- U.S. stock market falls on lack of fiscal stimulus, pandemic surge, and political uncertainty
- U.S. new home sales expected to remain near July’s 13-1/2 year high
- Claims expected to show a continued slow improvement
- 7-year T-note auction to yield near 0.47%
U.S. stock market falls on lack of fiscal stimulus, pandemic surge, and political uncertainty — The U.S. stock market on Wednesday succumbed to a combination of fears, sending stocks into a tailspin. The S&P 500 index on Tuesday fell sharply by -2.37% and closed just slightly above Monday’s 1-3/4 month low of 3229.10, where the index was down by exactly -10.0% from the record high posted on Sep 2.
Meanwhile, the Nasdaq 100 index on Wednesday plunged by -3.16% and closed just mildly above Monday’s 1-3/4 year low, where the index was down by -14.2% from the record high posted on Sep 2.
Bearish factors on Wednesday included (1) pleas by four Fed officials for more fiscal support for the economy, (2) the recent global surge in Covid infections, and (3) political uncertainty related to the Nov 3 election.
Fed Chair Powell yesterday appeared before the House select committee and once again called for more fiscal support. Three other Fed officials on Wednesday made more vocal pleas for additional fiscal support. Cleveland Fed President Mester said that the U.S. economy “is still in a deep hole,” and more fiscal support will be needed for recovery. Fed Vice Chair Clarida said, “additional fiscal support will likely be needed” to support the economy.
Chicago Fed President Evans said that he assumes Congress will provide another $1 trillion of fiscal support, but if that doesn’t happen, “then I think it’s going to be a lot harder, and much more unlikely, that the economy makes that much progress by the end of next year.”
Fed Chair Powell will testify again today when he joins Treasury Secretary Mnuchin before the Senate Banking Committee for the same quarterly review of the CARES Act that they did Tuesday before the House Financial Services Committee.
The pleas by Fed officials for more fiscal support suggest that the Fed may be much more worried about the economy than they are letting on. If so, then the stock market may be overly optimistic about the economic recovery and about the prospects for an earnings rebound.
Meanwhile, the pandemic situation is getting worse in parts of the world. For example, the UK this week had to curb bar and restaurant hours. Spanish authorities imposed a partial lockdown on Madrid. Israel was forced to impose its second national lockdown.
U.S. Covid infection rates have risen sharply in some areas of the country because of relaxed restrictions and students returning to school. The 5-day average of new U.S. Covid infections has climbed in the past two weeks to 42,000 from the early-Sep 2-1/2 month low of about 34,000, according to Johns Hopkins. Meanwhile, there is little hope of an effective and widely-available vaccine before early next year.
On the political front, the markets are mainly disappointed about the deadlock on a new pandemic stimulus bill, which might not be forthcoming even after the election. The stock market is also braced for the possibility of an inconclusive or contested November 3 presidential election. The stock market is also braced for the possibility of a Democrat sweep of Washington since former VP Biden has said that he plans to raise the minimum corporate income tax rate to 28% from the current level of 21%, which would take a direct bite out of earnings and thus stock prices.
U.S. new home sales expected to remain near July’s 13-1/2 year high — The consensus is for today’s Aug new home sales report to show a -1.2% decline to 890,000, losing a little ground after July’s +13.9% surge to a 13-1/2 year high of 901,000. New home sales in July were +16% above January’s pre-pandemic level of 774,000.
U.S. home sales are surging because many people are buying homes to escape from cities or are buying larger homes to work from home. Also, the current 30-year mortgage rate of 2.87% is only 1 bp above the previous week’s record low of 2.86%.
Claims expected to show a continued slow improvement — The consensus is for today’s weekly initial unemployment claims report to show a -20,000 decline to 840,000, adding to last week’s -33,000 to 860,000. Continuing claims are expected to show a -328,000 decline to 12.300 million, adding to last week’s -916,000 decline to 12.628 million. Initial claims are still 643,000 above the end-Feb pre-pandemic level, while continuing claims are 10.929 million above the pre-pandemic level.
7-year T-note auction to yield near 0.47% — The Treasury today will sell $50 billion of 7-year T-notes, concluding this week’s $177 billion T-note package. The $50 billion size of today’s 7-year T-note auction is up by $3 billion from Aug’s $47 billion auction and is up by a total of $18 billion (+56%) from the $32 billion size that prevailed in 2019. Today’s 7-year T-note issue was trading at 0.47% in when-issued trading late yesterday afternoon, which is near the middle of the narrow 21 bp range of 0.35% to 0.56% seen since July 1.
The 12-auction averages for the 7-year are as follows: 2.50 bid cover ratio, 5.0 bp tail to the median yield, 48.9 bp tail to the low yield, and 64% taken at the high yield. The 7-year is slightly above average in popularity among foreign investors and central banks. Indirect bidders, a proxy for foreign buyers, have taken an average of 64.0% of the last twelve 7-year T-note auctions, which is slightly above the median of 63.6% seen for all recent Treasury coupon auctions.
