Morning Markets Brief 10-8-2020

Summary and Price Action Rundown

Global risk assets are extending yesterday’s rebound this morning as investors refocus on the prospects for more fiscal and monetary stimulus after the November election. S&P 500 futures indicate a 0.5% higher open after the index jumped 1.7% yesterday, erasing Tuesday’s downside and upping its year-to-date gain to 5.8%, which is 4.5% below early September’s record high. Equities in the EU and Asia were broadly higher overnight. As investors continue to assess the outlook for policy stimulus, the dollar is slightly lower while longer-dated Treasury yields fluctuating near multi-month highs, with the 10-year yield at 0.77%. Brent crude prices remain choppy, jumping back toward $43 per barrel amid crosscurrents in the demand outlook.

Investors Recalibrate Expectations for Fiscal Stimulus

Amid President Trump’s public vacillation on pandemic relief negotiations as he attempts to recover from the coronavirus, investors are setting their sights on the prospect of even greater fiscal support after the election. Yesterday, US equities recouped their losses from Tuesday’s rollercoaster session, with traditional economy stocks leading to the upside, while the dollar weakened and longer-dated Treasury yields sold off, a pattern that suggests rising expectations for more fiscal stimulus, though consensus is shifting to a post-election deal. President Trump has publicly vacillated over the pandemic relief bill, again reversing his stance yesterday just hours after publicly announcing his decision on Tuesday to cancel talks with Democratic leadership until after the November 3rd election. Specifically, the President again took to Twitter yesterday morning to convey his readiness to sign standalone bills for provisions such as direct stimulus checks and an extension of PPP, particularly for the airlines industry which is facing upwards of 32,000 furloughs. Though President Trump’s most recent swerve is in a more stimulus-friendly direction, Speaker Pelosi is unlikely to make any near-term concessions to the White House in pursuit of a deal given Joe Biden’s increasing lead in the polls and Democrats are rejecting this piecemeal approach, as they have done repeatedly throughout this negotiation. Still, the prospects look favorable for specific airline industry aid, which Speaker Pelosi has endorsed and was the subject of discussion with Treasury Secretary Mnuchin yesterday, with further talks expected today. With regard to the broader deal, investors are increasingly focused on the prospects of an agreement following the election. In the case of a Trump victory, the House Democrats will likely accede to something like the $1.5 trillion version currently being supported by the White House, and if Joe Biden wins, the swing factor would be the Senate, with a Dem sweep pointing to passage of a considerably upsized package of roughly $3 trillion by early next year (more below).

Fed Communications Put Additional Easing in Focus

With investors pondering whether the FOMC might enact more aggressive easing in pursuit of their newly revised and more ambitious inflation and employment targets, the minutes kindled anticipation of more asset purchases. The September FOMC Meeting Minutes were released yesterday, highlighting that Fed officials see rates remaining at the 0-0.25% range through at least 2023 based on the current outlook, in pursuit of the revised policy targets: labor-market conditions achieve maximum employment, with a particular focus on lower-income segments, inflation reaches 2%, and inflation is on track to moderately exceed 2% for some period of time. So far, Fed officials have not specifically clarified what timeframe will be used to gauge the latter condition, though they have emphasized the approach is not anchored to a mechanical model and will maintain some measure of flexibility. The minutes also showed there was further discussion on the Fed’s asset purchase program, noting “that in future meetings it would be appropriate to further assess and communicate how the Committee’s asset purchase program could best support” its objectives. The Fed is currently purchasing $80 billion of US Treasuries and $40 billion in mortgage backed securities monthly. Market participants are also noting a study by a top Fed economist advocating the increasing use of asset purchases for monetary easing when interest rates are at the zero lower bound.

Additional Themes

Veep Debate Remains Orderly – With the polls showing Joe Biden extending his lead over President Trump, the stakes for last night’s Vice Presidential debate were high for both sides. With neither candidate landing a knockout blow, analysts suggest that the proceeding are unlikely to alter the dynamics of the race, which appear to be moving increasingly in favor of Joe Biden. Recent polling suggests Biden holds a nearly double-digit lead over Trump nationwide, is ahead in nearly most crucial swing states by varying degrees.

Weekly Jobless Claims Due – With key support like the Paycheck Protection Program rolling off, economists are bracing for an abrupt readjustment in US labor markets over the coming months. Nevertheless, new filing for the week ending October 3rd are expected to remain broadly steady at 820K. For context, initial jobless claims rose by 837K in the week ending September 26th, slightly below market forecasts of 850K and a decline from the prior week’s upwardly revised 873K figure. The reading marked the fifth consecutive week claims remained in the 800K’s territory, suggesting the labor market recovery remains stagnant as government support continues to wane.