Vaccine progress pushes equities higher

Prior week summary

In a holiday-shortened week, the major U.S. equity indices moved higher with the Dow Jones Industrial Average surpassing the psychologically significant 30,000 level at one point amid a deluge of economic data releases, positive vaccine developments, and rising COVID-19 cases in the U.S. As of Sunday evening, the global tally of COVID-19 cases sits just over 63 million with over 13.5 million cases originating in the U.S. The daily case count average continued to trend higher over the last week with the U.S. reporting a record-setting 194,979 new cases on Friday. While many state and local governments have re-imposed restrictions on movement and activity in recent weeks, cases, hospitalizations, and deaths continue to move higher at an accelerated pace with a record 91,000 individuals currently hospitalized across the country and nearly 2,300 deaths reported on Wednesday alone, a figure not seen since early May. In Europe, the daily case count average has trended lower in the last week as many nations enacted restrictions in an attempt to slow the spread of the virus, but death rates have moved higher in the last week.

Market participants were delighted on Monday when AstraZeneca announced that their prospective vaccine, developed in partnership with the University of Oxford, was up to 90% effective in preventing COVID-19 contraction. While the preliminary results appear promising, experts were quick to point out that the preliminary data suggests that the efficacy was 62% when both doses were administered, above the 50% minimum efficacy threshold set by U.S. regulators, but below the figures reported by Pfizer and Moderna for their prospective vaccines in recent weeks. On Friday, the UK requested a formal review of the vaccine by the Medicines and Healthcare products Regulatory Agency in hopes that the regulatory body would authorize the vaccine for emergency use in the country. The World Health Organization’s Chief Scientist Dr. Soumya Swaminathan highlighted the importance of having access to multiple, viable vaccines as a way to control the virus saying, “It is important that trials must continue. Trials of these early vaccines have given us some results but also there are a couple of dozen more that are currently in human trials. We need to get to the end of those to then have a choice, a basket of vaccines that we can choose from and be able to target them to different situations in countries with different populations.”

While the week was short due to the Thanksgiving holiday in the U.S., market participants were bombarded with several high-profile economic data updates last week. On Wednesday, the Commerce Department reported that the U.S. economy grew at a 33.1% annualized pace in the third quarter, in line with the initial third-quarter GDP figure released last month but below analyst expectations. While third-quarter GDP is a welcomed development after GDP dropped at a 31.4% annualized pace in the second quarter, analysts are currently forecasting a smaller pick up in the fourth quarter. The Atlanta Fed’s GDPNow Tool, which forecasts the current quarter’s GDP in real-time, projects fourth-quarter GDP to clock in at 11.0% growth. Jobless claims topped expectations with 778,000 individuals filing for unemployment in the last week, suggesting that restrictions implemented to slow the spread of COVID-19 are beginning to appear in the employment data. Conversely, the continuing jobless claims figure continues to fall with 6.07 million individuals receiving unemployment benefits compared to 6.37 million individuals last week. Demand for new homes appeared to be strong in October, with 999,000 new home sales reported. While the figure is slightly below the 1.002 million sales seen in September, the October figure represents a 41.5% increase over last October’s new home sales. Consumer spending rose 0.5% in October, the smallest increase since April and below the 1.2% increase reported in September. The PCE index, the Federal Reserve’s preferred inflation gauge, indicated that prices increased at a 1.2% annual rate, down from 1.4% in September. The Federal Reserve released the minutes from the FOMC’s latest policy meeting on Wednesday. Many officials preferred to give enhanced guidance to market participants on the bond-buying program and the conditions that would need to exist for the purchases to cease. According to the minutes, “Most participants judged that the FOMC should update this guidance at some point and implement qualitative outcome-based guidance that links the horizon over which the FOMC anticipates it would be conducting asset purchases to economic conditions.”

The look forward

Market participants are gearing up for another busy week of economic data releases with updated figures on the ISM Manufacturing Index, ISM Non-Manufacturing Index, construction spending, jobless claims, factory orders, and most notably, the November non-farm payroll report.

Rates snapshot

Market implied policy path (Overnight indexed swap rates)