Equities rally as virus surges in U.S.

Prior week summary

The major U.S. equity indices pushed higher on the week, notching a second consecutive week of gains, as positive developments in the hunt for both effective COVID-19 treatment options and a viable vaccine improved investor sentiment and outweighed concerns of a renewed surge in virus cases within the U.S. As of Sunday evening, the global infection tally stands just above 13 million cases with nearly 3.5 million confirmed cases originating in the U.S. In recent weeks, some states, particularly in the southern U.S. and California, have seen a renewed surge in virus cases, causing some hotspots to reimpose restrictions on non-essential businesses. On Friday, the U.S. reported over 71,000 new confirmed cases of COVID-19, breaking the previous global record for the largest daily increase in confirmed cases for one country.

Congress is considering another virus relief bill in the coming weeks, aimed at aiding businesses and employees in the hardest-hit industries such as travel and retail companies. Speaking to reporters on Friday, White House Economic Advisor Larry Kudlow, spoke of the desire for a more-targeted bill in this round of stimulus saying, “I think it’s going to be a tighter bill. We can’t keep posting $3, $4 trillion every three months or every two months,” and noted, “The key now is helping folks get back to work. We’ll have some unemployment reforms. We’ll have some re-employment bonuses. We will have some additional economic impact assistance in a targeted way.” Singing a similar tune, Treasury Secretary Steven Mnuchin, said on Thursday that the Trump administration is looking to cap the current unemployment coverage at 100% of pre-virus pay saying, “You can assume it will be no more than 100%, so, yes, we want to incent people to go back to work.” Many market participants were encouraged on Friday by new data released from Gilead Sciences on a study conducted on their antiviral drug, remdesivir. The study reported that remdesivir was associated with a 62% reduction in mortality and 74.4% of patients treated with the drug recovered by day 14 compared to 59.0% of patients who received standard-of-care treatment. Early this morning, Pfizer announced that the experimental vaccine they are developing in conjunction with BioNTech received a “Fast Track” designation by the Food and Drug Administration and expect to manufacture 100 million doses by year-end.

News was light on the economic data front this week. The ISM Non-Manufacturing Index smashed expectations posting a level of 57.1 for June, well above the 45.4 reading in May and the first reading in expansionary territory since March. The increase between May and June marks the biggest month over month increase in the measure since 1997. Many warn that this latest release does not account for the recent surge in virus cases in the U.S., and that may push the index down from its current position in July. Showcasing the deflationary effects of the virus outbreak, the June reading of the Producer Price Index showed prices falling 0.2% compared to a 0.4% increase last month. A host of Federal Reserve officials held speaking engagements throughout the week. Speaking in front of the National Association of Business Economists, San Francisco Federal Reserve President Mary Daly, highlighted the uncertainty around the economic outlook saying, “We don’t know how long it will fully take to put the virus behind us. I am assuming unemployment will level off at someplace we don’t want it to be.”

The look forward

In a busy week for economic data releases, market participants are looking forward to the release of updated figures on the Empire Manufacturing Index, industrial production, retail sales, the Consumer Price Index, and jobless claims, among others.

Rates Snapshot

Market implied policy path (Overnight indexed swap rates)