Stimulus package negotiations remain stalled
- October 13, 2020
Balance Sheet Risk Management
Financial Institutions | Kennett Square, PA
SummaryThe major U.S. equity indices moved higher for a second consecutive week as hopes for a breakthrough in stimulus package negotiations, positive COVID-19 treatment developments, and better-than-expected economic data improved investor sentiment despite rising COVID-19 cases in the U.S. and Europe.
Prior week summary
The major U.S. equity indices moved higher for a second consecutive week as hopes for a breakthrough in stimulus package negotiations, positive COVID-19 treatment developments, and better-than-expected economic data improved investor sentiment despite rising COVID-19 cases in the U.S. and Europe. After the House of Representatives passed a $2.2T stimulus bill the week prior, stimulus package negotiations between the Trump administration and senior Democrats continued last week as the two sides work to bridge the gap amid disagreements over the size of the relief package. President Trump abruptly called off negotiations on Tuesday, opting to wait until after the election for further negotiations and to focus on the confirmation of Supreme Court nominee Amy Coney Barrett. President Trump quickly changed course that evening, expressing support for targeted assistance to small businesses and the airline industry and reopening the door for negotiations. On Friday, the White House tabled a $1.8T relief proposal, revising the $1.6T offer the White House proposed a week earlier, in an attempt to further narrow the gap between the White House proposal and the $2.2T proposal passed by the House of Representatives. While Republicans have been hesitant to support a bill with the price tag of either proposal, President Trump suggested that he would accept a bill that costs more than either proposal on Friday saying, “I’d like to see it happen. A lot of people are hurting because of China. It wasn’t these people’s faults. I would like to see a bigger stimulus package frankly than either the Democrats or Republicans are offering.” While negotiations are set to continue, a timeline for a package both sides can agree on remains unclear. House Speaker Nancy Pelosi expressed resistance to the revised White House proposal on Sunday saying, “This past week, the president demonstrated very clearly that he has not taken the war against the virus seriously, personally or nationally. This attitude is reflected in the grossly inadequate response we finally received from the administration on Saturday. Until these serious issues are resolved, we remain at an impasse.”
As of Monday evening, the global tally for COVID-19 cases sits just under 37.5 million, with nearly 1.1 million individuals succumbing to the virus. COVID-19 cases have been rapidly rising across Europe and steadily rising in the U.S. as the World Health Organization reported the single greatest daily increase of COVID-19 cases since the pandemic began on Saturday. The U.K. and France have seen significant increases in confirmed cases and hospitalizations with France reporting over 26,000 new cases on Sunday, by far the country’s highest daily total. After Paris shuttered bars earlier in the week, French Minister for Solidarity and Health, Olivier Véran, announced that Lyon, Lille, Grenoble, and Saint-Etienne would enter the maximum “coronavirus alert level” and close their bars for at least two weeks. The move comes approximately two weeks after U.K. Prime Minister Boris Johnson announced similar restrictions in response to the increased spread of COVID-19 in the last several weeks. In the U.S., case counts have steadily trended higher over the week with the U.S. reporting over 62,000 new infections on Friday, a level not seen since mid-August. Many market participants appeared hopeful that Regeneron’s antibody treatment, REGN-COV2, and Gilead Science’s antiviral drug, Remdesivir, two drugs that President Trump deemed instrumental in his own recovery from COVID-19, would prove effective in treating individuals with the virus. Investor sentiment improved further on Wednesday when drug maker Eli Lilly announced that it is seeking an Emergency Use Authorization from the Food and Drug Administration.
Wednesday brought the release of the minutes from the FOMC’s latest policy meeting. The minutes added context to the discussions surrounding the FOMC’s adoption of average inflation targeting. While there were two dissenters at the conclusion of the latest policy meeting, the minutes indicated that “several” members argued that “there did not appear to be a need for enhanced forward guidance at this juncture,” and that, “such guidance could contribute to a buildup of financial imbalances that would make it more difficult for the Committee to achieve its objectives in the future.” On Tuesday, Federal Reserve Chairman Jerome Powell spoke about the economic outlook in a speech to the National Association for Business Economics. As has become increasingly common for the Federal Reserve Chairman, Powell reiterated calls for fiscal stimulus saying, “The recovery will be stronger and move faster if monetary policy and fiscal policy continue to work side by side to provide support to the economy until it is clearly out of the woods,” and noting, “Too little support would lead to a weak recovery, creating unnecessary hardship for households and businesses.”
The look forward
Market participants are gearing up for a busy week of economic data releases with updated figures on the Empire State Manufacturing Index, Philadelphia Fed Business Outlook Survey, Consumer Price Index, Producer Price Index, retail sales, and jobless claims, among others, dotting the economic calendar.
Market implied policy path (Overnight indexed swap rates)
Chatham Hedging Advisors, LLC (CHA) is a subsidiary of Chatham Financial Corp. and provides hedge advisory, accounting and execution services related to swap transactions in the United States. CHA is registered with the Commodity Futures Trading Commission (CFTC) as a commodity trading advisor and is a member of the National Futures Association (NFA); however, neither the CFTC nor the NFA have passed upon the merits of participating in any advisory services offered by CHA. For further information, please visit chathamfinancial.com/legal-notices.
Transactions in over-the-counter derivatives (or “swaps”) have significant risks, including, but not limited to, substantial risk of loss. You should consult your own business, legal, tax and accounting advisers with respect to proposed swap transaction and you should refrain from entering into any swap transaction unless you have fully understood the terms and risks of the transaction, including the extent of your potential risk of loss. This material has been prepared by a sales or trading employee or agent of Chatham Hedging Advisors and could be deemed a solicitation for entering into a derivatives transaction. This material is not a research report prepared by Chatham Hedging Advisors. If you are not an experienced user of the derivatives markets, capable of making independent trading decisions, then you should not rely solely on this communication in making trading decisions. All rights reserved.20-0395
Our featured insights
ARRC formally recommends SOFR Term Rates
In a busy week filled with corporate earnings releases, high-profile economic data updates, and the latest FOMC monetary policy meeting, the major U.S. equity indices and long-term Treasury yields drifted lower to end the month.
Equities shake off virus jitters; ARRC talks Term SOFR
Despite a sharp selloff to start the week, the three major U.S. equity indices recovered to finish the week higher, each setting new all-time highs, as market participants focused on a strong start to the corporate earnings season and shrugged off mostly weaker-than-expected economic data and renewed fears of the COVID-19 delta variant.
Inflation readings top expectations
The major U.S. equity indices moved lower for the week, snapping a three-week winning streak, as investors turned their attention to a slew of economic data updates and Federal Reserve Chair Powell’s semi-annual testimonies before Congress.
Regulators voice support for SOFR
Despite the recent rise in COVID-19 cases linked to the delta variant and weaker-than-expected economic data, the major U.S. equity indices extended their run last week, setting new all-time highs, while long-term Treasury yields continued their drift lower, falling to multi-month lows.
June payroll report tops expectations
The major U.S. equity indices continued their march higher last week with the S&P 500 and Nasdaq Composite Indices ending the week at all-time highs as generally favorable economic data outweighed concerns of a new surge of COVID-19 delta variant cases in the U.S.
Big banks pass stress tests
The major U.S. equity indices moved higher over the week with the S&P 500 and Nasdaq Composite Indices reaching new all-time highs amid a breakthrough in infrastructure negotiations, mixed economic data, and sustained improvement in the COVID-19 situation in the U.S.
FOMC Dots turn heads
The major U.S. equity indices ended the week lower as weaker-than-expected economic data and a more hawkish-than-expected FOMC monetary policy meeting dominated headlines and dampened investor sentiment.
Yields fall, ARRC launches “SOFR first” initiative
The major U.S. equity indices ended the week mixed with the tech-heavy Nasdaq Composite Index faring the best as updates to the Consumer Price Index and infrastructure bill negotiations in Washington dominated headlines in a week with few economic data updates and a speaking engagement blackout for Federal Reserve officials.