Market Reports

Looking Ahead – Two Minute Drill 9-11-2020

Looking Ahead – Two Minute Drill

The NFL season began last evening with an entertaining if uneven Thursday Night Football game between the Texans and the Super Bowl champion Chiefs in a partly filled Arrowhead Stadium, which provided sports fans with another encouraging step toward a semblance of normalcy. It may not have been anything close to top form, with limited practices and no pre-season, but it was a pleasure to witness, and just getting the teams out on the field at this point seems like a victory in itself.

With the Washington Football Team tipped to win maybe five games this season, the DC denizens are probably more focused on this town’s other favorite contact sport – politics. And this was a bruising week, with Senate Majority Leader McConnell’s so-called “skinny” stimulus bill, weighing in at a featherweight $500 billion versus the Democrats’ hulking $3 trillion HEROES Act, getting sacked in a procedural vote before it ever made it to the Senate floor.

Now, Congress looks set to run out the clock until their pre-election recess with no points on the board for the latest round of pandemic stimulus. The only remaining play they have to run is punting the government funding issue until after the upcoming election with what is expected to be a clean Continuing Resolution (CR), in accordance with the commitment made by Speaker Pelosi and Treasury Secretary Mnuchin. Since the appetite to append spending measures to the CR appears to be low on both sides, pundits are increasingly despairing of any path to victory for a pandemic relief bill at least until polling is over and the presidential election is decided (hopefully not after months of recounts and lawsuits, but that is a distinct possibility). However, economists warn that the withdrawal of stimulus would be premature and damaging to the recovery, falling hardest on those least able to bear the added burden. Fed officials have been voluble and unanimous on the need for more fiscal support as well.

Congressional Republicans and Democrats are understandably at odds over the bill, but by allowing the White House to take the lead in negotiations, until recently, Senate Leader McConnell implied that he would probably be able to get enough of his caucus to go along with whatever they negotiated. But the White House pivoted away from the more deal-friendly approach of prior negotiations spearheaded by Treasury Secretary Mnuchin, inserting former Tea Partier and current White House Chief of Staff Meadows into the proceedings, which Capitol Hill insiders suggested was a signal of a much tougher line by the administration. And that is how the negotiation has played out, with each successive drive toward a deal bogging down, which ultimately brought the Senate Republicans back onto the field.

Now that the Senate Republicans’ skinny version has been batted down, the ball is firmly back in President Trump’s hands. But so far, the lack of action has left many questions as to his motivations with regard to this bill.

  • Did he really begin to worry about the deficit? Unlikely, we think, as his past record and statements show great comfort with taking on debt, particularly at low interest rates.

 

  • Does he think he needs to appeal to the fiscal conservative wing of the party to nail down their support in November? Doubtful, it seems – deficit reduction is not currently a big swing voter issue nor a prominent feature of his policy platform now or ever.

 

  • Is he concerned that agreeing to a large pandemic stimulus bill now will undermine his claim that Covid-19 is basically a thing of the past? Possibly, but President Trump has not often been constrained by a need for exact logical consistency in his policy choices.

 

  • Is he worried about appearing to cave to the Democrats? Probably, but is this genuinely a deal breaker? It would not be the first time he has done so, and in the other cases he has just spun it as a victory and moved on.

 

  • Could he be convinced that more pandemic relief is not economically necessary? Of course President Trump is going to laud the economic rebound as the greatest thing ever, but we assume that the White House is well aware of the fragile and tentative nature of the recovery, even if they are encouraged by progress so far.

In fact, most standard US economic readings for the past few months have looked pretty solid and consistent with ongoing recovery, but there is a significant degree of noise in the data, the pace of improvement seems to be softening, and now fiscal support is being withdrawn. Notably, the headline figures for the most recent labor market data series have been better than expected, but the underlying details have shown clear signs of backsliding. Meanwhile, Fed officials continue to fret that high-frequency economic data shows growth leveling off.

Weighing the considerations above, and looking at the waning time on the clock, it seems like the right call for the White House is to put its hurry-up offense on the field for this negotiation. Mnuchin would be back under center (and Meadows on the bench), wrangling with Congressional Democrats and dragging enough Senate Republicans along to get a not-quite $2 trillion stimulus package across the goal line in time for relief checks to be rolling out to Americans in need during the height of campaign season. And the crowd goes wild.

Or the Trump administration can just take a knee on this pandemic relief bill and head to the locker room, adding another one to the Loss column when they, and the country, can perhaps least afford it.

Looking ahead, next week’s calendar features a Fed meeting, as well as decisions from the Bank of England and Bank of Japan. Japan’s ruling party will also vote on the successor to outgoing Prime Minister Abe. US retail sales and industrial production data for August will be in the spotlight, alongside another weekly initial jobless claims tally, while China and the EU will also be issuing key industrial and consumer data for last month.
 

  • Federal Reserve Meeting
  • Bank of England
  • Bank of Japan
  • US Retail Sales, Industrial Production, & Initial Jobless Claims
  • Chinese Data for August
  • EU Data for August

 

Global Economic Calendar: Back to school  

Monday
The week begins Monday with Japan’s Industrial Production Final Estimate and Capacity Utilization for July. Industrial production in Japan rose by 8% month-on-month (m/m) in July, compared with market consensus of a 5.8% advance and after a 1.9% gain in June, a preliminary estimate showed. This was the strongest monthly rise on record in industrial output, largely contributed by motor vehicles. On a yearly basis (y/y), industrial output shrank by 16.1% in July, after a 18.2% plunge in June. Capacity Utilization in Japan increased to 75 points in June from the 10-year low of 70.60 points in May.

On Monday in Europe we’ll get the Euro Area Industrial Production for July. Industrial Production in the Euro Area increased 9.1% m/m in June, still a decrease of 12.30% y/y, missing market expectations for a second consecutive month and easing from a revised 12.3% m/m jump in May. Output increased for all segments: durable consumer goods (20.2% vs 53.7% in May); capital goods (14.2% vs 26.0%); intermediate goods (6.7% vs 9.7%); non-durable consumer goods (4.8% vs 3.3%); and energy (2.6% vs 3.0%).

Monday wraps with a Chinese focus, specifically, China’s Fixed Asset Investment, Industrial Production, Retail Sales, and Unemployment changes in the month of August. China’s fixed-asset investment dropped 1.6% y/y to CNY 32.92 trillion in the first seven months of, compared to a 3.1% fall in January-June and in line with market consensus, after the economy began to open up and authorities loosened coronavirus-related restriction measures. Private investment decreased 5.7% (vs -7.3% in January-June) while public investment rose at a faster 3.8% (vs 2.1%). Next, China’s Industrial Production Growth stood at 4.8% y/y in July, short of market expectations of 5.1%. Manufacturing and utilities output continued to increase, while mining fell back into contraction territory. For the first seven months of the year, output shrank 0.4%. China’s Retail Trade declined by 1.1% y/y, missing market expectations of a 0.1% rise. This was the seventh straight month of contraction in retail trade, with people continuing to avoid crowded places, including shops, restaurants, and cinemas amid the COVID-19 crisis. From the January to July period, retail trade tumbled 9.9%. Finally, the Unemployment Rate in China remained unchanged at 5.70% in July.

Afternoon Markets Brief 9-17-2020

Summary and Price Action Rundown

US equities gave up early gains today as the Fed decision provided no new upside impetus and tech underperformance reemerged, while investors monitored fiscal stimulus headlines and soft retail data. The S&P 500 lost 0.5% today, retracing yesterday’s upside and paring its year-to-date gain to 4.8%, which is around 5.5% below early September’s record high. The tech-heavy Nasdaq also erased yesterday’s 1.2% gain, taking its robust year-to-date gains to 23.2%. Equities in the EU closed slightly higher while Asian stocks were mixed overnight. The dollar bounced from intraday lows after the Fed declined to adopt the more dovish policy formulation that some analysts had expected, while longer-dated Treasury yields edged higher, with the 10-year yield closing at 0.70%. Brent crude prices rebounded above $42 per barrel as US inventories shrank.

Fed Decision Meets Expectations

Despite increasingly accommodating guidance from the Fed today, the FOMC declined to enact the most dovish potential formulation predicted by some analysts. In today’s decision, the FOMC unsurprisingly left interest rates unchanged at 0-0.25% and projected that it would maintain this ultra-low rate range through at least 2023 in order to facilitate the US economy recovery from the fallout of the coronavirus pandemic. Specifically, the accompanying statement stated that this accommodative rate would likely be maintained “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.” Dallas Fed President Kaplan dissented in favor of a more flexible formulation, allowing for more proactive monetary tightening, while Minneapolis Fed President Kashkari expressed his preference to steer policy toward 2% inflation “on a sustained basis.” The statement also reiterated a commitment to continue buying Treasuries and mortgage backed securities at least at the current pace of $80 billion and $40 billion, respectively, over “coming months.” The Fed also updated its Summary of Economic Projections, expecting the unemployment rate by year’s end to average 7.6%, compared to the June projection of 9.3% and the current 8.4% rate. Officials revised growth projections to -3.7% from the prior -6.5% estimate for 2020 but to 4% for 2021, a slower rate than the previous 5% outlook. In his press conference, Chair Powell declined to invoke “enhanced guidance,” an even more accommodative formulation that would more formally tie policy decisions to inflation and unemployment targets. He did mention that the Main Street Lending Program, which has now deployed $2 billion of its $600 billion total firepower, is being tweaked in an effort to improve uptake. – MPP view: The Fed met our expectation that it would shy away from fully embracing enhanced guidance today, meaning they would not directly link policy action on rates and asset purchases to specific inflation and employment benchmarks. But they indeed used the dot plot and strong messaging to hammer home their deep commitment to maintaining ultra-accommodative policy settings for the foreseeable future. Overall, we thought this decision would not amount to a hawkish surprise but will not be as wildly dovish as it could have been, which seems about right. Overall, the market reactions comported with this view, though Treasury yield curve slightly steepened, which we did not expect.

 

More Encouraging Atmospherics Around the Pandemic Relief Bill

Developments continue to suggest renewed momentum toward a deal on further fiscal support. Chief of Staff Meadows, who has been cited by Washington insiders as taking a hard line in negotiations on this stimulus bill, indicated that President Trump is favorably disposed toward the compromise $1.52 trillion proposal put forward yesterday by the House “Problem Solvers Caucus,” a group of 50 centrist Representatives. This package would include $120 billion for unemployment assistance at $450/week in mid-October and then $600/week from December through January 2021, a second round of stimulus checks, about $500 billion in state aid, and liability protections for employers. This follows Speaker Pelosi’s statement on CNBC yesterday vowing that the House will not go into recess for the November election until an additional round of stimulus is passed. On Monday, Treasury Secretary Mnuchin had urged action on economic stimulus during his appearance on CNBC and downplayed concerns over the size of the deficit. Still, House Democratic leadership, while citing progress, suggested that they might hold out for a higher number, calling the size of the compromise bill “insufficient,” while Senate Republicans expressed mixed sentiments and concern over the magnitude of spending. Meanwhile, late afternoon reports indicated that House Republicans are pushing to expedite a bill that would redeploy remaining money in the Paycheck Protection Program. – MPP view: We have been out of consensus in thinking the odds of an agreement on this relief bill before month-end are relatively high, and viewed this $1.5 trillion proposal is a formulation that enough lawmakers and the White House can get behind. The White House seems on board, and we continue to expect a deal around this basic framework to be agreed before the pre-election Congressional recess.

Additional Themes

US Retail Sales Undershoot – Retail sales for the month of August disappointed, rising 0.6% after the downward revision of July’s number to 0.9% and missing the consensus forecast of a 1.0% increase. The deceleration of retail sales over recent months has been blamed on the expiration of federal unemployment benefits, the drying up of support for small businesses, and the persistence of the pandemic. Meanwhile, core retail sales, which most closely track the consumer spending component of GDP, fell 0.1% in August. While sales continue to rise for areas such as food and drink (4.7%), clothing (2.9%), and furniture (2.1%), more areas are starting to see significant reversals such as department stores (-2.3%), grocery stores (-1.6%), and sporting goods and hobby (-5.7%). Most analysts point to August’s data as a forerunner to the economic damage likely to result absent a significant stimulus package from Congress. The dramatic rebounds in May and June that have since tapered off over previous months were attributed heavily to both pent-up demand upon phased reopening of the economy and the CARES Act, which bolstered US consumer spending. The backsliding in retail sales comports with the warnings of many economists and Fed officials and may rekindle greater urgency on Capitol Hill to pass the next stimulus bill.

Rate Sensitivity in Mortgage Markets – According to the Mortgage Bankers Association (MBA) Weekly Mortgage Applications Survey, last week’s applications fell 2.5% from the week ending on September 11th, after rising 2.9% the previous week. The Refinance Index decreased 4% since last week, though is still 30% higher from the same week a year ago. The seasonally adjusted Purchase Index also dropped 1% from and the unadjusted Purchase Index fell 12%, yet has remained 6% above last year’s figure. Even with elevated refinance activity reported over the past several months, Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting, blames slowing demand on “remaining borrowers in the market potentially [waiting] for another sizable drop in rates.” The average interest rate for fixed 30-year mortgages has remained unchanged at 3.07%, 1-basis point above the record low, and average loan size continued to inflate, hitting a new survey high of $370,200. While this week’s data showed falling applications, the underlying trends remain strong. Purchase activity has outpaced last year’s levels for 17 consecutive weeks. Record low rates and a limited housing supply continue to underpin a prosperous housing market. In a separate report released this morning, the NAHB housing market index jumped 5 points to 83 in September, beating market projections of 78. The climbing figure registered a new record high for the survey’s 35-year history, driven by the low rate environment and a flurry people leaving big cities amid the pandemic.

Morning Markets Policy 9-18-2020

Summary and Price Action Rundown

Global risk assets are attempting to stage a rebound after two days of generally downside price action which followed a dovish Fed meeting and mixed US economic data. S&P 500 futures indicate a 0.1% higher open after the index lost 0.8% yesterday, paring its year-to-date gain to 3.9%, which is 6.3% below early September’s record high. The tech-heavy Nasdaq declined over 1% for a second consecutive session yesterday, shaving its robust year-to-date gains to 21.6%. Equities in the EU and Asia were mostly higher overnight. A broad dollar index is finding support near its recent 28-month low, while longer-dated Treasury yields are slipping lower, with the 10-year yield at 0.67%. Brent crude prices are hovering above $43 per barrel.

Capitol Hill Moves Forward on Spending Deal but Stimulus Package Remains in Limbo

Reports indicate that a bipartisan agreement on a government funding plan to avert a shutdown at month-end is nearly complete, though the parties remain at loggerheads over the pandemic relief bill despite this week’s renewed efforts at a compromise. Headlines overnight indicate that Congressional lawmakers are in the process of finalizing a deal, likely to be announced sometime later today, that will extend authorization to fund the government into mid-December. The news has suggested that Democrats had pushed for a longer Continuing Resolution (CR), into next year, but under the circumstances, ahead of an election and during a pandemic, there has been little apparent appetite on either side for brinksmanship over this issue. Two weeks ago, House Speaker Pelosi and Treasury Secretary Mnuchin jointly pledged their intention to seek a clean CR and not muddy the negotiations by attempting to append pandemic relief measures onto the bill. This leaves the pandemic relief negotiations still in limbo, though this week featured some progress in the form of a $1.5 trillion compromise proposal from the Problem Solvers Caucus, a bipartisan group in the House, which has drawn support from President Trump and other senior White House officials, though Congressional Democrats and Republicans have expressed wariness and dissatisfaction with the split-the-difference approach of the centrists.

 

Focus on Fed Policy Shifts to Bank Oversight

After Wednesday’s historically dovish FOMC decision drew a mixed reaction from analysts and a muted response in financial markets, market participants are now pondering the Fed’s next move on bank dividends and share buybacks. In late June, the Fed released its Stress Test results for the “Too Big to Fail” banks in the US, which issued all passing grades but called on banks to halt share buybacks and put dividends under review on a bank-by-bank basis, based on strength of capital in a severely adverse economic situation caused by the coronavirus. In that case, Well Fargo was a standout underperformer. Now, the Fed is embarking on another stress test exercise, having released its two highly adverse scenarios yesterday against which banks will evaluate the resiliency of their balance sheets. Specifically, one of the hypotheticals features a global financial market shock and the other posits a less acute but longer lasting economic dislocation. Results will be published by the end of the year. The Fed is also pondering extension of the restrictions it announced in June on bank stock buybacks and dividend payouts, which have drawn significant interest from lawmakers and are set to lapse at month-end. Financials have been among the worst performing US equity sectors this year, with an ETF of major bank stocks languishing at -32.4% year-to-date performance versus a gain of 3.9% for the broader S&P 500 and 64.9% upside for a basket of leading tech stocks. However, dismal stock performance has not been linked to credit stress, with market-based gauges of financial sector creditworthiness at placid and favorable levels.

Additional Themes

Trump to Decide on TikTok – Amid indications that Beijing will accept the current formulation of the deal between Chinese parent ByteDance and US tech giant Oracle, which would result in the creation of a new US entity, President Trump has indicated that he will issue his decision within the coming day. He expressed some reservations about Oracle’s status as a minority shareholder in the new US entity.

Looking Ahead – Next week’s calendar of events is sparser than the past couple of weeks, which were packed with meetings of major central banks and OPEC, alongside much consequential data. The focus will be on preliminary global purchasing managers’ indexes (PMIs) for the US, EU, Japan, and UK for September, some of the first mainstream data readings to give insights on the pace of activity in the current month. Notable US economic releases also include durable goods orders and new and existing home sales for August, along with another weekly jobless claims tally. From overseas, China’s central bank decision and EU consumer and business climate survey data will be in focus.

Morning Markets Brief 9-17-2020

Summary and Price Action Rundown

Global risk assets mostly retreated overnight as yesterday’s Federal Reserve decision spurred mixed market reactions, while investors await key US jobs data. S&P 500 futures point to a 1.2% lower open after the index lost 0.5% yesterday, retracing the prior session’s upside and paring its year-to-date gain to 4.8%, which is around 5.5% below early September’s record high. The tech-heavy Nasdaq returned to underperformance yesterday, sinking 1.2% and paring its year-to-date gains to 23.2%. Equities in the EU and Asia also posted losses overnight. Despite yesterday’s resolutely dovish messaging from the Fed, a broad dollar index is finding support near its recent 28-month low, while longer-dated Treasury yields are slipping lower, with the 10-year yield at 0.67%. Brent crude prices are back above $42 as OPEC+ meets today.

Federal Reserve Decision Continues to Reverberate in Markets

Investors are still digesting yesterday’s Fed decision, which featured increasingly accommodative guidance on rates, though the FOMC declined to enact the most dovish potential formulations that some had predicted. Analysts are pondering the nuanced and muted reaction in financial markets to what was a historically dovish Federal Reserve meeting. In yesterday’s decision, the FOMC unsurprisingly left interest rates unchanged at 0-0.25% and projected that it would maintain this ultra-low rate range through at least 2023 in order to facilitate the US economy recovery from the fallout of the coronavirus pandemic. Specifically, the accompanying statement indicated that this accommodative rate would likely be maintained “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.” Analysts are noting that the US economy has very seldom achieved this highly favorable economic scenario during the modern era. Dallas Fed President Kaplan dissented in favor of a more flexible formulation, allowing for more proactive monetary tightening, while Minneapolis Fed President Kashkari expressed his preference to steer policy toward 2% inflation “on a sustained basis.” The statement also reiterated a commitment to continue buying Treasuries and mortgage backed securities at least at the current pace of $80 billion and $40 billion, respectively, over “coming months.” In his press conference, Chair Powell declined to invoke the strictest form of “enhanced guidance,” which would formally tie policy decisions to inflation and unemployment targets. He did mention that the Main Street Lending Program, which has now deployed a paltry $2 billion of its $600 billion total firepower, is being tweaked in an effort to improve uptake.

Jobless Claims in Focus Amid Questions Over the Recovery Trajectory

After yesterday’s US retail sales figures for August undershot expectations, analysts will parse today’s release of last week’s initial jobless claims for any further indications of economic backsliding. Initial jobless claims for the week of September 12th are expected to improve to 850K after the prior week’s tally remained unchanged from the previous reading at 884K, missing market expectations of 850K. Continuing claims are expected to improve slightly after the reading for the week of August 29th rose nearly 100K to 13.38 million, topping expectations of 12.904 million. Alongside the disappointing initial claims last week, claims for Pandemic Unemployment Assistance (PUA) rose by 91K, marking the fourth straight increase. Combining the standard claims with PUA continuing claims means that 27.8 million people are receiving unemployment insurance payments, up from 25.7 million in early August. Analysts will be highly attuned for any downside surprise after retail sales showed a loss of momentum in August, rising 0.6% after the downward revision of July’s number to 0.9% and missing the consensus forecast of a 1.0% increase. The deceleration of retail sales over recent months has been blamed on the expiration of federal unemployment benefits, the drying up of support for small businesses, and the persistence of the pandemic. Meanwhile, flickers of hope on the US fiscal front continued brightening yesterday following of weeks of stalemated negotiations as the White House expressed support for the compromise $1.52 trillion proposal put forth by the House “Problem Solvers Caucus,” a group of 50 centrist Representatives.

Additional Themes

Bank of Japan (BoJ) Holds Steady – As widely expected, the BoJ left its policy settings fixed at its meeting overnight, though its economic projections were upgraded modestly. Amid the abrupt change in government leadership, with longtime Prime Minister Abe stepping down for health reasons, Governor Kuroda’s press conference emphasized policy continuity.

Oil Steady as OPEC+ Meets – After some whipsaw price action over the past week, oil prices are stable this morning in the middle of their recent ranges as OPEC and its allies (OPEC+) meet today to review their ongoing production cuts. Although the output curbs have been tapered since their tightest levels over the summer, Saudi and Russia have been pushing laggard cartel members for compensatory cuts over the fall.

Morning Markets Brief 9-16-2020

Summary and Price Action Rundown

Global risk assets are mostly higher this morning ahead of a pivotal Federal Reserve decision and key US economic data. S&P 500 futures indicate a 0.6% higher open after the index gained 0.5% yesterday as it continues to retrace last week’s downside, upping its year-to-date gain to 5.3%, which is around 5% below early September’s record high. The tech-heavy Nasdaq jumped 1.2% yesterday, taking its robust year-to-date gains to 24.7%, and is pointing higher this morning as well. Equities in the EU are flat while Asian stocks were mixed overnight. Ahead of the Fed, a broad dollar index is revisiting its recent 28-month low, while longer-dated Treasury yields are edging lower, with the 10-year yield at 0.67%. Brent crude prices are back above $41 per barrel as US oil inventories are expected to show a sharp draw this week.

Federal Reserve Guidance in the Spotlight

Uncertainty lingers over the prospects for the Fed to unveil enhanced guidance today in support of its recently reformulated employment and inflation mandates. Since Fed Chair Powell announced the Fed’s new framework for average inflation targeting and emphasis on full employment, specifically among lower income workers, at the virtual Jackson Hole conference last month, analysts have been pondering whether enhanced guidance will be rolled out at this month’s FOMC meeting in an effort to better achieve those goals. Messaging from Fed officials over enhanced guidance has been mixed in recent weeks, with some FOMC members suggesting that current guidance is sufficiently credible, being anchored in the increasingly dovish “dot plot,” strong statements from Chair Powell characterizing rate hikes as a distant prospect, and almost no apparent dissent within the ranks of the board. Futures markets imply no expectation of rate hikes until 2023 and a recent CNBC investor survey reflected expectations that the policy rate would stay at the zero lower bound until February 2023. The prospect of an incrementally dovish Fed tends to feed upside in tech stocks, which have been rebounding smartly this week after a rare bout of underperformance in early September. Meanwhile, the dollar and longer-dated Treasury yields have remained indecisive in recent weeks, as uncertainty over the overall economic picture as well as the Fed’s degree of commitment to rekindling inflation have impeded clear directionality.

 

US Retail Sales Expected to Slow

Recent US economic data has been noisy and uneven, and investors are looking to August retail figures to gauge the impact of expiring enhanced jobless benefits on consumers. On a month-on-month (m/m) basis, August retail sales are expected to decelerate to 1.0% from 1.2% in June. Analysts cite competing dynamics of back-to-school demand and the sunset of enhanced $600 per week unemployment benefits from the CARES Act as factors that could swing the number to the upside or downside of estimates. This follows a set of muddled US industrial production and manufacturing data series, as well as recent labor market data that has hinted at a degree of backsliding. Economists and Fed officials have been broadly encouraged by the recovery so far but have cited an apparent loss of momentum in recent weeks, with the prospect of no further fiscal support heightening the downside risks. Flickers of hope on the US fiscal front brightened yesterday following of weeks of stalemated negotiations as Speaker Pelosi issued a statement on CNBC vowing that the House will not go into recess for the November election until an additional round of stimulus is passed. Her comments were followed shortly afterward by the released details of a new bipartisan proposal from about 50 Representatives dubbed the “Problem Solvers Caucus” that would offer roughly $1.5 trillion in stimulus before the upcoming election. The plan would include $120 billion for unemployment assistance at $450/week in mid-October and then $600/week from December through January 2021, a second round of stimulus checks, about $500 billion in state aid, and liability protections for employers. On Monday, Treasury Secretary Mnuchin urged action on economic stimulus during his appearance on CNBC.

Additional Themes

Facebook Faces Antitrust Action – Reports indicated that the Federal Trade Commission may bring an antitrust case against social media giant by year-end, alongside indications that Google may be the subject of similar litigation. Facebook shares are down 1.9% in pre-market trading, with some downside also being ascribed to a temporary celebrity boycott of the platform, along with Instagram, in opposition to hate speech and misinformation disseminated thereon.

House Report Faults Boeing – Shares of the aerospace giant are 1.5% lower in pre-market trading after publication of a report by the House of Representatives’ Transportation and Infrastructure Committee excoriating the company for failures and deception resulting in the 737 Max debacle. House Democrats are preparing legislation to overhaul FAA oversight.

Morning Markets Brief 9-15-2020

Summary and Price Action Rundown

Global risk assets are rising again this morning as upbeat economic figures and some hopeful news on US fiscal stimulus prospects help brighten the market mood as investors await tomorrow’s Federal Reserve decision. S&P 500 futures point to a 0.8% higher open after the index advanced 1.3% yesterday, retracing around half of last week’s downside and upping its year-to-date gain to 4.7%, which is 5.5% below last Wednesday’s record high. The tech-heavy Nasdaq is set to extend yesterday’s 1.9% bounce, which also nearly halved last week’s losses and took its robust year-to-date gains to 23.2%. Equities in the EU are rising this morning while Asian stocks were mostly higher overnight. A broad dollar index is turning back toward its recent 28-month low, while longer-dated Treasury yields are edging upward, with the 10-year yield at 0.68%. Brent crude prices are back above $40 per barrel despite more bearish forecasts.

Encouraging Global Economic Data

Upbeat growth readings from China and rising sentiment indicators in the EU point to a continuing economic recovery overseas, sending the dollar back toward multi-year lows. The euro is edging back toward its recent 28-month highs versus the dollar, while the renminbi hit its strongest level since May 2019 following solid economic data that points to a continuing recovery from the pandemic-induced recession. China’s August reading of industrial production (IP) growth printed 5.6% year-on-year (y/y), topping a consensus forecast of 5.1% and July’s 4.8%. This follows yesterday’s better-than-expected IP readings from the EU and Japan, while analysts are awaiting the US IP print for August later this morning, with expectations for the month-on-month pace of growth to slacken to 1.0% from 3.0% in July. China’s August retail sales also surprised to the upside, expanding 0.5% y/y versus expectations for a flat reading after lagging at -1.1% in July. Analysts had pointed to the tepid recovery of the Chinese consumer as one of the lingering economic headwinds from the pandemic. Fixed asset investment for August also outpaced estimates, although only slightly, improving to -0.3% year-to-date from -1.6% in July, bettering a forecast of -0.4%. Meanwhile, EU data this morning also reflected a brighter growth picture, with Germany’s ZEW survey of economic expectations for September perking up to 77.4 versus an expectation of 69.5 after registering 71.5 in August. The current situation assessment also improved to -66.2 from -81.3, topping estimates of -72.0. For the whole EU, the ZEW outlook also improved markedly to 73.9 from 64.0 in August.

Flickers of Hope on the US Fiscal Stimulus Front

A group of moderate House Democrats are set to unveil their plan for a compromise $1.52 trillion pandemic relief bill today, potentially breathing some life back into the deadlocked negotiations. Reports indicated that the group is pressing Speaker Pelosi to restart talks with the White House in continued pursuit of an elusive deal on the next round of fiscal support for the pandemic-impacted US economy. Their draft bill is scheduled to be released later this morning. Although Speaker Pelosi has thus far held to her current $2.2 trillion position, which is more than $1 trillion below the initial size of the HEROES Act passed by House Democrats, she has continued to indicate that further compromise would be possible. Meanwhile, past communications from the White House have suggested that $1.5 trillion may be an acceptable figure. The bipartisan House Problem Solvers Caucus, comprised of 50 relatively centrist lawmakers, also arrived at a roughly $1.5 trillion compromise figure. Yesterday, Treasury Secretary Mnuchin urged action on economic stimulus during his appearance on CNBC, saying “[n]ow is not the time to worry about shrinking the deficit or shrinking the Fed balance sheet” and indicating that he is prepared to continue working toward a deal on the stalled bill.

Additional Themes

More Dire Oil Forecasts – Following yesterday’s downbeat assessment of the oil market outlook by OPEC, the monthly report from the International Energy Agency (IEA) painted a similarly grim picture. The IEA flagged increasing fragility in oil markets, calling the outlook “treacherous” due to the continued dampening of demand due to the ongoing impact from the pandemic. Notably, oil giant BP expressed an even more dismal view on the future of crude markets this week, projecting that demand will remain “broadly flat” for the next two decades as energy transitions will reshape the world away from traditional sources. CEO Bernard Looney indicated that he would shrink oil and gas output by 40% over the next decade and spend nearly $5 billion a year investing in renewable power.

TikTok Deal Under Review – Following reports early yesterday that Oracle had won the bidding for TikTok’s US business, with the tech giant confirming this later in the day, the Treasury Department is said to be initiating a review of the arrangement, which is not an outright sale.

Five Minute Macro 9-14-2020

In this week’s Five Minute Macro, the economy and the Pandemic continues to be the driving factor in markets, with a dovish Fed in second. Dollar depreciation moves up to third and Brexit and the Pound enters at fourth. Meanwhile, the next relief bill remains stalled in Congress. Also please meet our talented intern Evan Kloss.

Evan is a recent graduate from the LeBow School of Business at Drexel University, where he earned a M.S. in Economics and minors in mathematics and finance. During his undergrad career, he gained professional experiences in private wealth management, corporate finance and financial markets research. Upon graduating in April, Evan joined the Markets Policy team. Here, he continually contributes to coverage of macroeconomic, financial and policy themes, and shapes them into many of the narratives featured in our daily market briefs and weekly market viewpoints. Evan seeks to expand upon his economics and finance foundation by pursuing a professional career in financial markets research and macroeconomic analysis.

Morning Markets Brief 9-14-2020

Summary and Price Action Rundown

Global risk assets were mostly higher overnight as tech stocks attempt to stage a comeback from their recent underperformance, while investors monitor political developments in Japan and the UK, as well as the latest in the TikTok saga. S&P 500 futures indicate a 1.3% higher open after the index closed nearly flat on Friday, holding performance at -2.5% on the week and its year-to-date upside at 3.4%, which is nearly 7% below the record high of September 2nd. The tech-heavy Nasdaq is set to reverse some of its recent downside, which has brought it 10.0% below its early September peak. Equities in the EU are flat this morning while Asian stocks were mostly higher overnight. A broad dollar index is turning back toward its recent 28-month low, while longer-dated Treasury yields are rangebound, with the 10-year yield at 0.67%. The euro is up versus the dollar despite more commentary from EU officials, including European Central Bank President Lagarde over the weekend, about the strength of the single currency being a factor in their policymaking. Brent crude prices are hovering below $40 per barrel.

Oracle Wins Bidding for US TikTok Operations

As Washington and Beijing remain at odds over the controversial app, Oracle moves forward after it bests Microsoft in vying for the social media platform’s US business. Overnight, headlines indicated that Microsoft’s bid had been rejected and Oracle’s competing offer was accepted, though considerable uncertainty remains as to the precise terms. The reports note that the structure of the deal is less clear-cut than a full sale of the US business to Oracle, with the IT giant instead acting as a “technology partner” and taking a minority stake in a reorganized US TikTok corporate entity. Shares of Oracle are up 6.7% in pre-market trading, while Microsoft is down 0.8%. ByteDance, TikTok’s Chinese parent company, is reportedly set to propose the deal to the Trump administration before the September 15th deadline and it is unclear if the arrangement will satisfy the privacy concerns that spurred the initial White House move to ban the app. This follows reports on Friday indicating that Beijing is leaning toward blocking any prospective deal to sell TikTok’s US operations, though a spokesman for ByteDance stated that no such indication had been made. Chinese official commentary remains critical of the deal, likening the process to theft.

Japanese Markets Steady as Abe Ally Picked as Successor

Following the announced resignation of longstanding Prime Minister Abe for health reasons, his party opted for a continuity candidate, Yoshihide Suga. The Nikkei performed in-line with regional peers, Japanese government bonds were steady, and the yen is appreciating mildly but within recent ranges as the ruling Liberal Democratic Party elected outgoing PM Abe’s former Chief Cabinet Secretary as the new head of the party. Suga’s official ascension to the premiership will follow later this week. Suga has been a strong proponent of the reflationary fiscal and monetary policy combination championed by his former mentor, so-called “Abenomics,” and has pledged to continue and build upon this framework. He has also emphasized the maintenance of PM Abe’s relations with the Bank of Japan and cited the importance of additional monetary easing to meet potential economic challenges going forward. Suga has also opined that growth should be prioritized over concerns regarding Japan’s elevated sovereign debt levels. Analysts are now focused on his cabinet choices, which are expected over the next few days, as an indication of any potential intent to reform certain facets of the economic program. Meanwhile, Suga addressed speculation over the potential for a general election, noting that the pandemic makes voting more challenging and suggested that he may be leaning toward waiting to implement various policies before dissolving Parliament, as polls are not officially due for another year.

Additional Themes

Brexit Drama Whipsaws the Pound – Debate is beginning in Parliament today over Prime Minister Johnson’s gambit to undermine aspects of the withdrawal deal with the EU, with some high-profile Conservatives noting their opposition. The EU has warned that it will fight the Internal Market Bill, which would abrogate UK obligations toward Northern Ireland agreed with the EU in the Brexit Withdrawal Agreement and could provide a conduit for UK goods to reach the single market across the border between Ireland and Northern Ireland. The pound, which has acted as a barometer for risks surrounding Brexit, is up 0.6% versus the dollar today as debate over the bill begins, but is still down 3.8% for September.

Vaccine News Remains in Focus – Pfizer’s CEO indicated that a Covid-19 vaccine could be available by year-end, while AstraZeneca and Oxford resumed their phase three trials, which had been halted due to a health issue for a participant. Although considerable uncertainty remains over the timing for approval, the efficacy of the vaccine, the timeline for rollout, and public reception, investors are pondering whether the anticipation of a vaccine announcement has been a driver of countertrend price action over recent weeks.

Morning Markets Brief 9-11-2020

Summary and Price Action Rundown

Global risk assets are attempting to stage a rebound from yesterday’s renewed selloff this morning as equity price action remains choppy, while investors continue to monitor currency messaging by the European Central Bank and fiscal stimulus prospects in the US. S&P 500 futures point to a 0.8% higher open after the index fell 1.8% yesterday, retracing most of Wednesday’s rebound to pare its year-to-date upside to 3.4%, which is nearly 7% below last Wednesday’s record high. The tech-heavy Nasdaq has reverted to its recent underperformance trend, falling 2.0% yesterday to shave its robust year-to-date gains to 21.7%. Equities in the EU are flat this morning while Asian stocks were mostly higher overnight. A broad dollar index is turning back toward its recent 28-month low, while longer-dated Treasury yields are rangebound, with the 10-year yield at 0.69%. Brent crude prices are hovering below $40.

ECB Officials Continue to Refine Messaging on the Euro

The European Central Bank (ECB) Chief Economist has reemphasized currency strength as a headwind to reflation in the EU after yesterday’s policy meeting sent mixed messages on the currency. Earlier today, Chief Economist Lane tweeted his assessment that the ongoing appreciation of the euro has “significantly muted” inflationary pressures in the EU, seemingly taking a more forceful stance on the currency than ECB President Lagarde expressed in her post-meeting remarks yesterday. For context, Lane first emphasized euro appreciation as a headwind to reinflation on September 1st, just as the single currency was nearing the closely-watched level of $1.20, which is more than a two year high. From its March lows, the euro has gained more than 10% against the dollar and inflation is set to be negative for the first time in four years. Lane’s strong emphasis on the link between currency strength and disinflation contrasts with President Lagarde’s more tepid statement yesterday that “clearly to the extent that the appreciation of the euro puts negative pressure on prices, we have to monitor carefully such a matter, and this was extensively discussed.” Then she stressed that the ECB does not target the exchange rate and will likely not adopt a targeting strategy, though it remains cognizant of its movements. The euro moved higher during the ECB meeting, gaining nearly 1% versus the dollar before settling back in later trading, but is now moving higher again. Analysts cite continued strength in the euro as a potential catalyst, among a resurgence of Covid-19 and backsliding inflation metrics, as the likely catalysts for the ECB to expand the €1.35 trillion Pandemic Emergency Purchase Program (PEPP) as early as the December meeting.

Questions Linger Over the US Rebound as Stimulus Negotiations Sputter

The negotiations over the latest pandemic stimulus remain in limbo after yesterday’s failure of Senate Republicans’ “skinny” version of the bill, while recent US economic data has shown some hints of further backsliding. Recent US labor market data, in particular, has been somewhat mixed. Yesterday’s release of initial jobless claims for the week of September 5th registered a modest disappointment, remaining unchanged at 884K and missing market expectations of 850K, while continuing claims for the prior week rose nearly 100K to 13.38 million, also above expectations of 12.904 million. Alongside the disappointing initial claims, claims for Pandemic Unemployment Assistance (PUA) rose by 91K, marking the fourth straight increase. Combining the standard claims with PUA continuing claims means that 27.8 million people are receiving unemployment insurance payments, up from 25.7 mil in early August. For context, the Labor Department changed the seasonal adjustment procedure last week that flattered the headline initial claims figure, which would have been over 1 million using the prior formulation. This comes as the prospects for additional fiscal support continue to darken. The latest iteration of the pandemic relief bill, a roughly $500 billion package crafted by Senate Republican, failed in a procedural vote broadly along party lines yesterday. Senate Majority Leader McConnell has accused the Democrats of stonewalling for political gain while Senator Schumer expressed hope that blockage of the so-called “skinny” bill could entice Senate Republicans and the White House back to negotiations.

Additional Themes

TikTok Deadline Reaffirmed – President Trump has stated that his deadline for arranging a sale of the controversial Chinese app’s US operations before his ban on its use takes effect will not be extended. Regarding the timing, September 15th has been the stated deadline, though some analysts suggest that the actual deadline is September 20th, which is when the ban would become official. With Microsoft and Oracle among the suitors for the social media platform’s US operations, and Beijing likening the process to theft and asserting its right to veto any potential deal, this episode has become a focal point of US-China friction in recent months. Yesterday, reports emerged that the Chinese owner of TikTok, ByteDance, was in talks with US government officials in an effort to continue US operations absent a complete sale of the business, though it was not clear how data security could be assured in such an arrangement.

Looking Ahead – Next week’s calendar features a Fed meeting, as well as decisions from the Bank of England and Bank of Japan. Japan’s ruling party will also vote on the successor to outgoing Prime Minister Abe. US retail sales and industrial production data for August will be in the spotlight, alongside another weekly initial jobless claims tally, while China and the EU will also be issuing key industrial and consumer data for last month

Morning Markets Brief 9-10-2020

Summary and Price Action Rundown

Global risk assets are moving lower this morning as choppy equity price action continues, while investors await today’s European Central Bank decision and more US labor market data. S&P 500 futures point to a 0.6% lower open after the index rallied 2.0% yesterday to retrace a portion of its recent decline and improve its year-to-date upside to 5.2%, though it remained below last Wednesday’s record high. The tech-heavy Nasdaq is set to slide anew after snapping its streak of underperformance yesterday, jumping 2.7%, which took its year-to-date gains to 24.2%. Equities in the EU are also down while Asian stocks were mixed overnight. A broad dollar index is hovering above it recent 28-month low, while longer-dated Treasury yields are also steady, with the 10-year yield at 0.70%. Brent crude prices are sinking back toward $40.

Euro Heading Higher Ahead of ECB Decision

A Bloomberg report yesterday suggesting a more optimistic tone among European Central Bank (ECB) officials arrested the euro’s September slide, but analysts await further details after the conclusion of today’s meeting. In the leadup to today’s decision, the article cited some unnamed ECB officials already voicing their growing confidence in an improving forecast for the region’s economic recovery. The latest projections for output and inflation will likely resemble those presented in the June meeting, during which the ECB predicted a record 8.7% contraction for the 2020 year, though one unnamed official suggested that the GDP outlook may be upgraded, driven by better-than-expected private consumption. Recent economic data could support such an upward revision, as retail sales have shown a full recovery from the pandemic’s economic fallout. However, recent inflation figures in the EU undershot estimates, with some metrics falling into negative territory, and the strength of the euro has been in focus recently. The euro posted gains after the report’s release and is now 0.7% higher versus the dollar from yesterday’s intraday low, recovering a portion of the past week’s declines that were spurred in part by ECB Chief Economist Lane’s commentary on September 1st, which some perceived as jawboning the currency lower. Traders are awaiting the full announcement on the ECB’s policy and forecasts at 7:45am ET, followed by a press conference with ECB President Christine Lagarde at 8:30am ET. For context, at the July meeting, the economic outlook was slightly more optimistic, yet the use of all the bank’s stimulus measures was deemed necessary to underpin growth and reinflation. Policymakers have agreed that the flexibility of the central bank’s €1.35 trillion Pandemic Emergency Purchase Program (PEPP) should be considered a ceiling rather than a target, suggesting some officials are not keen on another stimulus package.

Initial Jobless Claims Expected to Incrementally Improve

After a series of noisy labor market figures over the past week, the data remains consistent with continued recovery but underlying details are more nuanced. The number of initial jobless claims for the week ending September 5th are expected to decline to 850K, representing further improvement on the prior week’s tally, which fell to 881K. That reading was well below consensus estimates of 950K and maintained the improvement trend from the prior report’s 1.011 million. Continuing claims also fell to 13.254 million from 14.492 million for the week ending August 22nd, bettering expectations of 14.000 million. This latest data now marks the lowest reported level of jobless claims since the pandemic took hold in early March, and is seen as a continuation of the broader trend of recovery since nationwide restrictions were eased in May. While the positivity is largely attributable to steadying trends of non-essential business re-openings, a new seasonal adjustment methodology took effect in last week’s report, deflating what would have been a much higher tally. For context, the Labor Department changed the seasonal adjustment procedure last week, siding with an additive, rather than a multiplicative, explaining that results will be more reliable as raw data remains astray from previous norms. Last week’s report would have been 1.020 million if the previous calculation methods were employed. 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 from 489K in early August. The report highlights that layoff numbers are still a prevalent concern, and state and PUA claims now total to 28 million. Moving forward, analysts will have to additionally consider PUA and Pandemic Emergency Unemployment Compensation (PEUC) numbers to get a full picture of the heath of the labor market.

Additional Themes
Oil Prices Under Pressure – Brent crude is turning back toward Tuesday’s multi-month low after the American Petroleum Institute forecast a jump in US stockpile data today, which would break the late summer streak of weekly drawdowns. The official inventory data from the Energy Information Administration is due at 11am.

Senate to Vote on Republican “Skinny” Stimulus Bill – Before the roughly $500 billion package can reach the Senate floor, it will face a procedural vote in which Senate Minority Leader Schumer indicates that it may fail. Senate Majority Leader McConnell accused the Democrats of stonewalling the deal for political gain while Schumer indicated that blockage of the so-called “skinny” bill today could entice Senate Republicans and the White House back to negotiations.