Category: Briefings

Morning Markets Brief 2-8-2021

Summary and Price Action Rundown

Global risk assets are building on last week’s gains as optimism continues to build for an impending economic recovery amid upbeat growth signals, upsized US fiscal stimulus, and expanding Covid-19 vaccine distribution. S&P 500 futures indicate a 0.3% higher open after the index advanced 4.7% last week to put gains for the year at 3.5%. Equities in the EU are also continuing upward, while Asian stocks posted robust gains overnight. A broad dollar index is hovering below its recent two-month highs, while longer-dated Treasury yields are continuing to edge higher, with the 10-year at 1.19%. Brent crude prices are extending their gains above $60 per barrel amid rising optimism over demand.

 

Secretary Yellen Advocates Bold Pandemic Relief Bill

The Biden administration and Congressional Democrats move ahead with unilateral approach to the American Rescue Act as Treasury Secretary Yellen makes the case for super-sized stimulus. Investors are noting Secretary Yellen’s strong advocacy for the $1.9 trillion plan on Sunday’s news programs, in which she indicated that a return to full employment would be possible next year with this degree of muscular fiscal support. This follows a series of maneuvers designed obviate the need for GOP support for the program and some high-profile criticism from ex-Treasury chief Larry Summers, who expressed concerns that overdoing stimulus would overheat the economy and spur inflation. Late last week, the Senate approved 51-50 a measure, with minor amendments, allowing Democrats to pass Biden’s relief plan through budget reconciliation. Votes for the measure fell strictly along partisan lines, with Vice President Harris casting the tie-breaking vote. Small amendments, including holding off on minimum wage increases and ensuring that wealthy Americans do not receive the $1400 stimulus payments, were added during the session, though none remain binding. The measure now returns to the House for a vote on the amended measure and, if passed, will proceed to the indicated committees for finalization by March. On Friday, President Biden emphasized that the Covid-19 relief bill stands as a higher priority than bipartisanship, offering his strongest criticism of Republican lawmakers since taking office and indicated that the Democrats would go it alone. if necessary, to get needed aid to struggling Americans. Speaker Pelosi has stated that the budget resolution will be brought to the floor later today and that committees will begin working on the specifics of the bill starting today. – MPP view: Though not every penny is likely to make it through, the Biden administration has strongly committed to the upper end of its stimulus spending range and put the marker down that it will aggressively pursue its legislative agenda, and so far it appears that Dem moderates like Senator Manchin are disinclined to stand in the way, all of which is positive for stocks and growth.

Economic Optimism on the Rise Despite Tepid Payrolls

Although this week’s data calendar is relatively light, market participants are increasingly on the lookout for signs that the US recovery is getting a head start. In January, the US economy added 49K jobs, missing the consensus estimate of a 100K rise but still representing an improvement on December, while the unemployment rate dipped from 6.7% to 6.3%. The nonfarm payrolls print was preceded last week by Thursday’s initial jobless claims tally, which showed that 779K Americans filed for unemployment benefits in the last week of January, a significant decrease to from the previous week’s level of 812K, and also well below market expectations of 830K. It marked the third straight week of falls in claims and the lowest amount since the last week of November but remains far above pre-pandemic levels of around 200K. And on Wednesday, payroll provider ADP estimated that private businesses hired 174K workers, handily outpacing market expectations of an increase of 49K, and recovering from a 78K decline in December. Other US data last week was also solid, with January Purchasing Managers’ Indexes (PMIs) and December factory orders and durable goods reflecting robust activity. January consumer price (CPI) data and weekly jobless claims figures will be in focus this week. Regarding the former, recent inflation readings have been punchier than expected though January’s CPI reading is expected to show little change from December. Market-based gauges of inflation expectations are at multi-year highs, however, revealing investor expectations of rising price pressures. – MPP view: We think inflation data will be noisy after the distortions of 2020 but that the pandemic will, over the medium to longer term, have an inflationary sting in the tail. We expect the Fed to hold to its commitment to be permissive rather than proactive in its policy posture toward the first wave of post-pandemic price pressures that are likely to materialize in the second half of this year. We expect that, around the summer or fall, the Fed passing the test of its new inflation targeting policy will restrain dollar appreciation and keep the Treasury yield curve biased toward steepening.   

Additional Themes

Earnings Season Continues to Provide Little Direction for Stocks – Fourth quarter (Q4) corporate results continue to be overshadowed by overarching market themes, like the GameStop episode and the brightening growth outlook, and today’s calendar is light. This week features the last major concentration of reports, with Twitter, GM, Coca-Cola, Disney, and Expedia among the most high-profile. With 295 of the S&P 500 companies having reported Q4 results so far, 74.5% have topped sales expectations and 81.0% have beaten earnings estimates, continuing the pandemic trend of overly conservative analyst forecasts. To this point, however, upside surprises on these quarterly figures have provided scant support for stock prices, though last week featured broadly more upbeat price action amid the waning volatility in short-squeeze stocks and better-than-expected growth data.

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

Tom Terrific – In his first year with the Tampa Bay Buccaneers, Tom Brady won his seventh Super Bowl in a lopsided contest last evening against the Kansas City Chiefs. He now has more Super Bowl wins than any franchise in the league, with New England and Pittsburgh having six each. – MPP view: Patriots Nation is strongly represented at MPP and we were rooting heavily for Brady, which was slightly bittersweet but far more sweet than bitter. 

Five Minute Macro 1-25-2021

The Biden Relief Bill remains front and center, while investors wait for the Fed on Wednesday and corporate earnings season continues. Finally, data continue to show the uneven effects of the pandemic and US-China tensions continue to percolate.

Five Minute Macro 1-19-2021

In this week’s Five Minute Macro, the Biden administration lays out a two-stage stimulus plan, while political tensions continue to simmer and Fed sends mixed policy signals. Meanwhile, US economic data continues to weaken and China tensions continue to percolate.

Looking Ahead – The Future’s So Bright, I Gotta Wear Shades 12-18-2020

Looking Ahead – The Future’s So Bright, I Gotta Wear Shades

 

After a year that featured so many surprises, and not many pleasant ones, it is a testament to both the natural human tendency toward optimism, as well as miracles of biomedical science, that 2021 can be a repository for so many positive and tantalizing expectations. The strong prospects for a V-shaped recovery not only in the economy but for our collective well-being are underpinned by a trio (at least) of highly effective vaccines that are being distributed with tireless efficiency by our logistical networks. Anticipation of a return to relative normalcy in the not-too-distant future is not only a psychological bulwark against the stresses and troubles of the present but is also a reasonably likely base-case scenario.

 

The reality could be more nuanced, as uneven supply and tentative public uptake of the vaccine may be factors that lengthen out the timeline for defeating Covid-19. But questions of pacing aside, 2021 seems almost certain to be showing us the way to brighter days ahead, particularly after the dark months of winter finally give way to spring and then summer. Investors are, of course, already flashing-forward to this upbeat future. Market participants know that growth will rebound after tipping into what might amount to a brief double-dip recession this winter. But whether faster or slower than consensus, how can growth not improve alongside increasingly widespread vaccine distribution? Meanwhile, the Fed has promised to stay ultra-easy; more pandemic relief spending is almost certainly on the way from Capitol Hill (with a greater front-loaded magnitude than we had expected, it appears); inflation seems highly likely to remain in abeyance; the trajectory of dollar depreciation is already well established; and the Treasury yield curve steepening trend is gradual but seemingly inexorable; and last but not least, buoyant stocks appear set to either run higher or a lot higher. Through the lens of the markets, 2021 looks almost – dare we say it – predictable?

 

Amid all this apparent predictability resides one glaring unknown – the outcome of the two Senate runoffs in Georgia on January 5th, which will decide control of the chamber. A leading prediction market reflects roughly 2/3 odds that the GOP get at least a split, leaving meaningful residual odds that the Dems sweep and take back control of the Senate by the thinnest of margins. Other aspects also feed the uncertainty:

 

  • Polls are untrustworthy
  • Unprecedented resources are pouring in
  • Large absentee ballot factor again
  • Messaging issues for GOP (local authorities pushing election security, Trump and supporters saying it was rigged and blasting their handling of it)

It is worth noting that moderate Dems may not be too upset to see the GOP keep control of the Senate if that occurs, as it would absolve them of any pressure to “change the world” and they can spend two years setting their policies up, trying them out, and painting McConnell and the Senate GOP as obstructionists for not passing any of the bills they are sent – infrastructure is a good example of this. Then, for the midterm elections in 2022, the Senate electoral math is firmly in the Dems’ favor as they only have to contest 13 seats versus 20 for Republicans.

 

In short, there can only be low conviction about the high-impact outcome in Georgia. The two vastly divergent alternate policy realities of the two possible outcomes are shown below:

Looking ahead, the year-end period will feature at least a few more days of continued drama on Capitol Hill over the pandemic relief bill and government funding deadline. Meanwhile, we expect Brexit negotiations to run over the Sunday deadline, and then the year-end departure date, but be accompanied by both sides trying to play up the “amicable divorce” angle, with promises to keep negotiating, even as the economic reality of the UK’s departure from the EU looks more like a disorderly Brexit. Meanwhile, the entire US political landscape will pivot around the Georgia Senate runoffs on January 5th, with control of the chamber and the Biden administration’s policy wishlist hanging in the balance.

 

The regular macro calendar for the coming weeks until January 8th features some global PMI data and the December nonfarm payroll report on that second Friday in January, when we will publish our first Looking Ahead of 2021. Have the happiest of holidays!

 

  • Nonfarm Payrolls
  • Global PMIs
  • US Personal Income, Spending & Inflation

 

Global Economic Calendar: Auld Lang Syne

 

December 22

The day begins with the GfK Consumer Climate Indicator in Germany. Heading into December the GfK dropped to a five-month low of -6.7, from a revised -3.2 in the prior month and below market consensus of -5, as sentiment was hit by a partial lockdown to curb a second coronavirus wave. The gauge for economic outlook fell 7.3 points to -0.2, the lowest figure since May of this year when it stood at -10.4. Also, the income expectations sub-index declined 5.2 points to 4.6, and the willingness to buy indicator dropped 6.5 points to 30.5. GfK consumer expert Rolf Buerkl stated, “How the infection rate develops in the coming weeks will play a decisive role in determining whether the consumer climate will be able to stabilize again. Only a significant decrease in the number of infections and an easing of restrictions will restore a more optimistic outlook.”

 

The US brings the Final Estimate of US 3rd Quarter GDP. The second estimate showed the US economy expanded by an annualized 33.1%, in line with the advance estimate. It is the largest expansion ever, following a record 31.4% plunge in Q2, as the economy rebounds from the coronavirus pandemic. Upward revisions to business and housing investment, and exports were offset by downward revisions to personal and public consumption and private inventory investment. Still, personal spending was the main driver of growth, helped by checks and weekly unemployment benefits from the federal CARES Act. However, GDP is still 3.5% below its pre-pandemic level.

 

December 23

The focus of the day will be on the US Personal Income and Spending. In October personal income fell by 0.7% m/m, following a downwardly revised 0.7% increase in the previous month and compared with market expectations of a flat reading. The decrease in government social benefits was mostly to blame because of a drop in Lost Wages Supplemental Payments, a Federal Emergency Management Agency program that provides wage assistance to individuals impacted by the pandemic. In contrast, compensation and proprietors’ income rose. On a positive note, personal spending increased 0.5%, following a downwardly revised 1.2% growth in September and slightly beating market forecasts of 0.4%. Personal spending increased 0.5% m/m, following a downwardly revised 1.2% growth in September and slightly beating market forecasts of 0.4%. Real PCE rose 0.5%, boosted by increases in spending for both goods and services. Consumption of goods advanced 0.2%, boosted by recreational goods and vehicles. In addition, spending on services was up 0.6% due to health care spending. Additionally, The PCE price index was unchanged in October, following a 0.2% gain in September, as a 0.1% increase in services cost offset a 0.2% decline in goods prices. Within goods, prices were down for nondurable goods and durable goods. Core PCE, which excludes food and energy, were also flat in October, in line with market expectations. Year-on-year, the PCE price index advanced 1.2% and Core PCE increased 1.4%.

 

December 24

Christmas Eve brings US Durable Goods Orders. In October new orders increased 1.3% m/m, easing from an upwardly revised 2.1% rise in September and above market expectations of 0.9%. It is the sixth consecutive gain in durable goods orders. Excluding transportation, new orders rose 1.3% and excluding defense, new orders went up 0.2%. Orders slowed for transportation equipment and capital goods and computers and electronics. Orders for non-defense capital goods excluding aircraft, a closely watched proxy for business spending plans, increased 0.7%, following a 1.9% rise in September.

 

January 3

The Caixin China General Manufacturing PMI rose to 54.9 in November from 53.6 in October and beating market estimates of 53.5. This was the seventh straight month of growth in factory activity and the strongest since November 2010, as the post epidemic economic recovery continued to pick up speed. Both output and new orders rose at the fastest rate in a decade, employment grew the most since May 2011 and new orders rose further. Also, buying levels increased at the steepest pace since the start of 2011, with stocks of purchases rising the most since February 2010. At the same time, capacity pressures persisted, with the rate of backlog accumulation being the quickest since April. Meanwhile, the active market led to longer delivery times from suppliers. On the price front, the gauges for input and output prices rose further into expansionary territory. Looking ahead sentiment remained strongly positive, despite easing slightly since October.

 

January 5

The ISM Manufacturing PMI fell to 57.5 in November from a two year high of 59.3 reached in October. The PMI came slightly lower than market forecasts of 58, but still pointed to expansion in the overall economy for the seventh month in a row. A slowdown was seen in production, new orders and inventories while employment contracted. On the other hand, new export orders increased faster. Timothy R. Fiore, Chair of the ISM Manufacturing Business Survey Committee said, “The manufacturing economy continued its recovery in November. Survey Committee members reported that their companies and suppliers continue to operate in reconfigured factories, but absenteeism, short-term shutdowns to sanitize facilities and difficulties in returning and hiring workers are causing strains that will likely limit future manufacturing growth potential. Panel sentiment, however, is optimistic.”

 

January 6

The Consumer Confidence Index in Japan edged up to 33.7 in November, the highest since February but below pre-pandemic levels. Two out of the main sub-indices improved, overall livelihood and income growth. Furthermore, the sub-indice of willingness to buy durable goods was stable, while that of employment perceptions weakened.

 

The ADP Employment Report estimated that private businesses in the US hired 307K workers in November, below an upwardly 404K in October and market forecasts of 410K. It is the smallest increase in four months as a rise in COVID-19 infections and further lockdowns slowed down the hiring. The service-providing sector added 276K jobs led by leisure and hospitality with 95K, education and health with 69K, professional and business with 55K, trade, transportation & utilities with 31K, other services with 18K and financial activities with 8K, while the information sector added none. The goods-producing sector created 31K jobs, due to construction with 22K, manufacturing with 8K, and natural resources and mining with 1K. Private payrolls in midsized companies were up 139K, small firms added 110K, and large companies 58K.

 

Australia’s Balance of Trade increased to AUD 7.46 bil in October from an upwardly revised AUD 5.82 bil in September. This was the biggest trade surplus since April, amid improving global demand as more countries reopen their economies following an easing of COVID-19 lockdowns. Exports rose 5% to AUD 35.72 bil, while imports edged up 1% to AUD 28.26 bil. Considering the first ten months of the year, the trade surplus widened slightly to AUD 60.92 bil from AUD 59.24 bil in the same period of 2019.

 

January 7

Canada’s Balance of Trade narrowed slightly to CAD 3.76 billion in October from an upwardly revised CAD 3.82 bil. Exports rose 2.2% to CAD 46.5 bil, the highest since February, partially on higher exports of pharmaceutical products. Meantime, imports increased at a softer 1.9% to CAD 50.23 bil, the highest since October last year in part due to higher imports of cell phones. Canada’s trade surplus with the US widened to CAD 3 bil from CAD 1.7 bil in September, as exports went up 2.0% while imports dropped 2.3%. The trade gap with countries other than the US widened to CAD 6.8 bil from CAD 5.5 bil, with imports rising 9.1% and exports climbing 2.7%.

 

The US Trade Deficit widened to $63.1 bil in October from a revised $62.1 bil and compared to market expectations of $64.8 bil. Exports increased 2.2% to $182 bil in 2020, while imports rose 2.1% to $245.1 bil, reflection both the ongoing impact of the COVID-19 pandemic and the continued recovery from the sharp declines earlier this year.

 

The Ivey PMI for Canada fell to 52.7 in November from 54.5 and missing market expectations of 54.7. It was the lowest reading since May, amid the ongoing tightening of some COVID-19 restrictions to curb a second wave of infections. Employment and supplier deliveries decreased, while inventories rose and price pressures intensified.

 

The ISM Non-Manufacturing PMI fell to 55.9 in November from 56.6, in line with forecasts of 56. The reading pointed to the slowest increase in the services sector in six-months, but it remained above the long-term average of 54.6. Production and new orders slowed, inventories contracted, and price pressures eased while employment rose at a faster pace. “Respondents’ comments are mixed about business conditions and the economy. Restaurants continue to struggle with capacity constraints and logistics. Most companies are cautious as they navigate operations amid the pandemic and the aftermath of the US presidential election,” Anthony Nieves, Chair of the ISM Services Business Survey Committee said.

 

January 8

Germany’s Trade Surplus narrowed slightly to €19.4 bil in October from €21.3 bil a year earlier. Exports shrank 6.5% y/y to €112 bil, the 8th straight annual decline and imports fell 5.9% to €92.7 bil, the 10th consecutive drop. Exports to the Euro Area went down 5.1% and those to the UK sank 11.7%. Sales to the US, which have been hit particularly hard by the coronavirus pandemic, dropped 10.5% while sales to China edged up 0.3%. Imports to the Euro Area decreased 2.9% and those from the UK were down 14.7%. Purchases from China slumped 3.3%, those from the US 18.8% and from the UK 17.6%. Adjusted for calendar and seasonal effects, exports were still 6.8% and imports 5.2% lower than in February of 2020, the month before restrictions were imposed due to the coronavirus pandemic.

 

The Canadian Employment Report showed the economy created 62K jobs in November, well above forecasts of a 20K rise and after an 83.6K increase in October. This is the lowest number since the recovery began six months ago as full-time work went up by only 99K and 37K part-time jobs were shed. Self-employment stalled and compared to public sector and private sector employees, employment in this group remained furthest from the February pre-COVID level. Increases were seen in Ontario, British Columbia and in all four Atlantic provinces. Employment growth resumed in the goods-producing sector in November, with most of the increase in construction. At the same time, employment in the services-producing sector was little changed, for the first time since the recovery began in May. Among youth aged 15 to 24, employment rose 0.9% from October, while the youth unemployment rate fell 1.4 percentage points to 17.4%.

 

The US Nonfarm Employment Report showed that the US economy added 245K jobs in November, easing from a downwardly revised 610K, and well below market expectations of 469K. It was the smallest employment gain since the job market started to recover in May from a record 20.787 mil loss in April. In November, nonfarm employment was below its February level by 9.8 mil, or 6.5%. Employment declined in government and retail trade while gains occurred in transportation and warehousing, professional and business services, and health care. The unemployment rate edged down to 6.7% from 6.9% and compared with market expectations of 6.8%, as fewer people looked for work. The number of unemployed persons fell by 326K to 10.7 mil and the employment level declined by 74K to 149.7 mil. The labor force participation rate edged down to 61.5% in November, 1.9% points below its February level. The employment-population ratio was little-changed at 57.3%, 3.8% points lower than in February.

 

The CPI in China unexpectedly declined by 0.5% y/y in November, after a 0.5% rise a month earlier and compared with market consensus of a flat reading. This was the first deflation rate since October of 2009 as food prices dropped for the first time in nearly three years, with prices of pork tumbling after soaring last year due to the African Swine outbreak. Also, there were falls in cost of transport, rent, fuel, and utilities, and clothing. Meanwhile, prices of household goods and services were flat, while cost rose for health, education, and other goods and services. On a monthly basis, the CPI fell by 0.6%, the steepest drop since May, and following a 0.3% decline in October.

Afternoon Markets Brief 12-18-2020

Summary and Price Action Rundown

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

 

US Fiscal Stimulus Negotiations Drag On

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

Brexit Talks Enter Another Pivotal Weekend

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

Additional Themes

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

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

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

Morning Markets Brief 12-22-2020

Summary and Price Action Rundown

Global risk assets are steadying this morning as the long-delayed US pandemic relief package heads to the President’s desk, Brexit negotiators soldier on despite more setbacks, and vaccine rollout continues apace. S&P 500 futures indicate a 0.2% gain at the open after the index closed with a modest 0.4% loss yesterday after being down nearly 2% in the morning, shaving year-to-date gains to 14.4%. Meanwhile, the Nasdaq continued its outperformance trend amid the Covid-19 resurgence. Equities in the EU are retracing a portion of yesterday’s steep loss, which was spurred by fears of the mutated Covid-19 strain in the UK and Brexit concerns, while Asian stocks were mostly lower overnight. A broad dollar index is holding above its recent multi-year low and longer-dated Treasuries are flat, with the 10-year yield at 0.93%. Brent crude prices are retreating toward $50 per barrel as OPEC+ considers its supply cut trajectory.

 

US Pandemic Relief Bill Finally Passes Congress

The House and Senate approved the $900 billion compromise relief package late last night alongside a spending bill to fund the government through the fiscal year, with President Trump set to sign it today. This long-awaited pandemic relief bill features $600 in direct payments to individuals (adults and children), which Secretary Mnuchin said yesterday could be sent to bank accounts as early as next week. Additionally, the package includes expanded and extended unemployment benefits of $300 per week through March 14th, $325 billion in support for small businesses, extended eviction moratorium and $25 billion in aid to renters, $15 billion for airlines, and assistance for schools, childcare, and vaccine rollout. The total includes $429 billion in unused funds from the CARES Act and the entire package will be appended to the $1.4 trillion omnibus spending bill that will fund the government through the end of this fiscal year. Both President-Elect Biden and House Speaker Pelosi indicated their belief that more stimulus will be needed next year, particularly given the relatively brief period granted for additional unemployment benefits. The provision to prevent the Fed from restarting any of the five CARES Act lending programs, or create similar ones in the future, had become the main sticking point last week once the two most controversial elements, direct funding for state and local governments and liability protections for businesses, had been omitted. While GOP Senators asserted that the provision would exclusively target the five Fed programs, Democrats accused Republicans of trying to hamstring the incoming Biden administration and limiting the ability of the Federal Reserve to respond to economic distress in the future. The final version of the bill is said to narrow the restriction on the Fed to identically reproducing the CARES Act programs, thereby allowing novel formulations of Fed emergency lending facilities in the future. – MPP view: Better late than never. And with the Democrats and Republicans both falling short of their two “must-haves” in this bill (state and local government aid, and corporate liability limits, respectively), we expect a resumption of negotiations after the inauguration.

Brexit Negotiation Bog Down in Waning Days Before the Deadline

The pound is extending its decline from recent highs against the dollar and euro as the UK and EU remain deadlocked over the stubborn sticking point of fishing rights, with the deadline looming next Thursday. Having missed yet another artificial deadline on Sunday, Brexit talks remain stalled this morning after the UK’s proposed compromise on fishing rights remained unacceptable to the EU. The pound, which has acted as a barometer for the fortunes of Brexit, at one point yesterday was down nearly 2% versus the dollar and euro, with the latest pandemic developments adding to the pressure, but steadied in later trading as the UK gave more ground on this challenging issue, and analysts note that more concessions may be forthcoming. With a reimposition of total lockdowns in southeast England and freight stoppage between the UK and France as the fraught backdrop, Prime Minister Johnson is reportedly set to decide in the coming days whether to accept EU terms on fishing and other outstanding issues or opt for a no-deal departure from the single market at midnight on December 31st. In the absence of a firm UK decision, however, reports suggest that talks could continue straight up to the deadline. – MPP view: We are retaining our out-of-consensus call for a hard and/or disorderly Brexit at year-end, as fishing rights remain intractable and the timeline is dwindling. But with both sides seemingly ready to continue talking past the deadline, Brexit may seem, from a market perspective at least, less like an acute shock and more like a chronic condition. 

Additional Themes

Possible Easing of OPEC+ Output Cuts – Russia gave indications today that it intends to support OPEC+ raising output by 500,000 barrels a day at next month’s meeting. The hike would take place in February, matching the increase already agreed for January. 500,000 barrels is the maximum monthly incremental supply hike allowed by the cartel’s agreement in early December. OPEC+ shifted their schedule to monthly meetings in order to be able to adjust their production more rapidly to changes in the market. The new stance from Russia came after Brent crude had already dropped toward $50 a barrel due to the UK implementing a new full lockdown in London and southeast England to combat a more contagious strain of Covid-19 that is spreading rapidly. Furthermore, a host of nations around the globe limited travel to and from the UK. Brent fell 2.9% today. – MPP view: Like stocks, oil prices have been in a transition phase as traders try to look past the dire near-term outlook to the post-vaccine demand surge. As we had expected, the latest OPEC boost provided short-term support to prices, and US stimulus expectations seem to have given some additional lift, with rising tensions (and increasing incidents) in the Gulf and dollar weakness adding to the upside impetus. Still, we have expected the dismal demand dynamics of the coming quarters to keep prices capped and see OPEC+ commitment to output cuts as difficult to maintain in the coming months. Today’s development is aligned with our base case expectation that oil prices will have a hard time making significant headway from here. 

Traders Eye Georgia Runoffs – Market commentators are noting options activity in the Treasury market in anticipation of the two Senate runoff elections scheduled for January 5th, though early and mail-in balloting is well underway with a reported 1.5 million votes already cast. For context, traders would expect to see longer-dated Treasury yields jump and the dollar slump in the event of a Democrat sweep of the two contests, which would deliver control of the Senate and facilitate a far more expansionary fiscal stance in the first time of the incoming Biden administration. Betting lines and a popular prediction market are reflecting odds of the Republicans achieving at least a split in the two races and retaining Senate control at over 70%. – MPP view: Our base case is aligned with consensus but we expect odds to tighten into polling day on January 5th and investors will not be able to take a GOP win for granted, which will keep longer-dated Treasury yields biased upward and will remain a headwind for the dollar. Though the potential for a Dem sweep might give rise to concerns over taxation at the margin, enthusiasm for a less constrained pro-growth and fiscally stimulative Biden economic program would, we expect, render that result a comfortable net positive for equities.