Stimulus bill optimism drives equities higher
Balance Sheet Risk Management
Financial Institutions | Kennett Square, PA
SummaryAfter suffering the worst week since October, the major U.S. equity indices regained their footing last week as renewed stimulus bill hope, sustained decline in COVID-19 case counts, and increased levels of vaccinations in the U.S. buoyed investor sentiment despite mixed U.S. economic data.
Prior week summary
After suffering the worst week since October the week prior, the major U.S. equity indices regained their footing last week as renewed stimulus bill hope, sustained decline in COVID-19 case counts, and increased levels of vaccinations in the U.S. buoyed investor sentiment despite mixed U.S. economic data. Stimulus bill negotiations continued to take shape last week after a group of ten Republican Senators proposed an alternative $618 billion relief package to President Joe Biden’s $1.9 trillion proposal last weekend. President Biden met with the group of ten Senators to discuss the package on Monday but reportedly characterized the bill as “way too small” and instead reiterated the need for a “big, bold package.” After dismissing the alternative proposal, Democrats pushed forward last week with a budget reconciliation process in an attempt to pass the $1.9 trillion proposal in its entirety without Republican support. The budget reconciliation process allows legislation to be passed with a simple majority in the Senate as opposed to the traditional 60 votes needed for a bill to be signed into law. With the Senate split 50-50 and Vice President Kamala Harris holding the tie-breaking vote, Democrats have the numbers to pass a $1.9 trillion relief proposal as long as no one in the party defects and votes against the legislation. After both the House of Representatives and the Senate passed a budget resolution on Friday, the reconciliation process was initiated, and committees will now begin drafting bills that will work to meet the demands of the President’s proposal. Within the $1.9 trillion proposal, the items given the highest importance are $1,400 direct payments to qualifying individuals, a $400 enhanced unemployment benefit through September, and $350 billion in funding for state and local governments. Speaking to reporters on Monday, House Speaker Nancy Pelosi emphasized the need to act without delay saying, “On Monday, we will begin working on the specifics of the bills. Hopefully, in a two-week period of time, we'll send something over to the Senate, and this will be done long before the due date, the expiration of so many initiatives.”
Many market participants were encouraged over the week as daily COVID-19 case counts continued to trend lower and daily vaccination counts continued to trend higher. As of Sunday evening, the U.S. COVID-19 tally sits just above 26.7 million cases, approximately a quarter of the world’s confirmed cases, with over 84,000 individuals currently hospitalized. Case counts continued to trend lower last week with the seven-day average daily case count sitting at 120,446 compared to 150,089 the week prior. Notably, vaccinations have been on the rise with over two million individuals receiving a shot on Friday alone. As expected, Johnson and Johnson applied for an Emergency Use Authorization (EUA) from the Food and Drug Administration (FDA) on Thursday for its prospective vaccine. If granted approval, the Johnson and Johnson vaccine would be the third vaccine, behind the Pfizer and Moderna vaccines, granted an EUA in the U.S. Notably, the Johnson & Johnson vaccine requires only one shot. The FDA is scheduled to discuss the EUA application later this month on February 26. In a statement released announcing the submittal of the EUA application, Johnson & Johnson’s Chief Scientific Officer Dr. Paul Stoffels emphasized the company’s readiness to meet demand saying, “Upon authorization of our investigational COVID-19 vaccine for emergency use, we are ready to begin shipping. With our submission to the FDA and our ongoing reviews with other health authorities around the world, we are working with great urgency to make our investigational vaccine available to the public as quickly as possible.
In a busy week for economic data releases, market participants received updates that largely pointed to a mixed U.S. recovery. Manufacturing measures released on Monday painted a mixed picture of the manufacturing industry. The ISM Manufacturing Index posted a 58.7 level in January, below the 60.7 level seen in December but well within expansionary territory. Conversely, the final HIS Markit manufacturing survey for January ticked higher to 59.2 compared to the 57.1 reading seen in December, as the output and new orders segments improved. The services sector continues to show strong indicators with the ISM Non-Manufacturing Index posting a 58.7 level, above both consensus estimates and the 57.2 reading seen in December. The employment situation wrangled control for market participant attention in the back half of the week. The ADP employment report released on Wednesday indicated that the U.S. private sector added 174,000 jobs in January, smashing expectations for a modest 48,000 job additions. Market participants were further encouraged on Thursday when it was revealed that jobless claims for the last week clocked in at 779,000. While the absolute level in claims remains far higher than the pre-pandemic peak reached in 1982, the most recent reading fell lower than last week’s 812,000 claims and the consensus expectation of 830,000 claims. Continuing claims also continued to trend lower as 4.59 million individuals continued filing claims as opposed to the 4.79 million claims seen the week prior. All eyes turned to the January non-farm payroll report on Friday morning and it largely disappointed. According to Friday’s release, the U.S. economy added 49,000 jobs, a significant improvement on the 227,000 job losses reported in December but nonetheless far below analyst calls for 105,000 job additions. The unemployment rate unexpectedly fell to 6.3% from 6.7%. While the improvement in the unemployment rate is encouraging on the surface, analysts were quick to point out that the decline was partially attributable to people leaving the labor force. A host of Federal Reserve officials spoke over the course of the week. Speaking about the U.S. recovery on Monday, Federal Reserve Bank of Boston President Eric Rosengren painted a dark picture for the current state of the U.S. economy but expressed hope for the future saying, “We’re still in the depths of a recession. I hope over the course of the spring, we’re talking about a significant recovery. But I think it does depend on some of the public health outcomes.”
The look forward
In a much lighter week for economic data releases, market participants will be looking forward to the release of updated figures on the Consumer Price Index, wholesale inventories, and jobless claims, among others. The second Senate impeachment trial of Former President Donald Trump begins on Tuesday.
Market implied policy path (Overnight indexed swap rates)
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