Playing with fire. Stocks closed lower yesterday, giving up modest gains after the President called off stimulus talks via Twitter. Investors were hopeful that a deal could be reached sending bond yields higher along with stocks earlier in the session but the abrupt change of course reversed the rallies in the final hour of trade.
N O T E W O R T H Y
Head scratcher. Many were left dumbfounded yesterday afternoon after the President announced in a Tweet that he instructed his staff to cease negotiations with House Dems over a new stimulus package. The new stimulus package was supposed to carry the economy along until a vaccine could be distributed, allowing it to move forward organically. The US economy has certainly shown signs of improvement in the past few months, but as stimulus from the CARES Act began to wane, so has the pace of the recovery. Additionally, state governments along with certain industries such as the airlines and restaurants are in dire need of a stopgap measure to avoid further job losses. The Federal Reserve has been on the front lines of the battle to save the economy, applying what many refer to as the “kitchen sink” to provide liquidity and stimulus to not only the financial system, but also to Main Street businesses. For the past several months the Fed has been calling on lawmakers to add more fiscal stimulus in order to ensure that the economic recovery endures. Unfortunately, the rancor that has dominated politics has stymied efforts by both parties from furthering any meaningful legislation. While the Fed certainly has additional tools, monetary stimulus alone cannot bring the economy back to its feet. Just yesterday morning the Fed Chairman Jerome Powell aggressively called on lawmakers to take action with further stimulus. In recent days it appeared that progress was being made in a last-ditch effort between the White House and House leaders. Democrats lowered the magnitude of their stimulus package and Republicans raised their offer. The positive movement in talks was partially responsible for helping stocks recover from their September swoon. Even the typically skeptical bond market showed signs that it was factoring in further stimulus. Recall that when bond traders expect the economy to be strong and produce inflation, they sell bonds, raising yields. Ten-year treasury yields spent the better part of the summer in the lower end of a tight range between 0.50% and 0.80%, helped by the Fed’s aggressive bond purchasing and monetary policy. A yield surge in the past few days is a sign that bond traders may be getting more optimistic. Yesterday 10-year yields rose to 0.79% before receding after Trump’s Tweet. But for a three-day bump in early summer, rates have remained below 0.8% since the market meltdown in March. For some reference, 10-year yields started the year at 1.88%, and a move of that magnitude for treasuries is not ordinary. But I am sure that I don’t have to say that these are not ordinary times. The past week has been a tumultuous one for stocks. Last week's raucous presidential debate certainly added volatility which was further increased with the President’s COVID announcement followed by his, what appears to be, quick recovery. Negotiations over more stimulus had both sides still far apart, but many have been hopeful that the President's health along with his weaker polling may be an incentive for him to get a deal done. Economists believe that a lack of further stimulus could shave off as much as 5 percentage points from GDP growth in this quarter. Though a big win by Democrats next month is thought by many to be a guarantee for more and bigger stimulus, the lame duck period that follows the election means that a deal may not come until 2021. With the hopes of something in the near-term dashed yesterday, traders are left wondering if this will just be another chapter in The Art of the Deal or the beginning of a difficult quarter.
THE MARKETS
Stocks closed the day in the red amidst late-session selling in response to the President’s withdrawal from stimulus negotiations. The S&P500 fell by -1.40%, the Dow Jones Industrial Average dropped by -1.64%, the Russell 2000 Index lost -0.30%, and the Nasdaq Composite Index gave up -1.57%. Bonds rose and 10-year treasury yields gave up -5 basis points to close at 0.73%.
NXT UP
- The Fed will release its FOMC meeting minutes this afternoon and we will get a glimpse into the banks discussions around further potential stimulus. Traders will be watching this one closely.
- Fed speakers today include Williams, Bostic, Rosengren, and Evans.
- The Treasury will sell $25 billion 10-year notes.
- DOE Crude Oil Inventories (Oct 2) are expected to have receded by -880.55k barrels compared to the prior week’s 1.98 million barrel draw down. Traders will be watching this number as Hurricane Delta heads to landfall in the Gulf, threatening production.