Equities pull back after weeks-long rally

Prior week summary

Despite the Nasdaq and S&P 500 setting all-time highs mid-week, the major U.S. equity indices ended the week lower, led by a sell-off in tech shares, ending a rally that persisted for nearly all of August. Market participants received a bevy of economic data releases this week that largely pointed to a recovering U.S. economy. The ISM Manufacturing Index topped expectations, posting a 56.0 level, the measure’s highest reading in 21 months. While the Index serves as a solid gauge of sentiment in the manufacturing industry, analysts warn that the high reading seen in August doesn’t suggest that the industry is faring better than it had at the start of the year as it continues to grapple with the fallout caused by the global pandemic. Factory orders beat expectations modestly, increasing 6.4% in July. All eyes turned to Friday’s release of the August non-farm payroll report. According to the release, the U.S. economy added 1.37 million jobs in August, topping expectations but below the 1.73 million job additions seen in July. While the report was largely positive, some suggested the report was softer than indicated, pointing to the 238,000 temporary Census jobs that were included in the figure. The unemployment rate fell far further than expected, dropping to 8.4% from 10.2%. A host of Federal Reserve officials spoke throughout the week, including Federal Reserve Chair Jerome Powell. In an interview with NPR released on Friday, Powell suggested that interest rates will need to stay low for years in order to cope with the economic fallout of the pandemic saying, “We think that the economy’s going to need low interest rates, which support economic activity, for an extended period of time. It will be measured in years,” and noting, “However long it takes, we’re going to be there. We’re not going to prematurely withdraw the support that we think the economy needs.”

On the geopolitical front, tensions between the U.S. and China flared over the holiday weekend. On Saturday, the U.S. Department of Defense indicated that it was considering a move that would add Chinese chip giant, SMIC, to the U.S. Commerce Department’s Entity List. The change in status would hinder SMIC’s ability to source products made in the U.S. China was quick to denounce the move with Chinese Foreign Ministry spokesman Zhao Lijian saying, “This not only breaks international trade rules, global industry chain, supply chain and value chain, but also spoils national interests and image of the U.S. itself.” President Trump heightened tensions further on Monday suggesting that the U.S. could stop doing business with China entirely saying, “If we didn’t do business with China, we wouldn’t lose billions of dollars,” and adding, “Whether it’s decoupling, or putting in massive tariffs like I’ve been doing already, we will end our reliance on China, because we can’t rely on China.”

As of Monday evening, the global infection tally stands at over 27.5 million confirmed cases with nearly 6.5 million confirmed cases in the U.S. In Europe, the situation is beginning to deteriorate after warding off a prolonged spike in cases for much of the summer. France, Germany, and the U.K. have recently seen spikes in the infection count, but this new spike has been mostly limited to younger individuals easing fears of a large spike in the death rate. In the U.S., the rate of hospitalizations and new confirmed cases has continued to stabilize after experiencing a surge in infections across the southern U.S. and California earlier in the summer. On Wednesday, the Centers for Disease Control and Prevention (CDC) instructed states to prepare for a COVID-19 vaccine as early as October of this year. The move by the CDC comes only a day after nine major pharmaceutical companies in the process of developing and vetting a prospective vaccine pledged to wait for Phase III trials to end prior to submitting applications for approval to the Food and Drug Administration. Speaking to reporters last week, Dr. Anthony Fauci, Director of the National Institute of Allergy and Infectious Diseases, suggested that a vaccine may be ready by year-end, but indicated that an October rollout was optimistic saying, “These are all guesstimates. It is conceivable that you can have it by October, though I don’t think that that’s likely.”

The look forward

In a holiday shortened week, the economic data releases for the week are light with jobless claims, the Consumer Price Index, the Producer Price Index, and wholesale inventories topping the bill.

Rates snapshot

Market implied policy path (Overnight indexed swap rates)