Virus surges in Europe

Prior week summary

The major U.S. equity indices ended the week mixed with the S&P 500 moving lower and the Nasdaq breaking higher as market participants digested a renewed surge of COVID-19 cases in Europe, stalled stimulus bill negotiations on Capitol Hill, and mixed economic data in the U.S. As of Sunday evening, the global tally for confirmed cases of COVID-19 sits just above 33.3 million with the death toll surpassing one million individuals globally. Cases in Europe have continued to rise with the likes of the U.K., France, Spain, and the Netherlands setting records for new cases in their respective countries over the last week. In the U.K., Prime Minister Boris Johnson has announced several new restrictions in response to the increase in cases and has stressed that “significantly greater restrictions” could be in store if the situation continues to deteriorate. The new restrictions include mandatory use of masks for store staff and shortened hours for restaurants and bars, among others. While no definitive timeline for the end of the restrictions has been announced, Johnson indicated the new rules may be in store for six months saying, “We will spare no effort in developing vaccines, treatments, new forms of mass-testing, but unless we palpably make progress we should assume that the restrictions that I have announced will remain in place for perhaps six months.” In the U.S., confirmed cases sit at a world-high of 7.3 million with new cases averaging just above 44,000 per day over the last week.

The continued spread of the virus throughout the country has substantially increased calls for fiscal stimulus over the last month. Talks remained stalled after the bipartisan Problem Solvers Caucus tabled a $1.5 trillion relief proposal in an attempt to break the deadlock last week. Analysts warned that last weekend’s passing of Supreme Court Justice Ginsburg and the Trump administration’s nominating of federal judge Amy Coney Barrett to fill the vacancy in the Supreme Court threatens the likelihood of additional virus-related stimulus reaching completion by the election. In response to last week’s $1.5 trillion bipartisan proposal, House Democrats are reportedly crafting a $2.4 trillion stimulus proposal, one which would include enhanced unemployment coverage, funding for the Paycheck Protection Program, and direct payments to Americans. Speaking on Sunday, House Speaker Nancy Pelosi seemed optimistic about the possibility of an agreement saying, “When I have a conversation with the administration, it is in good faith. I trust Secretary Mnuchin to represent something that can reach a solution, and I believe we can come to an agreement.”

While light on releases, the U.S. economic data updates for the week suggested a continuing recovery for the U.S. economy, but one which has slowed from the pace seen earlier this summer. The IHS Markit flash reading for the services sector moved down to 54.6, below August’s 55.0 level but within expansionary territory. The flash reading for the manufacturing sector reached a 20-month high posting a 53.5 level which modestly improved on August’s 53.1 reading. In the housing sector, existing home sales reached 6 million in August, in line with expectations and above July’s 5.86 million sales. The 6 million home sales seen in August is the fastest pace seen since 2006 and is up roughly 10.5% in the last year. New home sales reached 1.01 million in August, a pace also not seen since 2006, as the measure smashed both analyst expectations and the 956,000 sales seen in July. Jobless claims moved higher to 870,000 as the number of individuals filing for unemployment continues to shatter pre-pandemic highs with continuing claims falling modestly to 12.58 million individuals. A host of Federal Reserve officials spoke this week including Federal Reserve Chair Jerome Powell. Powell pushed back on calls for increased aid to very small businesses saying, “Extending credit in those small quantities would require a facility built from the ground that would be quite different than Main Street. It wouldn’t look like the current Main Street facility now. It’s just a very different kind of thing,” and reiterated calls for fiscal stimulus saying, “The Cares Act states clearly that these loans cannot be forgiven. For some businesses, a loan that could be difficult to repay may not be the answer. And in these cases, direct fiscal support may be needed.”

The look forward

Market participants are gearing up for a busy week of economic data releases as the ADP unemployment report, second-quarter GDP, jobless claims, ISM Manufacturing Index, construction spending, factory orders, and the September non-farm payroll report dot the economic calendar.

Rates snapshot

Market implied policy path (Overnight indexed swap rates)