Morning Markets Brief 9-4-2020

Summary and Price Action Rundown

Global risk assets are mixed this morning ahead of key US labor market data as investors ponder the drivers of yesterday’s sharp equity selloff. S&P 500 futures indicate a flat open after the index plunged 3.5% yesterday, cutting its year-to-date upside to 6.9% as it retreated from Wednesday’s record high. With losses concentrated in richly-valued IT stocks, the tech-heavy Nasdaq is set for a more downbeat open. Equities in the EU are slightly higher, with a boost from news of a possible bank merger, while Asian stocks retreated overnight. A broad dollar index is hovering above its recent 28-month low, while longer-dated Treasury yields are holding in their recent range ahead of the US jobs report, with the 10-year yield at 0.64%. Brent crude is continuing its meandering price action this week, rising above $44 per barrel.

August Nonfarm Payrolls in the Spotlight

Ahead of this morning’s August nonfarm payroll report, yesterday’s tally of initial jobless claims apparently improved but were flattered by a revised calculation method. 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%. Vice President Pence is set to discuss the numbers on CNBC later this morning. In the leadup to this consequential jobs report, this week’s series of labor market indicators have been somewhat mixed. The number of initial jobless claims declined to 881K in the week ending on August 29th, falling well below consensus estimates of 950K, and continuing the improvement momentum from the prior report’s 1.011 million. Continuing claims also fell to 13.254 million from 14.492 million, and beat expectations of 14,000K. This week’s data now marks the lowest reported level since the pandemic took hold in early March. While the positive tone of these figures comports with much of the other recent economic data showing a broadly steady pace of recovery, a new seasonal adjustment methodology took effect in yesterday’s report, deflating what would have been a much higher tally. Specifically, this jobless claims figure would have been 1.020 million if the previous calculation methods were used. 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 topping 489K in early August. The report highlights that layoff numbers are still a prevalent concern, and state and PUA claims now total 28 million. Moving forward, analysts will have to factor in PUA and Pandemic Emergency Unemployment Compensation (PEUC) numbers to get a full picture of the heath of the labor market.

US Equities Abruptly Surrender Some Recent Gains

After Wednesday’s broad rally for the S&P 500 masked rare underperformance for high-flying tech shares, the IT sector selloff gathered pace yesterday, dragging down broader indexes. Shares of leading tech companies posted steep losses yesterday, and are struggling to rebound this morning in pre-market trading, but still retain gaudy year-to-date gains. Analysts are pondering an array of potential catalysts for the move rather than one specific trigger. Shares of Facebook, Amazon, Netflix, Google, Apple, Microsoft, and Tesla lost 3.8%, 4.6%, 4.9%, 5.0%, 8.0%, 6.2%, and 9.0% respectively yesterday, extending Wednesday’s losses, but still boast 2020 upside of 41.8%, 82.3%, 62.5%, 22.8%, 64.7%, 37.8%, and 386.5%. Though the downside for stocks was the steepest since June, analysts are broadly characterizing the price action as healthy and corrective, noting that “overbought” and expensive tech sector shares had rendered US equity markets increasingly top-heavy. On the question of timing, some analysts focused on headlines over the past two days indicating that vaccine trials are heading into the final stages, with the prospect of a viable vaccine by the fall undermining some of the advantage of tech giants and other winners of the pandemic over the rest of the market. Prior instances of encouraging vaccine headlines have spurred similar price reactions, with investors temporarily rotating away from tech shares in response and dragging down the broader indexes. Additionally, the timing of the move, on the Thursday before Labor Day, may have exacerbated the selloff with less than ideal levels of liquidity.

Additional Themes

Risk of US Government Shutdown Eases – Reports last night indicated that House Speaker Pelosi and Treasury Secretary Mnuchin agreed to cooperate in an effort to avoid a government funding lapse later this month. With Congressional Democrats and the White House at odds over the stalled pandemic relief bill, some analysts have pondered the potential for this already fraught negotiation to become entangled in the wrangling over funding the government past September 30th. For context, Congress must agree on legislation to authorize government spending into the new fiscal year or face a government shutdown, with the last shutdown from December 2018 to January 2019 spanning a record 35 days amid controversy over funding for President Trump’s promised border wall with Mexico. A Continuing Resolution (CR) to fund the government past the election is considered the most likely option, with a spokesperson for Speaker Pelosi indicating that she favors a “clean” CR, rather than one that attempt to encompass terms from the deadlocked stimulus bill.

Looking Ahead and Happy Labor Day! – The holiday-shortened week in the US features some August inflation data and another round of initial jobless claims data, while the European Central Bank meeting will be in focus on Thursday, with the Bank of Canada the day before. To our US readers, enjoy a pleasant holiday weekend!