Morning Markets Brief 11-3-2020

Summary and Price Action Rundown

Global risk assets are subdued this morning after yesterday’s losses as investors continue to weigh the grim near-term outlook for the pandemic and the global economy against upbeat medium-term prospects for stimulus measures and eventual vaccine rollout. S&P 500 futures indicate a 0.1% lower open after the index retreated further from Tuesday’s record high yesterday, dropping 1.2% to reduce its year-to-date upside to 10.4%. Equities in the EU are lagging as regional leaders ponder further coronavirus containment measures, while Asian stocks were mixed overnight. A broad dollar index is up slightly from its recent multi-year low, while longer-dated Treasuries are firm, with the 10-year yield dipping to 0.86%. Brent crude is hovering around $44 per barrel despite some bearish signs of OPEC disunity ahead of its pivotal month-end meeting.


Investor Focus Shifts Back to Dire Near-Term Pandemic Dynamics Despite Vaccine Optimism

The announcement of school closures in New York City yesterday due to the accelerating coronavirus outbreak highlighted the downside risks to the economy over the coming quarters before widespread vaccine availability. US stock futures are still in the red this morning after equity losses accelerated yesterday afternoon following the announced closure of schools in New York City due to rising infection rates across the metropolis. The specific trigger was the weekly average rate of positive tests rising over 3%, which some analysts had thought might occur as early as last weekend. Mayor de Blasio characterized the closure as temporary but gave no indication of the timeline for reopening and cautioned a decline in the positivity rate alone may not be sufficient to send city students back to the classrooms. Although President-Elect Biden’s public health advisors have declined to support a strict lockdowns like the one imposed in South Australia this week, or even partial shutdowns like those instituted in Germany and France late last month, more state and municipal leaders are tightening restrictions and calling for families to stay home for the Thanksgiving holiday. Most recently, Kentucky announced statewide school closures this morning as well as a ban on indoor dining. Near-term concerns over the pandemic and its economic fallout are overbalancing more upbeat vaccine news, this time from AstraZeneca and Oxford University. Specifically, this vaccine is said to be highly effective in older adults, who are more vulnerable to this coronavirus and would be a higher priority for immunizations. – MPP view: We expect renewed US fiscal stimulus negotiations in December to be challenging and result in only a mini-deal before year-end (if that) and disabuse more optimistic investors of the notion that a GOP-controlled Senate will go higher than $500 billion for the post-transition pandemic relief deal (minus any amounts agreed next month). This puts the spotlight on the Fed, and we think they will not shy away from signaling augmented asset purchases at their December meeting.   

US Jobs Data in Focus Amid Rising Concerns of Double-Dip Recession

Analysts will be attuned to this morning’s jobless claims data for any signs of backsliding after weeks of improvement. After US retail sales for October signaled a warning about consumer fortitude ahead of what is increasingly likely to be a challenging winter from both a public health and economic standpoint, with large swathes of the US beset by the ongoing seasonal Covid-19 surge, labor market dynamics will be a key focus for market participants and policymakers alike. Initial jobless claims for the week ending November 14th are expected to improve slightly to 700K after the prior week’s tally showed that 709K Americans filed for unemployment benefits, down from the previous week’s revised level of 757K and below market expectations of 735K. This is the lowest number since late March but still well above pre-pandemic levels. Also, there were more than 298K new applicants to the Pandemic Unemployment Assistance (PUP) scheme, which covers workers that do not qualify for initial claims, compared with 362K in the previous period. So combined, 1.007 million claims were filed in the last two weeks. Furthermore, 6.79 million Americans filed continuing jobless claims in the week ended October 31st, comparing favorably with market expectations of 6.90 million and marking the lowest level since the pandemic began. All told, as of October 24th, 21.157 million Americans are receiving some fort of Federal assistance, down from 21.531 million in the previous week.

Additional Themes

Fed Nominee Shelton Faces Tough Odds – With the Senate now on recess until November 30th, and the potential for the balance of the Senate to shift with Democrat Mark Kelly being sworn in that day to replace Martha McSally after winning the race in Arizona, Judy Shelton’s nomination to the Fed Board is in jeopardy. For context, the process to confirm her was stalled in the Senate on Tuesday after Vice President-elect Kamala Harris returned to the chamber to cast a key vote today as two key Republicans were absent because of exposure to Covid-19. The other nominee under consideration, Christopher Waller, has broad support and is expected to be confirmed. Analysts have begun to speculate about which candidates the incoming Biden administration might consider if Shelton’s nomination falters and they have the chance to fill the vacancy. – MPP view: This would be a windfall for the Biden White House, particularly given the importance of Fed-Treasury coordination going forward. Even if her nomination fails, the Shelton precedent remains a signal to future administrations to get “your people” onto the FOMC to have your back.   

Turkish Lira Spikes on Rate Hikes – Turkey’s volatile currency is up 1.8% versus the dollar this morning, extending its recovery from late September’s all-time low, as the newly installed central bank governor implemented a 475 basis point interest rate hike to 15% at his inaugural meeting. President Erdogan has sent mixed messages regarding his support for the program of the newly installed economic team, and has a track record of interfering with central bank independence and advocating unorthodox economic theories. – MPP view: Emerging market assets have generally received a positive impetus from the Biden win, as he is assumedly more constructively engaged in international cooperation and development goals, along with the boost from a weaker dollar (please see our Market Viewpoints piece on EM from November 8th).