U.S. stocks fall sharply on worsening pandemic and stalled stimulus talks
Oct U.S. consumer confidence expected to edge higher
Aug U.S. home prices expected to extend July's surge
U.S. durable goods orders expected to continue to recover
2-year T-note auction to yield near 0.15%U.S. stocks fall sharply on worsening pandemic and stalled stimulus talks — The S&P 500 index on Monday fell to a 3-week low and closed the day sharply lower by -1.86%. The Nasdaq 100 index also fell to a 3-week low and closed the day down -1.61%.
Bearish factors for stocks included (1) the record Covid infection levels in the U.S. and much of Europe, (2) the lack of progress in the Pelosi-Mnuchin stimulus talks, (3) political uncertainty ahead of next Tuesday’s U.S. election, and (4) tech stock weakness sparked by a -21% plunge in SAP on disappointing management guidance for early 2021.
The prospects continue to look dim for the Pelosi-Mnuchin talks after White House economic director Kudlow said Monday that President Trump could not accept parts of the Democrats’ stimulus bill. A spokesman for Speaker Pelosi said she is still optimistic about a deal ahead of the election, but the White House is refusing to accept Democratic language on a national pandemic testing and contact tracing program. Ms. Pelosi said she is also still waiting on the outcome of talks among House committee chairs.
After confirming Amy Coney Barrett as a new Supreme Court justice yesterday evening, the Senate adjourned until after the election. The fact that most members of Congress are now out of town is likely to further slow progress in the stimulus talks.
U.S. stocks on Monday also fell on the surge in the pandemic to record highs in the U.S. and much of Europe. New Covid infections in the U.S. surged to a record daily high of 85,317 on Sunday and the 7-day average is at a record high of about 75,000. In Europe, new Covid infections have spiked to record highs in Germany, France, UK, Spain, Italy, Belgium, and the Netherlands.
Oct U.S. consumer confidence expected to edge higher — The consensus is for today’s Oct Conference Board U.S. consumer confidence index to show a small +0.2 point increase to 102.0, adding to September’s +15.5 point surge to 101.8. Consumer confidence is expected to stall in October due to the surge in the pandemic infection rates. Consumers are also cautious ahead of next Tuesday’s election.
U.S. consumer confidence has so far recovered only about one-third of the pandemic losses seen in spring since the pandemic is far from over and the U.S. labor market remains in very poor shape. In addition, the U.S. economic recovery is sputtering as U.S. government fiscal stimulus expires and as businesses and consumers brace for what is shaping up to be a weak economic recovery.
Aug U.S. home prices expected to extend July’s surge — U.S. home prices in August are expected to show a sharp increase due to strong demand for the few homes that are on the market. Home demand has surged as people look to escape urban areas and find homes with more space to work from home. Existing home sales in August rose by +2.4% to a 13-year high of 6.0 million units. Meanwhile, there were only 3.0 months worth of homes on the market in August, which matched the record low for the series.
The consensus is for today’s Aug FHFA house price index to show a sharp increase of +0.7% m/m, adding to July’s surge of +1.0% m/m. Today’s Aug S&P CoreLogic composite-20 home price index is expected to show increases of +0.5% m/m and +4.2% y/y following July’s report of +0.55% m/m and +3.95% y/y.
U.S. durable goods orders expected to continue to recover — The consensus is for today’s Sep durable goods orders report to show an increase of +0.5% m/m and +0.3% ex-transportation, adding to August’s increase of +0.5% m/m and +0.6% m/m ex-transportation. Meanwhile, Sep capital goods orders nondefense ex-aircraft, a measure of capital spending, is expected to show an increase of +0.7% m/m, adding to August’s increase of +1.9% m/m.
Durable goods orders have recovered most of the plunge seen this past spring on the pandemic shutdowns. However, durable goods orders would still have to rise by another +5.6% to match February’s pre-pandemic level of $246.2 billion. Durable goods orders in August were still down -4.4% on a year-on-year basis.
The good news is that manufacturing executives remain relatively optimistic about the outlook for the U.S. manufacturing sector. The ISM manufacturing index in September was at the respectable level of 55.4, and the new orders sub-index was even stronger at 60.2.
2-year T-note auction to yield near 0.15% — The Treasury today will sell $54 billion of 2-year T-notes, kicking off this week’s $188 billion T-note package. The $54 billion size of today’s 2-year auction is up by $2 billion from last month’s $52 billion auction and is up by $14 billion from the $40 billion size that prevailed in 2019 and early 2020 before the U.S. budget deficit exploded due to pandemic expenses. The benchmark 2-year T-note yield on Monday closed -0.6 bp at 0.15%, which is near the middle of the narrow range of 0.12% to 0.17% seen since mid-August.
The 12-auction averages for the 2-year are: 2.57 bid cover ratio, $145 million in non-competitive bids, 3.4 bp tail to the median yield, 21.5 bp tail to the low yield, and 45% taken at the high yield. The 2-year is the least popular coupon security among foreign investors and central banks. Indirect bidders, a proxy for foreign buyers, have taken an average of only 51.4% of the last twelve 2-year T-note auctions, well below the median of 63.8% for all recent coupon auctions.