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Market Update

Equities rise as stimulus bill negotiations falter

August 17, 2020


Despite faltering stimulus bill negotiations on Capitol Hill, the major U.S. equity indices marched higher for the week as COVID-19 vaccine developments and positive economic data releases boosted investor sentiment.

Prior week summary

Despite faltering stimulus bill negotiations on Capitol Hill, the major U.S. equity indices marched higher for the week as COVID-19 vaccine developments and positive economic data releases boosted investor sentiment. As of Sunday evening, the global COVID-19 tally stands at 21.8 million confirmed cases with just over 773,000 individuals succumbing to the virus. While the surge in cases across the southern U.S. and California has continued relative to the rest of the country, the total number of confirmed cases in the U.S. has decreased in aggregate and is well below the record-setting daily figures seen last month. After seeing a peak daily figure of just under 79,000 confirmed cases in late July, the U.S. reported approximately 61,500 cases on Friday. In Europe, the COVID-19 situation is beginning to deteriorate after experiencing declining infection rates after the initial spikes in March and April. Several European countries have reported a rise in infection counts in the last two weeks as travel has increased after the EU lifted some restrictions to travelers on July 1. On the vaccine development front, Russia announced that it has produced its first batch of the “Sputnik V” vaccine and is the first COVID-19 vaccine to go into production. Many scientists, including those within Russia, have expressed concern about the vaccine as Russian officials bypassed standard procedures that would require the prospective vaccine to conduct a “Phase III” trial, one which would see the vaccine tested on thousands of individuals. Russian President Vladimir Putin has hailed the development and production of the vaccine, promising its safety and suggesting a timeline that would see the virus ready for use by the end of this month. Asked about the new vaccine, President Trump said, “We don’t know much about it. We hope it works, we do, we hope it works,” but noted, “They’ve cut off certain trials and we feel it’s just important to go through the process.”

After President Trump signed a series of executive orders last weekend that extended the enhanced employment insurance and cut payroll taxes for individuals making under $100,000 per year, among others, Congress and White House officials continued to negotiate the terms of a COVID-19 relief bill attempting to find a middle ground between the $1T bill passed by the Senate and the $3.4T bill passed by the House of Representatives. While many issues have created roadblocks to the negotiations, unemployment insurance benefits, and financial aid to state and local governments remain the chief areas of disagreement between the two sides. After failing to reach an agreement last week, Speaker of the House Nancy Pelosi suggested that a $2T price tag would be acceptable but Treasury Secretary Steven Mnuchin called the $2T price tag a “non-starter” and suggested that a smaller bill packed with the items that they do agree on should be passed saying, “My view on negotiations is you agree on the things that you can agree on, have legislation that’s good for the American public, and then come back for another bill.”

On the economic data front, market participants digested several high-profile data updates that again suggested that the U.S. economy is beginning to recover. The Producer Price Index and Consumer Price Index both reported a 0.6% increase in prices in July. While prices have risen over the past few months, analysts warn that the steep drops in prices at the onset of the pandemic have tamed inflation expectations for the coming years. While the Consumer Price Index (CPI) is not the Federal Reserve’s preferred measure of inflation, the CPI has risen only 1% year over year compared to the 2.5% year-over-year increase seen in January, well below the Fed’s 2% target. Market participants were encouraged by the week over week drop in new unemployment claims as 963,000 individuals filed for unemployment in the last week. Although the levels remain far above records set before the pandemic, the jobless claims figure reported last week is the first time new claims have been under one million individuals in 21 weeks.

The look forward

Market participants are gearing up for another busy week of economic data releases as updated figures on the Empire Manufacturing Index, housing starts, building permits, jobless claims, the Philadelphia Fed’s Manufacturing Business Outlook Survey, existing home sales, among others, dot the economic calendar. The minutes for the FOMC’s latest policy meeting are released on Wednesday.

Rates Snapshot

Market implied policy path (Overnight indexed swap rates)

Source: Chatham Financial


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