Morning Markets Brief 9-23-2020

Summary and Price Action Rundown

Global risk assets are attempting to build on yesterday’s gains, as investors monitor mixed global economic data and another day of testimony for Fed Chair Powell. S&P 500 futures indicate a 0.4% higher open after the index rallied 1.1% yesterday, retracing Monday’s loss and upping its year-to-date gain to 6.6%, which is 7.4% below early September’s record high. The tech-heavy Nasdaq outperformed for a second day, as coronavirus concerns gave a lift to tech and other “stay at home” stocks, hoisting year-to-date gains to 22.2%. Equities in the EU are outperforming but Asian stocks were muted overnight. A broad dollar index is continuing to edge above its recent 28-month low ahead of key US data this morning, while longer-dated Treasury yields are stable, with the 10-year yield at 0.68%. Brent crude prices are rising toward $42 per barrel as traders monitor incoming US oil and gasoline inventory data.

Global Economic Data Reflects a Degree of Backsliding

As investors warily monitor the resurgence of Covid-19 in the EU and elsewhere, preliminary purchasing managers’ indexes (PMIs) for September in the EU, UK, and Japan revealed signs of weakness. For the EU, the downside surprise was primarily in the services gauge, which fell into a relatively steep contraction at 47.6, undershooting estimates of a moderately expansionary 50.6 and the August reading of 50.5. For context, PMI readings above 50 denote expansion of activity in the sector. Manufacturing, which has tended to be more resilient in the face of the pandemic, remained upbeat, topping expectations of 51.9 and the prior month’s 51.7 with a robust reading of 53.7. This left the EU composite PMI for September at 50.1, lagging forecasts of continuity with August at 51.9. The PMI readings for France and Germany mirrored the trends of the broader EU reading, with manufacturing prints surprising on the upside while services registered marked disappointment. Meanwhile, Germany’s gauge of the consumer climate for September was similarly discouraging, remaining subdued at -1.6% versus a projection of -0.8%, though slightly better than August’s revised -1.7%. Still, the euro is holding steady versus the dollar this morning after retracing some overnight weakness. The pound is also steady as UK preliminary PMIs for September remained in expansionary territory. Manufacturing came in at 53.4, services at 55.1, and the composite at 55.7, though the latter two slightly missed estimates and the gauges were down across the board from the prior month. Contrastingly, Japan’s September PMI previews all remained sub-50, signaling a similar pace of contraction with August, as the composite reading languishes at 45.5 versus 45.2 the prior month. Nevertheless, the yen is placid this morning as well. US preliminary PMIs for this month are due later this morning, and are forecast to remain solidly expansionary, with manufacturing estimated at 53.5 and services at 54.5.

More Congressional Testimony for Fed Chair Powell

After appearing yesterday alongside Treasury Secretary Mnuchin before the House Financial Services Committee, Chair Powell heads back to Capitol Hill today to testify for the House subcommittee on the coronavirus crisis. Market participants will monitor Chair Powell’s commentary, though his remarks yesterday provided little insight on monetary policy. Instead, he and Treasury Secretary Mnuchin focused on fiscal policy responses to the pandemic, emphasizing the urgency to pass another pandemic relief package. “Both employment and overall economic activity… remain well below their pre-pandemic levels, and the path ahead continues to be highly uncertain,” Powell stated. He urged lawmakers to focus fiscal support on the hardest hit businesses and unemployment benefits, and stressed support for state and local governments, something that Republican lawmakers have broadly opposed. Mnuchin highlighted similar needs, including a focus on supporting restaurants and the travel industry. Prospects for a deal have risen and fallen over the past few weeks, with the controversy over replacing Supreme Court Justice Ruth Bader Ginsburg worsening the partisan standoff. Powell also fielded questions on the Fed’s Main Street Lending Program, of which $1.5 billion of $600 billion has been tapped. Chair Powell stated adjustments were being made, though stated that some businesses would not benefit from these loans “in part because the CARES Act states clearly that these loans cannot be forgiven,” and “in these cases, direct fiscal support may be needed.” Powell and Mnuchin will speak before the Senate Banking Committee on Thursday.

Additional Themes
Beijing Hardens Rhetoric on TikTok – With the potential deal still up in the air as President Trump and Chinese leaders mull their stances, Chinese state media is expressing a more strident tone in characterizing the arrangement.

Government Funding Bill Heads to the Senate – Last evening, the House of Representatives passed a bipartisan spending bill, which pushes the deadline out past the election to December 11th. A deal between Speaker Pelosi and Secretary Mnuchin saw the farm aid pushed by Republicans and a low-income meal program supported by Democrats both being included. The bill is expected to pass the Senate over the coming week.