Relief package negotiations heat up
- October 19, 2020
Balance Sheet Risk Management
Financial Institutions | Kennett Square, PA
SummaryDespite faltering stimulus bill negotiations, rising COVID-19 cases in the U.S. and Europe, and troubling COVID-19 vaccine developments, the major U.S. equity indices marched higher for the third consecutive week.
Prior week summary
Despite faltering stimulus bill negotiations, rising COVID-19 cases in the U.S. and Europe, and troubling COVID-19 vaccine developments, the major U.S. equity indices marched higher for the third consecutive week. After the White House tabled a $1.8T stimulus proposal the week prior, in an attempt to bridge the gap with the House Democrats’ $2.2T proposal, negotiations continued last week with little progress toward a deal and without a clear path forward. Hopes for stimulus dimmed on Tuesday when Senate Majority Leader Mitch McConnell indicated that the majority of Senate Republicans wouldn’t support a deal with either the White House’s or House Democrats’ price tag saying, “My members think half a trillion dollars, highly targeted, is the best way to go.” Nevertheless, negotiations between Treasury Secretary Mnuchin and House Speaker Pelosi continued throughout the week and weekend, culminating in the issuance of a 48-hour deadline on Saturday evening by House Speaker Pelosi. Pelosi indicated that if the White House cannot reconcile the differences between their $1.8T proposal and the House Democrats’ $2.2T proposal within 48 hours, a deal would have to wait until after the election. Speaking to reporters on Sunday about the deadline and negotiations, Pelosi said, “The 48 only relates to if we want to get it done before the election, which we do. We’re saying to them, we have to freeze the design on some of these things — are we going with it or not, and what is the language? I’m optimistic, because again we’ve been back and forth on all this.” While it remains unclear if Senate Republicans would back a deal negotiated by the White House and senior Democrats, President Trump suggested that he could persuade Senate Republicans to vote for the hypothetical bill saying, “If I had something that would be good, I think I could quickly convince the Republicans to do it.” Talks are scheduled to continue between Treasury Secretary Mnuchin and House Speaker Pelosi on Monday.
The stall in relief funding comes as COVID-19 cases are surging in the U.S. and Europe, with the global tally sitting just above 39.8 million cases. Investor sentiment soured early in the week when drug makers Johnson & Johnson and Eli Lilly announced that the Data and Safety Monitoring Board halted the late-stage trials for their vaccine because of adverse reactions in participants and antibody treatment, respectively. While a halt in the trials does not imply that the trials will not restart, the halt could persist for some time. Similar concerns in September halted AstraZeneca’s vaccine trial in the U.S., and it has not resumed to date. Sentiment improved on Friday when Pfizer announced that it is preparing an application for an Emergency Use Authorization for its prospective vaccine. The company expects to have data on the safety of the vaccine by the third week of November and is planning on applying for an Emergency Use Authorization in late November should the trials pose no safety issues.
Market participants were the beneficiaries of a deluge of economic data releases over the last week that pointed to a mixed U.S. recovery. On the manufacturing front, two regional gauges of manufacturing activity sent conflicting signals on the state of the manufacturing industry. The Empire Manufacturing Index fell below expectations to 10.5 in October, below the 17.0 level seen in September. On the contrary, the Philadelphia Fed Business Outlook Survey surged to 32.3 in October, defying analyst calls for a drop and handily beating the 15.0 level seen in September. Retail sales improved for the fifth straight month, increasing 1.9% in September, above analyst expectations and August’s 0.6% increase. The International Monetary Fund (IMF) released its bi-annual World Economic Outlook report on Tuesday. Notably, the IMF revised its global growth rate forecast for 2021 to 5.2% down from 5.4%. In a statement released with the report, IMF Chief Economist Gita Gopinath said, “Both advanced and emerging market economies are likely to register significant losses of output relative to their pre-pandemic forecasts. Preventing further setbacks will require that policy support is not prematurely withdrawn. Recovery is not assured while the pandemic continues to spread.”
The look forward
In a light week for economic data releases, market participants are looking forward to updated figures on housing starts, building permits, existing home sales, and jobless claims, among others.
Market implied policy path (Overnight indexed swap rates)
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