Morning Markets Brief 9-3-2020

Summary and Price Action Rundown

Global risk assets are mixed this morning after a strong start to September as investors await more US labor market data and monitor fiscal and monetary developments in the EU. S&P 500 futures point to a 0.5% lower open after the index jumped 1.5% yesterday, increasing its year-to-date gain to 10.8% and registering a new all-time high. Equities in the EU are outperforming on the prospect of more fiscal and monetary stimulus (more below), while Asian stocks were mixed overnight. A broad dollar index is continuing to edge above its recent 28-month low, while longer-dated Treasury yields are comfortably back in their recent range, with the 10-year yield at 0.65%. Brent crude is sinking back toward $43 per barrel.

More US Jobs Data Due Today

This morning’s release of initial jobless claims for the week ending August 29th is the next in a series of increasingly consequential US labor market readings this week, culminating with tomorrow’s nonfarm payroll report. Unemployment filings for last week are forecast to again fall below the closely-watched 1 million threshold after the readings from the two weeks in mid-August indicated a degree of backsliding. For context, the week ending August 7th featured the lowest tally of new claims since the height of the pandemic at 971K and marked the 20th straight week of declining filings since the historical peak of 6.9 million in the last week of March. Meanwhile, continuing claims for the week ending August 22nd are expected to hover around 14.0 million, only a moderate improvement from 14.5 million the prior week. This comes after yesterday’s ADP employment figures significantly undershot expectations for August as private businesses hired just 428K workers over the month, less than half of the expected 950K. While the labor market continues to rebound from the record 19 million job losses in April, only half of those jobs have been recovered so far. Industries underpinning the recovery include service providers such as leisure and hospitality (129K), education and health (100K), and professional and business employment (66K). Goods producers added 40K jobs during the month driven by increases in construction and manufacturing employment, as well as natural resources and mining. Large companies have driven the increases in employment as shown by private payroll data, where hiring was up 298K in contrast with midsize companies and small firms which sat at 79K and 52K, respectively. These numbers vary greatly from the expectations for nonfarm payroll data due on Friday, though such divergences are common due to ADP’s difference in methodology. With the rapid rebound in employment from May and June now easing, consensus forecasts for August’s nonfarm payrolls sit around 1.4 million new jobs with a 1.3 million gain in private payrolls, and the unemployment rate falling to 9.8%.

EU Fiscal and Monetary Policy in the Spotlight

French President Macron has announced a fiscal stimulus package while the European Central Bank (ECB) frets over the strength of the euro. The so-called “Relaunch France” program features €100 billion in spending on wage enhancements, tax breaks, and green economy initiatives. Analysts note that the composition of the package represents a pivot from direct pandemic relief measures to longer-term investments in French workers and the economy. This comes alongside news that German Chancellor Merkel and her government are set to suspend limits on deficit spending for next year as well, with an expectation that costly labor market support measures will need to be extended. Germany has approved €218 billion in additional spending this year. These headlines have put a floor under the euro this morning after the single currency had slid 1.7% since its intraday, multi-year high versus the dollar on Tuesday, with the selloff spurred in part by ECB jawboning. On Tuesday, as the euro crested $1.20 for the first time since May 2018, ECB Chief Economist Lane indicated that the strength of the currency is a headwind to the central bank’s reflationary efforts, which implies that it may prompt further easing, a position echoed in a subsequent Financial Times article citing ECB sources.

Additional Themes

Vaccine Headlines in Focus – Yesterday, the CDC alerted states to be ready for vaccine distribution by November 1 as analysts suggest that the earliest results from the advanced trials being led by AstraZeneca, Moderna, and Pfizer could be published as early as the middle of this month. Final results, which under normal circumstances would be required before drugmakers seek approval for a vaccine, are unlikely to be available before year-end, though analysts note overt political pressure to accelerate the process. Earlier this week, Dr. Fauci raised the possibility that the trials could be suspended if initial results were overwhelmingly possible.

Visa Data Shows Resilience – Earlier this week, Visa reported US payments volumes for August grew 7% year-on-year, marking a slight downtick from the 8% increase in July. Transaction trends were consistent with the overall economic data releases that have been showing stable growth throughout the second quarter. US credit volumes shrank 8%, consistent with July, and debit volumes growth fell two points to 24% for the month. Travel-related cross-border volume was down 70%, though e-commerce, excluding travel, remained at a notable 15%. August’s slight deceleration is likely attributable to the curtailing of key unemployment benefits at the beginning of the month as well as the ongoing Covid-19 resurgence in certain US hotspots. Moving forward, analysts will be highly attuned to consumer demand signals given the expiration of several CARES Act relief elements and deadlocked talks over the next stimulus bill.