Morning Markets Brief 8-13-2020

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 8th, 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 1st, 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.