Senate stimulus bill fails to pass

Prior week summary

In a holiday-shortened week, the major U.S. equity indices moved lower for a second consecutive week as the tech sell-off continued amid mixed economic data and stalled stimulus bill negotiations on Capitol Hill. While economic data releases for the week were light, market participants received updates on the labor market as well as the latest readings on inflation. The initial jobless claims reading showed 884,000 individuals filed for unemployment in the last week, topping expectations and suggesting that the labor market recovery may be showing signs of slowing as jobless claims have not only remained well above pre-pandemic norms but also have trended upward in the last four weeks. Continuing claims increased for the first time in five weeks last week and now stands at 13.39 million individuals. Inflation data was released in the form of the Producer Price Index and the Consumer Price Index (CPI) last week, both of which suggested that inflationary pressures remain muted. Producer prices rose 0.3% in August, half of the month over month increase seen in July but modestly above expectations calling for a 0.2% increase. The increase in the August reading was largely driven by the 0.5% increase in the index of services. On the consumer price front, the CPI increased 0.4% in August, below July’s 0.6% reading but above analyst calls for a 0.3% increase. While Friday’s CPI release marks the third consecutive month that the reading has increased, inflation remains very low with prices rising 1.3% year over year. Prices had been rising at a 2.5% year over year pace at the start of the year as measured by the CPI.

Stimulus bill negotiations continued to falter last week as Republicans and Democrats worked to reach a compromise on a bill that would provide additional aid to both individuals and companies hardest hit by the pandemic. In an attempt to break the impasse, Senate Republicans introduced a “skinny” $500B relief bill that looked to extend enhanced unemployment benefits of $300 per week and provide an additional $257B to the Paycheck Protection Program. The bill failed to pass on Thursday after receiving only 52 of the 60 votes needed to pass. Speaking to reporters on Friday, Senate Majority Leader appeared pessimistic about the prospects of a compromise on additional relief saying, “I can’t predict we are going to get together here in these last two months before the election. I wish I could tell you we were going to get another package, but it doesn’t look good right now.” White House economic advisor Larry Kudlow was more optimistic saying that, “We compromised last winter. We should be able to do it again.”

As of Sunday evening, the global case tally stands at just over 29.2 million confirmed COVID-19 cases with over 900,000 individuals succumbing to the virus. In the U.S., 6.7 million individuals have been confirmed to have contracted COVID-19, roughly a quarter of the world tally. The U.S. has seen steadily decreasing rates of infection and hospitalization averaging approximately 35,500 new cases per day in the last week, far below the record-setting figures seen in July that approached 80,000 individuals per day. Market participants received a surprise update on Tuesday that AstraZeneca was halting clinical trials of its promising COVID-19 vaccine after a neurological illness was discovered in one of the study participants. The halt in trials dampened investor sentiment midweek as the prospective vaccine is regarded as one of the most promising COVID-19 vaccine candidates and is also one of the vaccines farthest along in testing. Sentiment received a boost late last week however, after it was determined that the illness in the study participant was not a result of the vaccine trial, and Phase III testing was expected to resume.

The look forward

Market participants are gearing up for a busy week of economic data releases as updated figures on the Empire Manufacturing Index, industrial production, retail sales, jobless claims, housing starts, and the Philadelphia Fed Business Outlook Survey, among others, dot the economic calendar. The FOMC holds its two-day policy meeting on Tuesday and Wednesday of this week.

Rates snapshot

Market implied policy path (Overnight indexed swap rates)