of these measures. The four orders signed provide an additional $400/week in unemployment benefits, suspend some student loan payments through the end of the year, extend a moratorium on evictions for renters, and instruct employers to defer certain payroll taxes through the end of the year for Americans earning less than $100,000.

Corporate Concern Over WeChat – Analysts are citing a report this morning indicating that management of Apple and more than a dozen other key US corporations raised concerns on a call with the White House about the impact on their business from the impending ban on WeChat. For context, President Trump announced last week that Chinese-owned social media apps WeChat and TikTok would be banned from the US as of mid-September. Chinese officials are set to raise this issue in the Phase One trade review with their US counterparts scheduled for this coming week.

Summary and Price Action Rundown

Global risk assets are rebounding this morning after yesterday’s selloff, while Treasury yields are continuing to rise ahead of US inflation data. S&P 500 futures indicate a 0.8% higher open after yesterday’s 0.8% decline pared the year-to-date gain to 3.2%, with the index hovering around 1% below February’s all-time high. Equities in the EU and Asia were muted and mixed overnight. The dollar is fluctuating near two-year lows while longer-dated Treasury yields are extending their upside, with the 10-year yield at 0.67%, its highest level since early July. Brent crude prices are back above $45 per barrel.

US Inflation Figures in Focus

After yesterday’s release of producer price inflation showed faster-than-anticipated increases in price pressures, the focus today will be on the consumer price gauge (CPI). With longer-dated Treasury yields vaulting higher yesterday and continuing to move upwards this morning, traders will be particularly attuned to this morning’s US CPI reading for July, with an upside surprise likely to fuel a further rise in Treasury yields. US CPI increased to 0.6% in June from May’s four-and-a-half-year low of 0.1% and is expected to edge up to 0.7% for July. June’s pace of price increases was the fastest in three months as businesses reopened after the coronavirus lockdown, led by food and food at home prices, as well as energy costs and medical care services. On a monthly basis, prices went up 0.6% in June, the most since August of 2012, slightly beating market consensus of a 0.5% gain. The annual US core consumer price inflation rate, which excludes volatile items such as food and energy, stood at 1.2% year-on-year in June, unchanged from the previous month’s nine-year low and slightly above market expectations of 1.1%. For context, the Fed targets 2% inflation and may pivot to “enhanced guidance” at the September meeting, which would more formally link interest rate and asset purchase policies to this benchmark. However, the Fed favors an alternate inflation metric, core PCE, over CPI. Yesterday, US producer prices (PPI) rose 0.6% in July from a month earlier, reversing the 0.2% decline in June and beating forecasts of only a 0.3% gain. Last month’s data marked the largest increase in producer prices since October 2018, mainly driven by rising energy costs following the easing of coronavirus-induced restrictions.

UK Data Reflects Deep Recession

UK GDP figures for the second quarter (Q2) showed a worse slump than any other major European economy, shrinking by a fifth and falling into its deepest recession on record. A preliminary estimate indicated that UK gross domestic product shrank by 20.4% on quarter (q/q) and 21.7% from a year prior in Q2, equivalent to an annualized rate of 59.8%, the most since comparable records began in 1955, which was roughly in line with expectations of a 20.5% quarterly contraction. A recovery from the depths of the lockdown gained momentum in June, with output growing 8.7% from the prior month, faster than most economists had expected, although broadly in line with the Bank of England’s latest predictions. This means GDP has grown 11.3% since its April low, but remains 17.2% beneath its level in February, before the coronavirus crisis hit. Analysts said the UK’s underperformance was partly due to the length of its lockdown, and partly because the consumer-facing services sector that was hardest hit by social distancing has a bigger weight in GDP, accounting for 80% of the economy. Private consumption accounted for more than 70% of the decline in the GDP, down by 23.1%. There was also notable retrenchment in gross fixed capital formation (-25.5%) and government consumption (-14.0%). The services sector fell 19.9% q/q, accounting for three-quarters of the fall in GDP.

Additional Themes

Kodak Mum on Loan – After the market closed yesterday, Eastman Kodak released its second quarter earnings report posting a net loss of $5 million and $213 million in revenue, down 31% year-over-year. While investors were interested in the financial state of the company and its resilience to the pandemic, the main focus was on updates regarding the proposed $765 million Defense Production Act loan from the International Development Finance Corporation (IDFC). Shares experienced meteoric gains in recent weeks upon news of a potential government loan to fund the operational restructuring towards establishing Kodak as a major domestic supplier of pharmaceutical ingredients. However, shares toppled 28% over the past week amid allegations of insider trading by Kodak executives who had prior knowledge of the potential deal. On Monday, the White House responded that Kodak will not receive the loan unless the company is cleared of wrongdoing. During the earnings call yesterday evening Kodak stated it will not “discuss the potential loan or the related matters” as the company is currently under internal review. Kodak also chose to not hold a Q&A session post-conference. While investigators are currently conducting an internal review of Kodak’s executives’ actions, public disclosures filed with Congress reveal Kodak spent $870,000 lobbying Congress and federal agencies during the second quarter. The last time the company spent on lobbying was $5,000 in Q1 2019.

US-China Trade in Focus – Reports this morning indicate that China is intent on bringing the impending US bans on TikTok and WeChat into the Phase One trade deal review talks schedule for the middle of this month. China’s agricultural purchase commitments are another key issue.