Morning Markets Brief 9-24-2020

Summary and Price Action Rundown

Global risk assets are struggling to stabilize this morning after yesterday’s early gains evaporated into losses amid increasing consternation over the outlook for US fiscal and monetary policy stimulus, alongside coronavirus resurgence fears and US political uncertainty. S&P 500 futures point to a 0.1% lower open after the index surrendered 2.4% yesterday, retracing Tuesday’s gain and cutting its year-to-date upside to 0.2%, which is 9.6% below early September’s record high. The tech-heavy Nasdaq underperformed, with Tesla among the downside leaders following an underwhelming corporate event, cutting its year-to-date gains to 18.5%. Equities in the EU are slightly lower after steeper losses in Asian stocks overnight. A broad dollar index is continuing to rebound from recent 28-month lows amid support from safe haven demand, while longer-dated Treasury yields are stable, with the 10-year yield at 0.67%. Brent crude prices are hovering below $42 per barrel.

US Policy Uncertainty Deepens Amid a Barrage of Communications

Another day of Congressional testimony by Fed Chair Powell, again alongside Treasury Secretary Mnuchin, as well as an array of speeches by FOMC officials are set to redouble the message that more fiscal stimulus is necessary and monetary policy is on hold. Some market participants are expressing concerns that by continually emphasizing the importance of additional fiscal support in sustaining the US economy recovery, Chair Powell and his Fed colleagues are implying a worrying degree of monetary policy ineffectiveness, which may be denting investor confidence. In referencing the Fed’s barely utilized $600 billion Main Street Lending Program, he stated that he and his colleagues had “done basically all of the things we can think of” to fix it but it remains inert. This quote has since been taken out of context by multiple market commentators as a broad expression of the Fed’s monetary policy impotence. Additionally, the chorus of calls from Fed officials for another pandemic relief plan and grim prognostications for the recovery absent such stimulus come against a backdrop of waning odds of a deal. Amid the battle over replacing Justice Ginsburg, who passed away last Friday, the prospects for bipartisan compromise on the bill have dwindled. Meanwhile, the messaging of Fed speakers over the specifics of their recent policy shift have been somewhat garbled, with Vice Chair Clarida attempting yesterday to clarify the Fed’s newly formulated policy posture toward to inflation, saying “[w]e’re not going to even begin to think about lifting off, we expect, until we actually get observed inflation… equal to 2%” and suggested that rates may be held steady even beyond that. However, earlier in the week, Chicago Fed President Evans averred that the Fed’s new guidance does not prevent tightening before inflation averages over 2%, “and so, we could start raising rates before we start averaging 2%.”

US Labor Market Data in Focus Amid Recovery Concerns

With increasing hints of economic backsliding in recent US data, which is being seen even more clearly in EU data, analysts will monitor today’s release of last week’s initial jobless claims for any signs of weakness. Initial jobless claims for the week of September 19th are expected to improve to 840K after the prior week’s tally improved modestly to 860K from 893K the prior week but slightly undershot consensus expectations of 850K. This marked the third consecutive week with claims below 1 million, but the weekly rate of improvement has plateaued. Furthermore, continuing jobless claims, which consist of the total number of Americans on state benefit rolls, fell to 12.63 million in the week ended September 5th, below market consensus of 13.0 million and now the lowest level since the beginning of April when the effects of the coronavirus pandemic became observable in the data. Another positive in last week’s release was that filings in the federal program created in response to the Covid-19 crisis, called Pandemic Unemployment Assistance (PUA), decreased for the first time in five weeks, to 659k from 868k. However, PAU claims have been volatile on a weekly basis as the previous two weeks showed increases of 260k.

Additional Themes

Rising US Political Risk – Investors are increasingly concerned about a protracted and disruptive post-election period in the US amid a fraught and litigious process to declare an eventual winner. President Trump redoubled his criticism of mail-in ballots, intimating that they are susceptible to voter fraud, and declined to specify his response in the event Joe Biden were to win. Futures contracts on US equity volatility are showing increasing investor expectations of market turbulence around the election date and for months thereafter.

EU Biz Confidence Holds Up Despite Covid Resurgence – Metrics of German and French corporate optimism for September improved from the prior month, although they mostly fell slightly short of expectations. Earlier this week, preliminary September purchasing managers’ indexes for the EU display a notable weakening in service sector activity. A measure of UK consumer confidence is due later today. For context, resurgent Covid-19 outbreaks have recently spurred a return to stricter containment measures in various UK and EU locations.