Agreement reached on COVID-19 relief bill
- December 21, 2020
Balance Sheet Risk Management
Financial Institutions | Kennett Square, PA
The major U.S. equity indices finished higher for the week, setting new all-time highs, as the expectation of federal stimulus and the approval of a second COVID-19 vaccine fueled investor optimism despite worsening economic data and rising COVID-19 cases.
Prior week summary
The major U.S. equity indices finished higher for the week, setting new all-time highs, as the expectation of federal stimulus and the approval of a second COVID-19 vaccine fueled investor optimism despite worsening economic data and rising COVID-19 cases. After working over the weekend on a new stimulus bill, a bipartisan group of lawmakers tabled a $908 billion proposal on Monday. With the spread of the virus accelerating across the globe and enhanced unemployment benefits set to expire for millions in the coming days, Congressional leaders sparred over the terms of the proposed package for much of the week. On Sunday evening, an agreement on a $900 billion COVID-19 relief package was reached with the bill set to go to vote on Monday. Notably, the plan includes a onetime $600 direct payment to most adults and $600 per child, a $284 billion replenishment to the Paycheck Protection Program, and enhanced unemployment insurance of an additional $300 per week. The deal comes after months of back and forth between Congressional leaders and the White House. In a joint statement released after the announcement that an agreement had been reached, Senate Minority Leader Chuck Schumer and House Speaker Nancy Pelosi said, “Today, we have reached agreement with Republicans and the White House on an emergency coronavirus relief and omnibus package that delivers urgently needed funds to save the lives and livelihoods of the American people as the virus accelerates. We are going to crush the virus and put money in the pockets of the American people.” Two key sticking points — liability protections for businesses against COVID-19-related claims and federal aid for state and local governments—were dropped from negotiations and are expected to be addressed in additional legislation that will be negotiated after the new year. Foreshadowing the future talks, Schumer said on Sunday, “It cannot be the final word on congressional relief.”
The U.S. continued to set records last week as the virus continues to surge in many parts of the country. Over 240,000 cases were reported on Friday alone, a pandemic record, with the seven-day average daily death count rising above 2,600 individuals, also a pandemic record. In the context of the global outbreak, the U.S. accounts for approximately 17.65 million cases, roughly 23% of the global tally. While the U.S. has been receiving much of the media attention related to the recent surge in the virus, heads turned across the Atlantic to the U.K. this week, which has recently discovered a new, potentially more transmissible, strain of COVID-19. On Saturday, Prime Minister Boris Johnson announced new restrictions, specifically to regions labeled as “Tier 4” zones, regions with the largest spikes in new infections. Speaking to reporters after announcing the new restrictions, Johnson said, “Given the early evidence we have on this new variant of the virus — the potential risk it poses — it is with a very heavy heart I must tell you we cannot continue with Christmas as planned. In England, those living in Tier 4 areas should not mix with anyone outside their own household at Christmas.” Fearful of the new strain, many countries have banned travel with the U.K., including Ireland, Germany, France, and Canada.
After Pfizer and BioNTech’s vaccine was approved for emergency use the week prior, the Food and Drug Administration (FDA) issued Moderna’s prospective vaccine an Emergency Use Authorization on Friday, allowing the vaccine to be used on individuals 18 years old and older. Moderna expects approximately 20 million doses will be delivered by year-end. In a statement released announcing the vaccine’s approval for emergency use, Moderna assured that distribution would begin immediately and that full licensure would be requested in 2021 saying, “The Moderna COVID-19 Vaccine is now authorized for distribution and use under an Emergency Use Authorization. Delivery to the U.S. Government will begin immediately. Moderna will continue to gather additional data and plans to file a Biologics License Application with the FDA requesting full licensure in 2021.” With two vaccines now approved for emergency use and distributions of those vaccines beginning, a Centers for Disease Control and Prevention (CDC) panel voted on Sunday, 13-1, to place frontline essential workers and individuals over the age of 75 at the front of the line when deciding which groups to allocate the initially scarce number of doses to. Should CDC Director Robert Redfield accept the panel recommendation, it would serve as the backbone of the federal guidance given to states on how to implement the distribution of the vaccine.
In a busy week for economic data releases, the updated data mostly pointed to a slowing U.S. economy as the country grapples with a surge in COVID-19 cases and the restrictions stemming from the spike. Retail sales in November contracted 1.1%, far below the -0.4% decline expected and the -0.1% decline seen in October. Most segments saw declines in November with only grocers, internet retailers, and home centers notching higher sales. Jobless claims moved higher for the week to 885,000, the highest level seen in nearly four months. Manufacturing activity looks to have slowed in December with the Empire Manufacturing Index posting a 4.9 level, below November’s 6.3 reading, and the Philadelphia Fed Business Outlook Survey reading clocking in at 11.1, far below the 26.3 level seen in November. Housing starts improved to 1.547 million in November, above analyst expectations and October’s 1.528 million reading. The FOMC held its final policy meeting of the year last week, and, as expected, left the target range unchanged at 0.00%–0.25%. While no change to the target range was expected, the Fed offered clarity on the path of its bond-buying program in the release following the conclusion of the policy meeting. In the FOMC-issued statement, the FOMC said, “In addition, the Federal Reserve will continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage-backed securities by at least $40 billion per month until substantial further progress has been made toward the Committee's maximum employment and price stability goals. These asset purchases help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses.” Previously, the FOMC indicated that the bond purchases would continue over the “coming months.”
The look forward
In a holiday-shortened week, market participants are looking forward to the release of updated figures on third-quarter GDP, new and existing home sales, jobless claims, durable goods orders, and consumer spending, among others.
Market implied policy path (Overnight indexed swap rates)
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