Morning Markets Brief 9-25-2020

Summary and Price Action Rundown

Global risk assets are tuning lower again this morning amid fears of a Covid-19 resurgence, a cloudy outlook for US fiscal and monetary policy stimulus, and pronounced US political uncertainty. S&P 500 futures point to a 0.8% lower open after the index edged 0.3% higher yesterday, recovering from a late session selloff and upping its year-to-date gain to 0.5%, which is 9.3% below early September’s record high. Equities in the EU are underperforming as coronavirus outbreaks re-accelerate, with Spain potentially facing a return to mass lockdowns, while Asian stocks were mixed 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 slightly lower, with the 10-year yield at 0.66%. Brent crude is sliding below $42.

Faint Glimmers of Fiscal Stimulus Hopes Amid the Murky Growth Outlook

As US economic data shows signs of backsliding risk, consensus over the need for more pandemic support may be pushing both sides back to the table. House Democrats are reportedly working to slim their $3.4 trillion HEROES Act to a roughly $2.4 trillion package designed to restart negotiations with the White House and headlines suggested that prospects for renewed talks are rising. For context, both Treasury Secretary Mnuchin and House Speaker Pelosi have emphasized the importance of additional fiscal support for the economic recovery and expressed eagerness to continue negotiations in their remarks this week. This comes after flickers of hope for progress last week, with Speaker Pelosi vowing that the House would not go into recess for the November election until an additional round of stimulus is passed and the House “Problem Solvers Caucus” unveiling a compromise plan for $1.5 trillion in stimulus that was subsequently praised by President Trump. This comes after yesterday’s data showed that initial jobless claims rose by 870K in the week ending September 19th, which is the fourth consecutive week in the 800K’s range, suggesting that the labor market recovery has stalled as government support continues to wane. This morning’s readings of US durable goods orders from August are expected to show a deceleration, while next week’s September nonfarm payroll number will be scrutinized for any signs of weakness. A bevy of Fed officials have redoubled their calls for more fiscal stimulus this week, asserting that additional support is necessary to extend the recovery.

Investors Ponder Fed Policy Communications

In addition to nearly unanimous calls from Fed officials this week for more fiscal stimulus, FOMC speakers also tried to add some specificity to their latest policy shift but the messages were somewhat mixed. After last week’s Fed meeting drew a nuanced reaction from financial markets, with analysts seizing on certain ambiguities in the delineated policy shift, scant additional clarity was achieved this week amid some crosstalk from Fed officials. Most prominently, Chicago Fed President Evans admitted on Tuesday 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%.” This statement highlights that the Fed’s expressed projection of holding rates at the 0-0.25% range “until labor market conditions have reached levels consistent with the committee’s assessments of maximum employment and inflation has risen to 2% and is on track to moderately exceed 2% for some time” does not amount to a firm commitment. Additionally, Evans pointed out that there is no clarity on the time frame the Fed may use when calculating an inflation average. Fed Vice Chair Clarida on Wednesday emphasized a more dovish posture but still acknowledged policy optionality, saying “we’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.

Additional Themes

Chinese App Bans Head to Court – A federal judge set a deadline of 2:30pm today for the Trump administration to delay its upcoming ban on TikTok, which is set to take effect on Sunday, or file papers in response to Chinese owner ByteDance’s injunction request in advance of a scheduled Sunday morning hearing on the injunction. This comes as lawyers for the administration attempt to overturn the judicial stay imposed on President’s intended ban on WeChat, another Chinese social media app targeted for national security concerns.

Chinese Property Giant Under Scrutiny – Shares of Evergrande, the largest issuer of speculative grade dollar bonds in Asia, fell nearly 10% overnight and the price of its bonds tumbled amid reports that it is facing potential cash crunch early next year.

Looking Ahead – Next week’s calendar features some key US economic data, with September nonfarm payrolls as the headliner on Friday, with estimates reflecting a slackening pace of job growth. Purchasing managers’ indexes (PMIs) for the US and China will also be in focus, alongside US personal income, spending, and price data for August.