Category: Briefings

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.

Summary and Price Action Rundown

Global risk assets are advancing this morning after Russia’s announcement that a domestically-produced vaccine has been approved for use, while President Trump mulls additional options for stimulus amid deadlocked talks with Congress over the pandemic relief bill. point to a 0.5% higher open after yesterday’s gains extended the index’s year-to-date upside to 4.0%, registering a new high for the pandemic and coming within 1% of February’s all-time high. Equities in the EU are jumping on the vaccine news and encouraging economic data, while Asian stocks were mostly higher overnight. The dollar is turning back toward nearly two-year lows while longer-dated Treasury yields are finding support on vaccine hopes, with the 10-year yield at 0.61%. Brent crude prices are rising above $45 per barrel.

Optimism Over Russian Vaccine News

Russia’s announcement that a Covid-19 vaccine has been approved is providing further impetus for the ongoing rally in global equity markets. Earlier this morning, global risk asset prices lurched higher following news that Russia’s Health Ministry has issued the world’s first approval for a Covid-19 vaccine, which has been developed by the Gamaleya Institute. President Putin declared that it provides lasting immunity, with the Health Ministry estimating a two-year period of effectiveness, and that his daughters have each received a dose. Reports have registered a degree of skepticism from the global medical community, with concerns that the standard Phase 3 trial period had been radically shortened or skipped entirely in an effort to rush the vaccine to market. With a profusion of potential vaccines in various stages of development, investors have been poised for a series of vaccine announcements beginning roughly around now, though there continues to be deep uncertainty over their effectiveness as well as the ability to produce and distribute them widely enough to achieve herd immunity in a timely fashion.

White House Eyes Tax Cuts Amid Congressional Deadlock on Stimulus

After President Trump moved to circumvent Congress over the weekend with stopgap pandemic relief measures through executive order, his remarks last evening revealed a pivot to prospective tax cuts. At a press conference yesterday, President Trump indicated that he is revisiting the idea of reducing capital gains tax rate, which tops out at 20%, and will seek to deliver a middle-class tax cut, noting that details would follow shortly. However, analysts point out that his ability to enact these measures without Congressional assent is limited, though an executive order could in theory be used to require capital gains to be indexed to inflation, thereby effectively reducing the rate paid. Such an approach has been considered previously and is deemed likely to face legal challenges. This comes as questions mount over the efficacy of President Trump’s executive orders issued in lieu of a pandemic relief deal. Amid mixed messages from the White House regarding the payroll tax holiday, businesses must assume that they will to have to pay back the deferred amounts later this year, while more states are pushing back regarding their obligation under the President’s unemployment relief to pay a quarter of the $400 additional benefit. Meanwhile, House Democrats and administration officials remain at loggerheads over key negotiating points, particularly the amount of unemployment benefit support and aid to states and municipalities.

Additional Themes

Australian Business Confidence Slips – The National Australia Bank’s (NAB) index of business confidence plunged to -14 in July from a downwardly revised 0 in the prior month, amid uncertainties surrounding the Covid-19 resurgence that led to renewed restrictions in Victoria. Confidence fell across all industries, led by a decline in mining. The survey was conducted prior to the stage 4 lockdown in Melbourne but confidence had already deteriorated for fear of the spread of the coronavirus. The NAB Group Chief Economist said, “while the improvement in conditions is very welcome, capacity utilization and forward orders point to ongoing weakness overall. Therefore, with confidence still fragile there is some risk that conditions lose some of their recent gains in coming months.”

EU Economic Outlook Brightens – The closely-followed ZEW economic expectations survey showed improvement in August for both Germany and the EU as a whole. The German reading jumped to 71.5 from July’s reading of 59.6, handily topping consensus estimates of 55.8, while the regional gauge advanced to 64.0 from 59.6. For context, recent upside surprises in EU economic data have contributed to gains for euro, sending the single currency to its highest level versus the dollar since spring of 2018.

US Small Business Confidence Dips – The NFIB small business optimism index undershot expectations in July, declining to 98.8 from June’s multi-month high of 100.6 versus estimates of only a slight tip to 100.5. The NFBI chief economist noted the difficulties that small businesses faced last month in attempting to reopen amid a widespread Covid-19 resurgence.

Summary and Price Action Rundown

Global risk assets were mostly higher overnight as President Trump attempts to circumvent Congress to deliver pandemic relief through executive action, while US-China tensions continue to percolate but stop short of significant escalation. S&P 500 futures indicate a slightly higher open after last week’s gains extended the index’s year-to-date gain to 3.7%, registering a new high for the pandemic and coming within nearly 1% of February’s all-time high. Equities in the EU and Asia were mostly higher overnight. The dollar is continuing to claw higher from nearly two-year lows though longer-dated Treasury yields are settling back toward recent lows, with the 10-year yield at 0.55%. Brent crude prices are re-approaching $45.

White House Resorts to Executive Action Stimulus Stopgaps

After the administration failed to reach an agreement last week with Congressional Democrats over the magnitude and priorities of the next round of US pandemic relief spending, President Trump took executive actions over the weekend that have raised questions of enforceability and administration. President Trump issued an executive order and a series of memorandums targeted at coronavirus stimulus on Saturday, moves which some analysts characterize as bypassing Congressional authority over the purse, as stimulus talks remained at an impasse following another contentious week of negotiations. There is no apparent schedule for talks to restart today. 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. Unemployment benefits are to be mostly covered by the federal government ($300/week) with state governments providing the remaining $100/week, though some governors are expressing doubt that their threadbare budgets can bear such an obligation. The duration of these payments is also unclear, as is the timeline for disbursement of funds to eligible recipients. Meanwhile, the Trump administration has sent mixed messages on the details of the payroll tax holiday, raising confusion over its application. The breakdown in negotiations leaves several other issues, from stimulus checks to PPP funding, on hold until an agreement can be reached.

US-China Tensions Remain Elevated

In retaliation for the latest US moves to counter China, including sanctions on eleven high-ranking officials involved in oppression in Hong Kong and the impending bans on Chinese-owned apps TikTok and WeChat, Beijing announced that it would sanction eleven US officials. Senators Rubio and Cruz are two high-profile names on the list, but with China matching the US figure of eleven targeted individuals and no Trump administration officials on the list, there is a sense of proportionality and de-escalatory intent suggested in this move. For context, last week featured high-profile moves by the Trump administration targeting China and Chinese companies with alleged deep government ties. Friday morning, the US announced that it was imposing sanctions on eleven Chinese officials including Hong Kong’s Chief Executive Carrie Lam over their role in “implementing Beijing’s policies of suppression of freedom and democratic processes” according to the Treasury Department. This move followed recent executive orders from the administration that will impose a ban on Chinese-based apps TikTok and WeChat in the US amid privacy and national security concerns. Relatedly, the scramble by US companies to arrange potential bids for TikTok’s US business continues to heat up, with Twitter now in the mix along with Microsoft and other companies. Equities in Hong Kong underperformed overnight, though mainland Chinese equities rallied and both the onshore and offshore renminbi remained stable against the dollar near their strongest levels since March.

Additional Themes

Kodak Deal on Hold – The $765 million 25-year loan from the International Development Finance Corporation to expedite domestic production of drugs for several medical conditions, authorized by the Defense Production Act, has been delayed amid allegations that Eastman Kodak board members engaged in improper stock purchases ahead of the disclosure. Upon the announcement of the loan late last month, shares of the former photo giant soared over 300% and continued to rise over the ensuing days, gaining roughly 1000% over the course of that week.

Pivotal Global Economic Data This Week – This week, US retail sales figures for July offer the greatest potential for moving markets, as analysts will be attuned for signs that the resurgence of Covid-19 last month dented consumer sentiment. Meanwhile, initial jobless claims and consumer price inflation will also be in focus. Overseas data includes key Chinese growth readings for July, as well as second quarter EU and UK GDP.

Summary and Price Action Rundown

Global risk assets were mostly lower overnight amid rising US-China tensions and uncertainty over US fiscal stimulus negotiations, while investors await this morning’s key US labor market data. S&P 500 futures point to a 0.4% lower open after the index rose another 0.6% yesterday to extend its year-to-date gain to 3.7%, registering a new high for the pandemic and coming within nearly 1% of February’s all-time high. Equities in the EU and Asia were mostly lower overnight. Ahead of the pivotal US jobs number, the dollar is climbing above almost two-year lows while longer-dated Treasury yields are flat around their lowest levels since early March, with the 10-year yield at 0.53%. Brent crude prices are dipping below $45 per barrel.

US Labor Market in the Spotlight

After some mixed employment data earlier this week raised questions over the durability of the US jobs market recovery, investors are awaiting July nonfarm payroll figures. The Labor Department’s highly-anticipated July employment numbers are due later this morning, with consensus estimates for 1.48 million new jobs after June’s record 4.80 million. Following a spurt of hiring over recent months amid the selective reopening of the economy, economists are pondering a leveling-off in improvement. Yesterday’s new jobless claims data for the week ending August 1^st showed that another 1.2 million Americans filed for unemployment benefits, the least since the pandemic started, 200k less than last week and comparing favorably to consensus expectations of 1.4 million. It was also the largest weekly drop in jobless benefits applications in almost two months, but still the 20^th consecutive week of over a million claimants. Earlier this week, data showed a steep deceleration in private payrolls in July as payroll provider ADP reported that private businesses in the US hired just 167,000 workers last month, far short of market expectations of a 1.5 million rise after a revised 4.3 million increase in June. With ADP and continuing claims sending somewhat disparate signals, analysts will be particularly attuned to this morning’s nonfarm payrolls report.

US-China Tensions Ratchet Higher

In the latest move to counter China and its international companies with alleged ties to the Chinese Communist Party, President Trump banned apps TikTok and WeChat, effective in 45 days. President Trump invoked the 1977 International Emergency Economic Powers Act to justify the bans on US companies dealing with Chinese parent companies ByteDance and with Tencent specifically in connection with WeChat. The law provides a broad mechanism for the US government to impose restrictions on companies deemed to pose a threat. The TikTok order formalizes President Trump’s announcement earlier this week that app would be blocked in the US unless a US buyer completes a deal for the business within 45 days. Once the order takes effect, at the end of that period, any transactions between TikTok’s parent company, ByteDance, and US citizens will be outlawed for national security reasons. For the more than 100 million Americans who have downloaded TikTok, experts say the app may no longer be sent software updates, rendering TikTok inoperable over time. President Trump yesterday renewed calls for Microsoft to acquire the app and suggested that it should try to buy TikTok’s entire global operations. Secretary of State Pompeo signaled that the crackdown on TikTok was part of a broader campaign against Chinese tech companies with access to the data of US citizens. On Thursday, in a display of bipartisan solidarity on this issue, the Senate unanimously passed a bill to ban TikTok on government-issued devices. Trump also signed an executive order to restrict US business with China-based Tencent Holdings but narrowly in regard to its WeChat app. More than a billion people in China use WeChat, an all-in-one app used for messaging, social media and making mobile payments. Additionally, a White House working group also put forward a plan that Chinese companies with shares traded on US stock exchanges would be forced to de-list unless they comply with specific audit requirements by 2022. Chinese firms that are planning an initial public offering in the US would have to comply before they can be listed. The administration’s plan would require rule-making by the SEC, which ultimately oversees the audits of companies whose shares are traded in the US.

Additional Themes

US Stimulus Talks on the Brink – With today seen as an unofficial deadline for a deal, the atmosphere around the negotiations has turned more contentious. Speaker Pelosi and Senate Minority Leader Schumer expressed disappointment with yesterday’s talks, saying that the two sides are far apart on key issues. This dour assessment was echoed by Treasury Secretary Mnuchin and WH Chief of Staff Meadows. President Trump continues to assert that he will enact economic relief measures through various executive orders in lieu of a deal.

Earnings Feature Pandemic Impact – As earnings season winds down this week, analysts are focused on some notable reports from companies impacted by the pandemic. Shares of Uber are down 3.5% in pre-market trading after soaring Uber Eats deliveries failed to offset the steep decline in customer rides. With 441 of S&P 500 companies having reported, 84.3% of results have featured a positive earnings-per-share (EPS) surprise and 63.9% have topped revenue estimates. However, growth of sales and earnings are down 11.2% and 9.3%, respectively, thus far year-on-year.

Summary and Price Action Rundown

Global risk assets are mostly lower ahead of this morning’s key US labor market data, while investors monitor halting progress toward a US pandemic stimulus bill. S&P 500 futures indicate a 0.2% lower open after the index rose 0.6% yesterday to extend its year-to-date gain to 3.0%, registering a new high for the pandemic and coming within 2% of February’s all-time high. Equities in the EU and Asia were mixed overnight. The dollar is hovering near two-year lows while longer-dated Treasury yields are sliding back toward their lowest levels since early March, with the 10-year yield at 0.52%. Brent crude prices are holding above $45 per barrel.

Uncertainty Over US Labor Market Recovery

Following yesterday’s disappointing US jobs figures for July, analysts are awaiting this morning’s release of weekly unemployment claims data and looking ahead to tomorrow’s consequential nonfarm payroll figures. According to payroll provider ADP, private businesses in the US hired just 167,000 workers in July, far short of market expectations of a 1.5 million rise after a revised 4.3 million increase in June. The labor market continued to recover from April’s record slump in employment, but a resurgence in Covid-19 infections has forced several states to scale back or pause the reopening of their economies, sending some workers back to unemployment. Businesses with between 50 and 499 employees reported an outright decline of 25,000. Big business brought back 129,000 jobs while firms with fewer than 50 workers added just 63,000. All but 1,000 of the jobs came from the services sector, as professional and business services led with 58,000 while the battered hospitality sector saw an addition of 38,000. Analysts are now awaiting today’s weekly jobless claims data, with expectations for a relatively stable 1.40 million new filings for the week ending August 1^st versus 1.43 million the prior week. This will set the stage for the Labor Department’s highly-anticipated July nonfarm payrolls figures, which will be released tomorrow morning. Consensus estimates are for 1.50 million new jobs after June’s record 4.80 million.

Bank of England Holds Policy Steady

The UK central bank deferred its decision on additional easing into the fall as it monitors the ongoing economic effects of the pandemic and eyes the risk of hard Brexit at year-end. The Bank of England (BoE) voted unanimously today to maintain the key bank rate at a record low of 0.1%, in line with analysts’ expectations as this summer meeting was generally seen as a placeholder ahead of the BoE’s likely more consequential decisions at either the September or November meetings. The Committee also voted unanimously for the BoE to continue with its existing programs of UK government bond and sterling non-financial investment-grade corporate bond purchases, maintaining the target for the total stock of these purchases at £745 billion. The Committee expressed the intention not to tighten monetary policy until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably and Governor Bailey downplayed the prospect of negative interest rate policy (NIRP). Some analysts had expected the BoE to take a more proactive approach at this meeting, perhaps increasing the magnitude of asset purchases, with that option now being deferred to September or November, while futures markets are now reflecting diminished odds of NIRP. As market participants recalibrate to account for the slightly less dovish than anticipated BoE policy stance, the pound is getting a boost this morning, rising 0.5% versus the dollar to approach its 2020 high from January. Still, further easing is anticipated amid ongoing headwinds from the pandemic and the threat of a no-deal Brexit at year-end.

Additional Themes

Clock Ticks Down on US Stimulus – With tomorrow seen as an unofficial deadline for a deal before possible Congressional recess, mixed reports of progress towards a consensus continue. Speaker Pelosi, Senate Minority Leader Schumer, Treasury Secretary Mnuchin and WH Chief of Staff met again yesterday afternoon, with the Trump administration offering to extend federal unemployment insurance at $400 per week and the moratorium on evictions from federally backed housing into December, alongside $200 billion in aid for states and municipalities. Though progress was cited, no agreement was forthcoming.

Earnings Feature Pandemic Impact – As earnings season winds down this week, analysts are focused on some notable reports from companies impacted by the pandemic. Disney traded 8.9% higher yesterday after announcing a solid performance driven by impressive growth in its Disney+ streaming service that now totals 60.5 million subscribers. Meanwhile, analysts are bracing for ugly numbers from Uber after today’s closing bell. With 415 of S&P 500 companies having reported, 84.2% of results have featured a positive earnings-per-share (EPS) surprise and 64.2% have topped revenue estimates. However, growth of sales and earnings are down 11.5% and 10.3%, respectively, thus far year-on-year.

Summary and Price Action Rundown

Global risk assets moved higher overnight as brightening prospects for the US pandemic stimulus bill and solid economic data in China and the EU lifted spirits and depressed the dollar, while US-China tension continue to simmer in the background. S&P 500 futures point to a 0.6% higher open after the index gained 0.4% yesterday to extend its year-to-date upside to 2.3% and register a new high for the pandemic, while the Nasdaq tagged another all-time high. Equities in the EU and Asia were mostly higher overnight. The dollar is relapsing back toward two-year lows while longer-dated Treasury yields are edging above their lowest levels since early March, with the 10-year yield at 0.53%. Brent crude prices are jumping above $45 per barrel, buoyed by solid global growth figures and a weakening dollar.

Signs of Compromise Brighten US Fiscal Stimulus Prospects

After reports from Capitol Hill signaled further slippage in the timeline for an agreement, the Trump administration appears to be taking the initiative to push for an expedited compromise. As negotiations extend into their second week over the size and shape of the next stimulus package, mixed reports of progress towards a consensus continue. Yesterday evening, Treasury Secretary Mnuchin stated that while a deal was not imminent, there had been agreement with House Speaker Pelosi and Senate Minority Leader Schumer over the timeline to reach accord by the end of this week so that legislation can pass next week. He noted that the White House was offering a compromise on jobless benefits and an extension of an eviction moratorium to year-end. Speaker Pelosi emphasized the need for swift passage of this bill in a subsequent interview, and she and Senator Schumer both characterized last evening’s meeting as representing a step forward. This comes after some key Congressional leaders warned yesterday that talks may spill over into next week as progress remains elusive on the main sticking points, namely federal unemployment benefits and financial aid to state and local governments. The Trump administration has continued to float the idea of taking unilateral action should Congress fail to finalize a deal. Specifically, President Trump has mentioned issuing, through executive order, an eviction moratorium and perhaps more controversially the suspension of the Federal payroll tax, a proposal both parties curtly rejected in the early construction of their stimulus plans.

US-China Tensions Continue to Simmer

With the controversy over TikTok as the latest flashpoint in the fraught relations between Washington and Beijing, headlines yesterday indicated that the US would review the progress on the Phase One trade deal around mid-month. With US-China friction continuing over issues such as TikTok, Hong Kong, handling of the pandemic, and human rights in Western China, analysts noted reports that US Trade Representative Lighthizer would be meeting virtually with Chinese Vice Premier Liu He on August 15^th to review the first six months of progress since inking the Phase One trade deal. China’s US Ambassador characterized the review as a routine exercise and expressed expectations of a “positive” atmosphere. However, Chinese buying of US agricultural goods is lagging the targets set forth in the deal for a year-one increase of $77 billion worth of purchases, while progress toward the $25.3 billion energy products purchase target is even further behind the curve. For context, in early May, President Trump had mused publicly that the Phase One trade deal might break down over China’s alleged mishandling of the Covid-19 outbreak. However, on May 8^th, the Chinese Ministry of Commerce and the US Trade Representative (USTR) both characterized a conference call among US Trade Representative Lighthizer, Treasury Secretary Mnuchin, and Chinese Vice Premier Liu as constructive. The USTR statement indicated “good progress” and noted that “both countries fully expect to meet their obligations… in a timely manner.”

Additional Themes

China PMIs Remain Firm – The Caixin China composite purchasing managers’ index (PMI) slipped to 54.5 in July from 55.7 a month earlier, with an easing pace of expansion in the service sector cooling the gauge, while the manufacturing sector expanded at the fastest pace in nearly a decade. China’s July services PMI eased to 54.1 from a decade high of 58.4 the prior month but that level remains consistent with solid growth. For context, PMI readings over 50 denote expansion of activity in the sector. The manufacturing PMI rose to 52.8 in from 51.2 in June, beating market consensus of 51.3. New orders kept increasing and the backlog of work also rose. Meantime, both overseas demand and employment continued to be troubled for both sectors. Both onshore and offshore renminbi hit five-month highs versus the dollar overnight.

Solid EU Data Lifts Euro – The euro is rising to its strongest level versus the dollar since spring of 2018 after the final reading of July service PMIs were slightly lower the initial estimates but remained in robustly expansionary territory, lifting the July composite reading slightly ahead of estimates to 54.9 from 48.5 in June. Meanwhile, EU retail sales for June also remained strong, rising 5.7% on the month to gain 1.3% on the year.

Summary and Price Action Rundown

Global risk assets were mixed overnight as investors monitor central bank policymaking, await additional corporate earnings, and ponder prospects for the US pandemic stimulus bill. S&P 500 futures indicate a 0.2% lower open after the index rose 0.7% yesterday to register a new high for the pandemic, while the Nasdaq tagged another all-time high. Equities in the EU and Asia were mixed overnight. The dollar is steady near two-year lows and longer-dated Treasury yields are turning back toward their lowest levels since early March, with the 10-year yield at 0.54%. Brent crude prices continued to hover in a narrow range around $43 per barrel.

Central Bank Policy in the Spotlight

The Reserve Bank of Australia (RBA) held its monetary settings steady overnight as the Federal Reserve sets the groundwork for a potential policy pivot in September. As widely expected, the RBA kept its policy rate unchanged at a record low of 0.25%, a level it first set in late March. The central bank said that a recovery from the Covid-19 crisis is now underway in most of Australia, despite Victoria’s government imposition of stage 4 restrictions across Melbourne over the weekend to contain a second-wave outbreak. Their baseline economic scenario has output falling 6% this year and then growing 5% next year with the unemployment rate increasing to around 10% by the end of the year. The RBA board reiterated that it will not increase the cash rate target until progress is being made towards full employment and it is confident that inflation will be within the 2-3% target. Governor Lowe emphasized that fiscal and monetary stimulus will be required “for some time” and indicated that the RBA would start a fresh round of bond buying tomorrow to maintain its yield curve control policy (YCC), because the yield on 3-year Australian Government Securities had recently started rising above its target interest rate of 25 basis points. The RBA did not focus on the level of the Australian dollar, which is continuing its appreciation trend this morning, rising 0.2% versus its US counterpart to re-approach its strongest level since early 2019. This comes ahead of the Bank of England (BoE) meeting this Thursday, at which policy is expected to be held similarly steady, though some analysts expect an increase in asset purchase levels. Also, market participants will focus on any additional insight from the BoE regarding the prospect for negative interest rate policy (NIRP) over the coming months if the economy needs additional monetary easing. Meanwhile, Fed officials have expressed broad skepticism of NIRP and recent communications suggest little appetite for RBA-like YCC. Instead, the FOMC appears poised to enact a more subtle shift at the September meeting by adopting a form of enhanced forward guidance on interest rates, explicitly tied to their already-existing inflation and employment mandates.

Talks Grind Ahead on US Fiscal Stimulus Deal

Commentary from Capitol Hill suggested incremental progress toward agreement on this next phase of pandemic relief. Yesterday, House Speaker Pelosi characterized the day’s negotiations with Treasury Secretary Mnuchin and White House Chief of Staff Meadows as “productive” but despite “moving closer together,” she indicated that “there are a lot of issues that are still outstanding.” The main point of contention and the most urgent matter is the $600 per week unemployment benefit augmentation from the CARES Act, which expired last Friday. Meanwhile, President Trump has floated the idea of taking executive action to alleviate the economic burden caused by the coronavirus, particularly on evictions, but details are scant.

Additional Themes

US-China Frictions Over TikTok – Chinese state media likened the Trump administration’s actions regarding the controversial social media platform TikTok to thievery, though acknowledging that the sale of US operations to Microsoft or another buyer might be appealing to owner ByteDance on a business level. For context, President Trump has ordered TikTok to exit its US operations by September 15^th to allow time for a potential sale to be finalized, and further stated that the US government should collect a substantial fee for arranging the deal. Chinese state media referred to impending retaliation, though Beijing has limited options for a directly proportionate response given that it already bans Facebook, Twitter, and Google.

Earnings Season Features Final Key Reports – The busiest and most consequential period of second quarter (Q2) earnings season has concluded but this week still features some meaningful reports, including companies that have faced notable impacts from the pandemic. Insurers Allstate and Prudential along with Walt Disney and Wynn Resorts, report after today’s closing bell. Through the remainder of the week, CVS, MetLife, Etsy, Royal Caribbean, Eastman Kodak,AMC Entertainment, and Norwegian Cruise Lines are among the headliners. With 338 of S&P 500 companies having reported, 84.5% of results have featured a positive earnings-per-share (EPS) surprise and 65.6% have topped revenue estimates. However, growth of sales and earnings are down 12.1% and 10.6%, respectively, thus far year-on-year.