Virus surges, restrictions return

Prior week summary

The major U.S. equity indices ended the week mixed with the Dow Jones Industrial Average and the S&P 500 drifting lower and the Nasdaq inching higher amid mixed economic data, surging COVID-19 cases in the U.S., and encouraging vaccine developments from Pfizer and Moderna. COVID-19-related news continued to dominate headlines and drive sentiment last week. As of Sunday evening, the global tally of COVID-19 cases sits just below 59 million with the U.S., India, and Brazil accounting for nearly 50% of the world’s cases. The virus continued to spread rapidly through the U.S. in the last week, with the daily case count seven-day average rising to nearly 170,000 on Friday, the highest seven-day average during the pandemic. With cases rising rapidly and deaths averaging nearly 1,500 per day, many state and local governments have announced new restrictions aimed at curbing social interaction in an attempt to slow the spread of the virus. Notably, New York City Mayor Bill DeBlasio announced on Thursday that New York City public schools will transition to all-remote learning immediately after the city’s COVID-19 positivity rate crossed 3% last week. Speaking to reporters after the decision, DeBlasio said, “We will bring our schools back. But we're going to have to reset the equation. Something is changing, it's changing rapidly in this city. We certainly see what's happening around the country. We've got to reset the equation.” On Sunday, Los AngelesCounty announced that, starting Wednesday, all restaurants, including outdoor dining, and bars will be required to shut down for at least the next three weeks. As the holiday season nears, experts warn that the U.S. could continue to see cases rise at a heightened pace as families gather and travel increases.

Market participants received several encouraging vaccine updates last week beginning on Monday morning when Moderna announced that their prospective vaccine was 94.5% effective at combatting COVID-19 contraction according to the preliminary results of their Phase III clinical trial. According to reports, Moderna plans to apply for an Emergency Use Authorization from the Food and Drug Administration (FDA) upon meeting follow-up data requirements, a milestone the company expects to meet by month-end. After Pfizer announced that its experimental vaccine was over 90% effective last week, the company revealed that updated data suggested that the vaccine was 95% effective in combatting COVID-19 contraction. On Friday, Pfizer indicated that it asked the FDA to grant the experimental vaccine an Emergency Use Authorization. With case counts rising rapidly across the country, the FDA is expected to assess the prospective vaccine quickly, possibly allowing distribution to begin by mid-December. Speaking on Pfizer’s decision to apply for an Emergency Use Authorization, Chief Executive Albert Bourla said, “Filing in the U.S. represents a critical milestone in our journey to deliver a COVID-19 vaccine to the world and we now have a more complete picture of both the efficacy and safety profile of our vaccine, giving us confidence in its potential.”

The economic data updates for last week suggested a mixed U.S. economic recovery. The Empire Manufacturing Index fell to 6.3 in November, lower than the 10.5 level seen in October as declines in the new-orders and shipments indices dragged the measure lower. Retail sales increased 0.3% in October, in line with analyst expectations but markedly lower than the 1.6% increase seen in September. The October retail sales figure notched a sixth consecutive month-over-month increase but marked the smallest gain since May. Housing starts and existing home sales both topped expectations in October, clocking in at 1.53 million and 6.85 million, respectively. Jobless claims moved higher last week, rising to 742,000 claims as the implementation of new virus-related restrictions around the country begin to show up in the employment data. Continuing jobless claims remained on a falling trajectory, posting 6.37 million claims last week, below the 6.80 million seen the week prior. On Thursday, Treasury Secretary Steven Mnuchin indicated that he would allow several emergency lending facilities to expire on December 31. In a letter to Federal Reserve Chair Jerome Powell, Mnuchin asked that the Federal Reserve return, “the unused funds to the Treasury,” arguing that, “This will allow Congress to re-appropriate $455 billion, consisting of $429 billion in excess Treasury funds for the Federal Reserve facilities and $26 billion in unused Treasury direct loan funds,” and that, “The Federal Reserve facilities supported by the Treasury’s contribution of CARES Act funds have clearly achieved their objective.” Powell penned a response to Mnuchin on Friday saying, “We will work out arrangements with you for returning the unused portions of the funds allocated to the CARES Act facilities in connection with their year-end termination.”

The look forward

In a holiday-shortened week, market participants are gearing up for a busy week of economic data releases with updated figures on Q3 GDP, jobless claims, durable goods orders, new home sales, and consumer spending, among others, dotting the economic calendar.

Rates snapshot

Market implied policy path (Overnight indexed swap rates)