- Weekly market focus
- Markets wait for pandemic relief bill as Senate returns to Washington
- U.S. pandemic statistics continue to improve but remain high
- U.S. politics likely to play bigger market role as Nov 3 election approaches
- Next week’s FOMC meeting could provide new guidance
Weekly market focus — The U.S. markets this week will focus on (1) any progress on the deadlocked pandemic relief bill, (2) politics as the Nov 3 election draws closer, (3) the pandemic statistics and any news of progress on vaccines, (4) the Treasury’s sale this week of 3-year, 10-year and 30-year securities, and (5) a light economic report week.
Key U.S. economic reports this week include the JOLTS report on Wednesday, the Aug PPI report on Thursday, and the Aug CPI report on Friday.
In Europe, the focus will be on Thursday’s ECB meeting, which is expected to produce an unchanged policy. Key economic reports include Tuesday’s Eurozone Q2 GDP revision and industrial production reports from France and Italy on Thursday.
The markets will also be carefully watching this week’s Brexit negotiating round. The Brexit talks have made virtually no progress thus far, but the UK and EU still have time to reach a deal if there is enough political will. The EU wants to wrap up a deal in time for their summit in October, which would leave time for the national parliaments to ratify a deal before the transition period ends on Dec 31, 2020.
In Asia, the markets will continue watching U.S./Chinese tensions, which have deteriorated to a new low. The U.S. seems likely to proceed with banning more Chinese software apps in the U.S. along with more pressure on Chinese stocks listed in the U.S. The U.S. State Department last week also put tight new restrictions on Chinese diplomats operating in the U.S.
The markets will also be carefully watching the phase-one trade deal, which so far remains intact. However, China remains far behind on its promises to purchase U.S. products and President Trump could claim at any time that he has grounds to cancel the deal and launch a new round of tariffs.
Markets wait for pandemic relief bill as Senate returns to Washington — The U.S. markets this week will focus mainly on the fate of the pandemic bill as the Senate returns to Washington today. The full House isn’t scheduled to return to Washington until next Monday (Sep 14).
Senate Majority Leader McConnell has indicated that he may try to have the Senate vote on a “skinny” pandemic bill this week totaling only about $500 billion. However, it isn’t clear whether such a bill could get past a 60-vote filibuster and get a vote in the full Senate since Democrats oppose that concept, and since Mr. McConnell said there is a group of his Republican Senators who will not vote for any additional pandemic aid. Meanwhile, House Speaker Pelosi has held out for a full $2.2 trillion bill.
U.S. pandemic statistics continue to improve but remain high — The 5-day average of new U.S. Covid infections last week dropped to a 2-1/2 month low of about 39,000 per day, according to Johns Hopkins. That is down sharply from July’s peak of about 70,000, but remains high. The current U.S. restrictions seems sufficient to keep the pandemic on a downward trend, although the pandemic continues to hobble major sectors of the U.S. economy.
Globally, the U.S. is in second place for new infections behind India. The 5-day average of new infections in Brazil has been bouncing around in the 35,000-55,000 per day range. Meanwhile, new infections in India are in a runaway mode and have now reached almost 90,000 per day.
U.S. politics likely to play bigger market role as Nov 3 election approaches — The markets this week will start paying closer attention to politics in the 8-week stretch leading up to the November 3 election. The markets are waiting to see if the Democrats will sweep Washington by taking the House, Senate, and Presidency, which would give them full rein to pass legislation, if the Senate also decides to do away with the 60-vote filibuster.
Since the Democrats are widely expected to keep control of the House, the other main scenario is for the status quo of divided government where the Republicans retain control of the Senate and/or the presidency.
The betting odds at Predict.org, for whatever they are worth, are at 58% for a win by former VP Biden versus 44% for a win by President Trump. The odds for control of the Senate are at 58% for the Democrats versus 45% for the Republicans. The odds for the Democrats to retain control of the House are at 84%.
Next week’s FOMC meeting could provide new guidance — The markets will also be looking ahead to next week’s FOMC meeting on Sep 15-16. The FOMC is not expected to shift its key policy variables of the 0.00%/0.25% funds rate target and the $120 billion per month QE program.
However, the FOMC is expected to discuss providing more specific interest rate guidance following its recent decision to formally adopt average inflation targeting. It remains unclear whether the FOMC will announce that more specific guidance at the Sep 15-16 meeting, or wait until it has more data about how the U.S. economic recovery is faring and the prospects for a vaccine.
The FOMC at its Sep 15-16 meeting will release an updated set of macroeconomic forecasts and is due to provide a new Fed-dot forecast for the funds rate. In the last Fed-dot forecast released in June, all FOMC members predicted an unchanged funds rate through 2021 and only two members predicted a hike in 2022.