- Stock market rallies sharply despite deadlocked stimulus talks
- Brexit comes down to the wire ahead of Thursday’s EU Summit
- U.S. inflation expected to edge higher but remain below target
Stock market rallies sharply despite deadlocked stimulus talks — The U.S. stock market on Monday rallied sharply even though there was no progress in the stimulus talks. U.S. stocks on Monday rallied on strength in tech stocks, which produced a +3.09% rally in the Nasdaq 100. Amazon.com jumped by +4.66% ahead of its 2-day Prime Day Sale that begins today. Meanwhile, Apple surged by +6.25% after RBC Capital Markets raised its price target to $132 from $111, citing the potential of Apple’s Fitness+ service.
U.S. stocks also saw carry-over support from a +2.6% surge in China’s Shanghai Composite stock index on Monday to a 5-week high on expectations that Chinese President Xi Jinping will announce in a speech on Wednesday that China will develop the southern China region of Shenzhen into a global technology hub.
Monday’s rally in the U.S. stock market came despite the low odds for a stimulus deal before the November 3 election. Speaker Pelosi and Treasury Secretary Mnuchin this week are expected to continue their talks about a stimulus deal. However, the two sides remain far apart. The White House last Friday raised its offer to $1.8 billion, but Speaker Pelosi said that was still not enough. Meanwhile, some Senate Republicans were outraged that the bill could be as large as $2 trillion and said that it would hurt them politically with their base due to that large amount of debt-fueled spending.
House Majority Leader Hoyer on Monday sent a notice to House members telling them that no votes are expected in the House this week. The House is on recess until after the election, but they are subject to being called back to Washington on 24 hours notice if a vote is needed on a stimulus bill.
Meanwhile, the full Senate will not return to Washington until this next Monday, after which Senate Majority Leader McConnell will hold a vote to confirm Amy Coney Barrett as a new Supreme Court justice. However, the Senate Judiciary Committee is in Washington this week to hold four days of hearings on Ms. Barrett’s Supreme Court nomination that began yesterday.
The U.S. stock market seems to be overlooking the deadlocked stimulus talks, in part because of market expectations that former VP Biden will win the election and engineer a big stimulus package in early 2021. The stock market seems to be happier about a big stimulus package than they are about the likelihood of higher corporate and capital gains taxes if Democrats sweep Washington.
Brexit comes down to the wire ahead of Thursday’s EU Summit — The UK and EU continue to engage in brinkmanship ahead of the soft deadline of the 2-day EU Summit on Thursday and Friday. UK Prime Minister Johnson has said he will walk away from the talks on Thursday (Oct 15) if the EU doesn’t agree to bigger compromises and if he thinks there is no chance of a deal.
The biggest issues continue to be state aid and EU access to UK fisheries. French President Macron is playing hard-ball on EU access to UK fisheries, and it remains be seen whether he will relent at the last minute, allowing other EU members to compromise on that issue.
Meanwhile, the markets seem to be fairly confident that the UK and EU will reach a last-minute agreement that averts a no-deal Brexit on December 31. GBP/USD has rallied mildly in the past two weeks and reached a 1-month high on Monday, closing the day up +0.21%.
U.S. inflation expected to edge higher but remain below target — The consensus is for today’s Sep CPI to edge higher to +1.4% y/y from Aug’s +1.3%. However, the Sep core CPI is expected to be unchanged from Aug’s +1.7% y/y.
The core CPI fell sharply during the pandemic shutdowns from +2.3% y/y in February down to a 9-1/2 year low of +1.2% in May-June. The core CPI has since rebounded higher to +1.7% in August but remains well below the pre-pandemic level of +2.3%.
Meanwhile, the Fed’s preferred inflation measure, the PCE deflator, is in similar shape, with the Aug PCE deflator at +1.4% y/y and the core PCE deflator at +1.6% y/y. The core PCE deflator has already rebounded higher to +1.6% y/y from the 9-1/2 year low of +0.9% posted in April, but is still 0.3 points below February’s pre-pandemic level of +1.9%.
The Fed has said that it will not start raising interest rates until inflation has matched its +2.0% target and is on its way to moving above target as a means to meeting its new average inflation target of +2.0%. The Fed is not projecting that the PCE deflator will hit +2.0% until 2023. However, inflation is running ahead of the Fed’s forecasts since the current core PCE deflator of +1.6% is already above the forecast of +1.2% for late 2020 and is nearly at the +1.7% forecast for the end of next year.
Meanwhile, current market expectations for inflation are only modestly below the Fed’s +2.0% target and are back to pre-pandemic levels. The 10-year breakeven inflation expectations rate is currently at +1.74%. That is up sharply from March’s spike to +0.47% but exactly matches the breakeven rate of +1.74% seen at the end of 2019 before the pandemic struck in early 2020. Inflation expectations are back to pre-pandemic levels because of (1) the upward rebound in the economy, and (2) the Fed’s extraordinarily easy monetary policy with near-zero interest rates and its QE program of $120 billion per month.
