Election and COVID Scenarios Vie for Market Attention

Elections and COVID

One presidential debate down and with the president beset with a case of COVID (but set to be released today) that could be it for debates this cycle. Thus, we travel into November with a contested election still a serious consideration. How that impacts yields is anyone’s guess but we think the kneejerk reaction should be faded.  It’s inevitable given the divisions in the country that as we move inside a month to the election that the uncertain outcome will keep the market on edge but we still think a 10-year yield under 1.00% is likely while on the flipside, moving below 0.34% resistance will be a huge challenge as well. Thus, we see the range that has prevailed since March continuing through the election with perhaps some testing, but ultimately the reality of the pandemic and the economic headwinds will limit any election-inspired volatility. On Wednesday we get minutes from the September FOMC meeting, and while the Fed didn’t change policy the Fed made news. The overt forward guidance by Fed Chair Powell that any policy change would require three things was monumental. Those three things are: an inflation rate at 2%, inflation trending over 2%, and an economy at full employment. With unemployment at 7.9% reaching 3.5% could take a few more years. In that event, we see policy staying at the zero lower bound during that time. The minutes, however, may provide some additional insight.

 

 

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 Top 5 Events for the Week

Oct. 5 — 9, 2020

1. Election and COVID Scenarios — All Week
2. FOMC Meeting Minutes — Wednesday
3. September ISM Services Index — Monday
4. August Trade Balance Report — Wednesday
5. Initial Jobless Claims — Thursday

 

1.  Election and COVID Scenarios — All Week

One presidential debate down and with the president beset with a case of COVID (but set to be released from the hospital today) it looks like that may be it for debates this year. Thus, we travel into November with a contested election a real possibility. How that impacts yields is anyone’s guess but we think the kneejerk reaction should be faded.  It’s inevitable given the divisions in the country that as we move inside a month of the election that the uncertain outcome will keep the market on edge but we still think a 10-year yield under 1.00% is likely while on the flipside, moving below 0.34% resistance will be a huge challenge as well. Thus, we see the range that has prevailed since March continuing through the election with perhaps some testing of the range but ultimately the reality of the pandemic and the economic headwinds of it will limit any election-inspired volatility.

 

2.  September FOMC Meeting Minutes — Wednesday

The September FOMC meeting while not having any change in policy did have some reverberating content. The overt forward guidance by Fed Chair Powell that any policy change would require three things was monumental. Those three things are: an inflation rate at 2%, and also a trend in inflation over and above 2%, and an economy at full employment. While the details around full employment were left unsaid, if we reached 3.5% unemployment prior to the pandemic one can assume that is the bar for full employment until stated otherwise. Thus, with unemployment at 7.9%, reaching 3.5% could take a few more years. In that event, we see policy staying at the zero lower bound for several years. The minutes, however, may provide some additional insight into the matter.

 

3.  September ISM Services Index — Monday

While the manufacturing index gets more attention, the services sector does account for about 90% of the economy so it obviously has more influence overall. The services index is expected to slip a bit from 56.9 in August to 56.2 in September, still in solid expansionary territory and well above the April low of  41.8. That difference shows the magnitude of the economic freeze from lockdowns to a robust rebound this summer.

 

 

4.  August Trade Balance Report — Wednesday

The August Trade Balance Report is expected to show a widening in the deficit as the pick-up in economic activity is reflected in a pick-up in imports while exports remain somewhat flat.  The trade deficit is  expected to deepen to -$66.2 billion versus -$63.6 billion in July. The best reading over the last year was -$34.6 billion in February as imports stalled with the coming pandemic. The average over the past year is -$45.5 billion so we’re worse than that now, again as exports remain relatively flat and imports climb with the rebounding economy.

 

5.  Initial Jobless Claims — Thursday

The weekly change in initial jobless claims continues to be the best real-time indicator of how the economy is recovering and the expectation is that while recovering the recovery is getting shallower.  The Bloomberg consensus expects jobless claims for the week ended October 3 to be 820 thousand, down slightly from 837 thousand the previous week.  Continuing claims are expected to be 11.40 million versus 11.77 million the prior week. While the trend is headed in the right direction the slope is very shallow and that speaks directly to the Fed’s concerns that this will be a long and grinding recovery that spans years, not months.

 

 

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