U.S. economy contracts sharply in the second quarter
- August 3, 2020
SummaryMajor U.S. equity indices ended mixed for the week as market participants digested second-quarter corporate earnings results, stimulus bill negotiations on Capitol Hill, and COVID-19 vaccine developments.
Prior week summary
The major U.S. equity indices ended mixed for the week with the S&P 500 notching a weekly gain as market participants digested second-quarter corporate earnings results, stimulus bill negotiations on Capitol Hill, and COVID-19 vaccine developments. Nearly 40% of the companies within the S&P 500 reported second-quarter earnings results in the last week. While many corporations were expected to report falling earnings amid the pandemic backdrop, a majority of the companies that have reported thus far have topped consensus expectations. Highlighting the heavy toll the virus has taken on the U.S. economy, the GDP figures released on Thursday reported that the U.S. economy contracted at a 32.9% annualized pace in the second quarter, by far the largest quarterly drop in American history. The lack of consumer spending played a significant role in the downturn as consumer spending fell at a record 34.6% annualized pace in the second quarter. While second-quarter GDP fell far further than seen in the first quarter, many analysts expect a sharp rebound in the third quarter with consensus estimates in the neighborhood of an 18% annualized rise. The U.S. economy continues to face uncertain headwinds from the virus as the surge seen in the southern U.S. and California has continued in the last week. Further complicating the recovery, initial jobless claims increased week over week for the second consecutive week with 1.43 million individuals filing for unemployment for the first time. Continuing jobless claims also moved higher to 17.1 million claims, up from the 16.2 million figure reported last week.
Negotiations on another stimulus bill began on Capitol Hill this week after Senate Republicans tabled their opening proposal on Monday. The $1 trillion price tag for the GOP bill is far lower than the $3.4 trillion bill passed in the House of Representatives in May and is the source of much consternation. While both bills agree on another round of direct payments to American citizens, major roadblocks remain with significant disagreement resulting from the employment insurance “boost” that sat at an extra $600 per week and expired on Friday. Negotiations look set to continue in the coming days as the expiration of the unemployment insurance enhancement has many in Congress ready to act quickly. Speaking to reporters over the weekend, Treasury Secretary Steven Mnuchin expressed his desire to both provide aid and control federal spending saying, “There's obviously a need to support workers, support the economy. On the other hand, we have to be careful about not piling on enormous amounts of debt for future generations.” The warning comes only days after rating agency Fitch downgraded the U.S. outlook from stable to negative. In a statement released with the decision, Fitch said, “The outlook has been revised to negative to reflect the ongoing deterioration in the US public finances and the absence of a credible fiscal consolidation plan.”
The look forward
In a busy week of economic data releases, market participants are looking forward to updated figures on the ISM Manufacturing Index, the ISM Non-Manufacturing Index, construction spending, factory orders, jobless claims, and the July non-farm payroll report, among others.
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.20-0310
Our featured insights
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.
Increase lending capacity
Many financial institutions have excess liquidity due to the global pandemic and resulting economic stimulus. Management can deploy this liquidity into new loan originations or the investment portfolio. Although bond returns are better than cash, a more attractive return may be provided from mortgage loans.