U.S. economy contracts sharply in the second quarter
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)
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