Virus resurgence complicates reopening plans

Prior week summary

The major U.S. equity indices ended the week mixed with the S&P 500 marching higher for the third consecutive week on the back of encouraging news on the vaccine front. The week began on shaky footing as the resurgence of COVID-19 in the southern U.S. and California dampened investor sentiment and renewed fears that the country could be headed for more lockdowns. As of Sunday evening, the U.S. infection count sits just below four million confirmed cases, over a quarter of the global case count, with nearly 150,000 individuals succumbing to the virus. California has seen a steep rise in both infections and hospitalizations in recent weeks with the state reporting nearly 6,000 new cases on Sunday. On Monday, California Governor Gavin Newsom re-imposed many of the lockdown measures taken at the beginning of the virus outbreak, shuttering bars, banning indoor dining, and closing many non-essential businesses in the hardest-hit counties. Further dampening the mood, California’s two largest school districts, Los Angeles and San Diego, announced that schools will not open their doors this fall and will instead hold all classes online. The recent resurgence in the virus has seemingly increased the likelihood of another round of stimulus from Congress. Speaking to reporters last week, White House Economic Advisor Larry Kudlow, outlined the Trump administration’s goals for the next installment and was confident that talks for another round of stimulus would begin shortly saying, “The President does want a payroll tax holiday, and that, along with restricting COVID liabilities for small business restaurants and so forth, and one of the key aspects of our asks for the next round of CARES Act, which will probably be discussed beginning the week when the Senate returns.”

Market participants received a deluge of economic data updates over the last week and the results largely suggested a recovering U.S. economy as state economies began reopening in recent weeks across the country. On the manufacturing front, the data suggested a continued rebound in both production and sentiment. The Empire Manufacturing Index rose to 17.2 in July, well below pre-pandemic levels but well above the -0.2 level seen in June. The Philadelphia Fed’s Manufacturing Business Outlook survey fell slightly in July to 24.1 but fared significantly better than analyst calls for an 18.1 reading. Industrial production rose 5.4% in June, well above analyst expectations and the modest uptick seen in May. Analysts warn that while the pickup in industrial production is an encouraging sign for the manufacturing sector, industrial production remains nearly 11% below the pre-pandemic levels seen in February. Consumer prices rose 0.6% in June as measured by the Consumer Price Index, the biggest increase since 2012, with a rise in energy prices accounting for roughly half of the increase. While prices have risen in June, the Consumer Price Index has risen only 1.2% year over year, well below the Federal Reserve’s 2% target. Following a record increase in May, retail sales increased 7.5% in June, well above expectations. Retail sales figures have seen a stellar rise in the last two months, but many warn that the recent resurgence in COVID-19, which has caused some states to re-impose lockdown measures, is not reflected in the data and could hamper the recovery of the U.S. consumer. A host of Federal Reserve officials held speaking engagements throughout the week. Speaking at the Economic Club of New York, St. Louis Fed President James Bullard, looked to justify the rebound in equities since the sell-off in March saying, “Equity markets are something we don’t usually talk about at the Fed. I think they have been optimistic and they have been right, I think, up to now anyway,” and noted, “They were optimistic in the May-June time frame and indeed the data came in and validated the market thinking.”

The look forward

The economic data releases for the week are light with updated figures on new and existing home sales, jobless claims, and the IHS Markit flash indicators for the manufacturing and service sectors dotting the economic calendar.

Rates Snapshot

Market implied policy path (Overnight indexed swap rates)