Morning Markets Brief 9-10-2020

Summary and Price Action Rundown

Global risk assets are moving lower this morning as choppy equity price action continues, while investors await today’s European Central Bank decision and more US labor market data. S&P 500 futures point to a 0.6% lower open after the index rallied 2.0% yesterday to retrace a portion of its recent decline and improve its year-to-date upside to 5.2%, though it remained below last Wednesday’s record high. The tech-heavy Nasdaq is set to slide anew after snapping its streak of underperformance yesterday, jumping 2.7%, which took its year-to-date gains to 24.2%. Equities in the EU are also down while Asian stocks were mixed overnight. A broad dollar index is hovering above it recent 28-month low, while longer-dated Treasury yields are also steady, with the 10-year yield at 0.70%. Brent crude prices are sinking back toward $40.

Euro Heading Higher Ahead of ECB Decision

A Bloomberg report yesterday suggesting a more optimistic tone among European Central Bank (ECB) officials arrested the euro’s September slide, but analysts await further details after the conclusion of today’s meeting. In the leadup to today’s decision, the article cited some unnamed ECB officials already voicing their growing confidence in an improving forecast for the region’s economic recovery. The latest projections for output and inflation will likely resemble those presented in the June meeting, during which the ECB predicted a record 8.7% contraction for the 2020 year, though one unnamed official suggested that the GDP outlook may be upgraded, driven by better-than-expected private consumption. Recent economic data could support such an upward revision, as retail sales have shown a full recovery from the pandemic’s economic fallout. However, recent inflation figures in the EU undershot estimates, with some metrics falling into negative territory, and the strength of the euro has been in focus recently. The euro posted gains after the report’s release and is now 0.7% higher versus the dollar from yesterday’s intraday low, recovering a portion of the past week’s declines that were spurred in part by ECB Chief Economist Lane’s commentary on September 1st, which some perceived as jawboning the currency lower. Traders are awaiting the full announcement on the ECB’s policy and forecasts at 7:45am ET, followed by a press conference with ECB President Christine Lagarde at 8:30am ET. For context, at the July meeting, the economic outlook was slightly more optimistic, yet the use of all the bank’s stimulus measures was deemed necessary to underpin growth and reinflation. Policymakers have agreed that the flexibility of the central bank’s €1.35 trillion Pandemic Emergency Purchase Program (PEPP) should be considered a ceiling rather than a target, suggesting some officials are not keen on another stimulus package.

Initial Jobless Claims Expected to Incrementally Improve

After a series of noisy labor market figures over the past week, the data remains consistent with continued recovery but underlying details are more nuanced. The number of initial jobless claims for the week ending September 5th are expected to decline to 850K, representing further improvement on the prior week’s tally, which fell to 881K. That reading was well below consensus estimates of 950K and maintained the improvement trend from the prior report’s 1.011 million. Continuing claims also fell to 13.254 million from 14.492 million for the week ending August 22nd, bettering expectations of 14.000 million. This latest data now marks the lowest reported level of jobless claims since the pandemic took hold in early March, and is seen as a continuation of the broader trend of recovery since nationwide restrictions were eased in May. While the positivity is largely attributable to steadying trends of non-essential business re-openings, a new seasonal adjustment methodology took effect in last week’s report, deflating what would have been a much higher tally. For context, the Labor Department changed the seasonal adjustment procedure last week, siding with an additive, rather than a multiplicative, explaining that results will be more reliable as raw data remains astray from previous norms. Last week’s report would have been 1.020 million if the previous calculation methods were employed. While the adjusted state claims data suggests further recovery, the same indications are not portrayed by initial claims for Pandemic Unemployment Assistance (PUA), which rose again for a third consecutive week. PUA claims came in at 759K, up from 607K last week, and from 489K in early August. The report highlights that layoff numbers are still a prevalent concern, and state and PUA claims now total to 28 million. Moving forward, analysts will have to additionally consider PUA and Pandemic Emergency Unemployment Compensation (PEUC) numbers to get a full picture of the heath of the labor market.

Additional Themes
Oil Prices Under Pressure – Brent crude is turning back toward Tuesday’s multi-month low after the American Petroleum Institute forecast a jump in US stockpile data today, which would break the late summer streak of weekly drawdowns. The official inventory data from the Energy Information Administration is due at 11am.

Senate to Vote on Republican “Skinny” Stimulus Bill – Before the roughly $500 billion package can reach the Senate floor, it will face a procedural vote in which Senate Minority Leader Schumer indicates that it may fail. Senate Majority Leader McConnell accused the Democrats of stonewalling the deal for political gain while Schumer indicated that blockage of the so-called “skinny” bill today could entice Senate Republicans and the White House back to negotiations.