Vaccine developments improve sentiment

Prior week summary

The major U.S. equity indices ended the week mixed with the Dow Jones Industrial Average and the S&P 500 moving higher and the Nasdaq heading lower amid rapidly rising COVID-19 cases in the U.S., mixed economic data updates, and encouraging COVID-19 vaccine developments. As of Sunday evening, the global tally of COVID-19 cases sits just below 55 million with over 20% of the cases originating in the U.S. The U.S. has seen a rapid rise in COVID-19 cases and hospitalizations in the last month. On Friday, the U.S. reported over 184,000 new cases of COVID-19, marking the fourth consecutive day that the daily case count set a record and tallying a seven-day moving average above 150,000 cases for the first time during the pandemic. As cases surge around the country, many state and local governments have re-imposed restrictions, including New York, which now requires bars and restaurants to close at 10pm. In Europe, COVID-19 infection rates have also been on the rise with several countries, including France, Germany, and the U.K., issuing significant restrictions on social activity and travel in recent weeks. After French President Emmanuel Macron announced a second lockdown two weeks ago, French Prime Minister Jean Castex announced on Thursday that there will be no changes to the guidance for at least the next two weeks as the country works to get the virus under control so they can, “allow a new easing of rules at the time of the Christmas holidays.”

Market participants were delighted at the start of the week when Pfizer and BioNTech announced that an interim analysis of an ongoing clinical trial on its prospective vaccine showed that the vaccine was more than 90% effective in preventing COVID-19 contraction, sending equities and yields higher and improving investor sentiment. While the preliminary trial results are highly encouraging, Pfizer will need at least two months of follow-up data from volunteers, expected to be available later this month, before the company can begin to seek approval from the Food and Drug Administration to distribute the vaccine. Anthony Fauci, Director of the National Institute of Allergy and Infectious Diseases, emphasized the importance of widespread vaccine adoption saying, “We’ve got to convince people to take the vaccine, because if you have a highly effective vaccine and only 50% of the people take it, you’re not going to have the impact that you’d need to essentially bring the pandemic down to such a low level that it’s no longer threatening society. And that’s the goal of a vaccine.”

In a light week for economic data releases, market participants digested updated figures on inflation and jobless claims. Thursday’s release of the Consumer Price Index (CPI) indicated that prices remained unchanged over the last month, falling below expectations for a 0.1% increase. Inflation continues to trend lower, with prices rising 1.2% year over year as measured by the CPI, much lower than the 2.3% pace seen before the pandemic. Wholesale prices rose more than expected in October, increasing 0.3% according to the Producer Price Index but below the 0.4% pace seen in September. 709,000 individuals filed for unemployment in the last week, the lowest level seen during the pandemic but above any level seen in the country before this year. Analysts warn that the trend lower in jobless claims may reverse as the U.S. grapples with a surge in COVID-19 cases. Continuing jobless claims also fell week over week to 6.79 million. Federal Reserve Chair Jerome Powell spoke at the European Central Bank’s Forum on Central Banking on Thursday. In his remarks, Powell expressed optimism about the recent progress in vaccine developments saying that it, “is good and welcome news to the medium term,” but cautioned, “It’s just too soon to assess with any confidence the implications of the news for the path of the economy, especially in the near term.”

The look forward

Market participants are gearing up for a busy week of economic data releases with updates on the Empire Manufacturing Index, retail sales, industrial production, housing starts, building permits, jobless claims, existing home sales, and the Philadelphia Fed Business Outlook Survey, among others, dotting the economic calendar.

Rates snapshot

Market implied policy path (Overnight indexed swap rates)