Pfizer’s announcement Monday of a potentially 90% effective coronavirus vaccine triggered a wave of hope and optimism to the markets, renewing expectations that life in the U.S. could return to normal sometime in 2021. However, after a strong first two days after Monday morning’s early announcement in pre-market trading, the reality of vaccination timing, in light of the strongest surge yet during the entire pandemic, gave way to concern on how much further the health and economic crises can deteriorate before vaccinations can begin to have a positive effect on turning these problems around and return America back to “normalcy.”
This vaccination news sent equity markets soring and interest rates higher on the first major piece of positive news in eliminating the coronavirus, as opposed to positive advancements in treating those afflicted, since the onset of the pandemic. In the equities market, the S&P 500 Index and the Dow Jones Industrial Average (“DJIA”) briefly reaching record highs to start this week. The S&P 500 Index opened Monday at 3,630, its highest mark on record, up 3.4% from Friday’s previous close of 3,510. Monday’s DJIA session followed in the S&P’s footsteps, seeing a record high of 29,933 at its Monday open, closely within the marquee level of 30,000. The ten-year Treasury yield, the bellwether of Treasury market rates, quickly jumped to 0.920% Monday and reached a high of 0.975% intraday Tuesday, after closing on the previous Friday 15.5 bps (0.155%) lower, at 0.820%.
But by Wednesday, the incredible spread of COVID-19 globally, especially in Europe and the U.S., started to sober up equity markets, making them come to terms with how much more damage can come to the country’s health and economy before any vaccine can start turning these debilitating dilemmas around, as the surge in cases spur fear of tougher measures to curb the virus. This disposition did not affect the Treasury market until Thursday as Wednesday was a non-trading Veterans Day holiday.
This change in mood was driven by U.S. cases making new record highs this week, with the most deaths since May. Thursday saw a record number of new cases of over 159,500 on the day alone. This made for the ninth day in a row that the U.S. has reported over 100,000 new cases per day. The top five worst days have all occurred during the first two weeks of this month. California and Texas have now each reported a total of over 1 million cases alone. Several Midwest and Plain states are showing test positivity rates of 40-50%. Most hospitals are now projected to exceed ICU capacity based on the current rate of infections.
To further somber the market outlook until vaccines begin to take significant effect, the Institute for Health Metrics and Evaluation (IHME) at the University of Washington in Seattle on Thursday projected that the U.S. will have 320,403 deaths by January 1st and 438,940 deaths by March 1st, over 200,000 more deaths in the next 2.5 months, if measures to curb the spread of coronavirus don’t change. One of the biggest current concerns is the return of the fervently infected college student population back home to a diaspora of destinations, helping to spread the virus to a large number of various locations, both urban and rural. If measures relax from their current insufficient levels of mask wearing, social distancing, and various restrictions throughout the country, that March 1st death toll projection increases to as high as 587,000. COVID-19 is now the second leading cause of death in the U.S., only led by heart disease, which itself is worsening as medical attention decreases due to the immediate coronavirus emergency demands on the healthcare.
Over 242,000 Americans have died from COVID-19 since the first U.S. death now known to be on February 6th in Santa Clara County in California, a little more than nine months ago. For perspective, the 1918 Spanish flu cost a total of approximately 675,000 American lives from February 1918 to April 1920, or over 27 months.
Stock market measures began to fall and Treasury rates declined as this record pace of coronavirus cases added to concerns about tougher restrictions to contain the spread of the disease that are beginning to be re-established in cities such as New York and Chicago. These immediate economic concerns combine with the prospects of what can, and likely will, happen in the next five months to get through before vaccines, treatments, and testing combine to mitigate and begin to reverse the course of the current health calamity.
Once vaccines are initially introduced, potentially as early as December, not every aspect of society will bounce back immediately, with rollouts of the vaccines starting with essential workers and plans dictating numerous phases of reopening. Most public health and infectious disease experts support a phased-in rollout that would ensure that those who need a vaccine the most get first dibs. But challenges with storing and shipping vaccines could mean delays as they are being disseminated. The phased-in rollout is also meant to help kick-start the economy. Once enough people have been vaccinated, certain activities, such as going to the mall, eating in a restaurant, or seeing a movie in a theater, may become safe once again.
Dr. Anthony Fauci, the government’s top infectious disease expert, said Wednesday that a coronavirus vaccine could be available to all the country by April. A report published by the National Academies of Sciences, Engineering, and Medicine included recommendations for how the first batch of vaccines could be earmarked. The guidelines covered four phases, with front-line health care workers and people at highest risk, those over age 65 and those with underlying health conditions that make them particularly vulnerable to severe COVID-19, slated to receive the vaccine first. The second phase, encompassing up to 35% of the U.S. population, would include teachers, childcare workers, and other “critical workers in high-risk settings,” such as people with jobs in public transit or the food supply system. The plan’s third phase would cover children, young adults, and people who work in industries that pose “moderately high risk of exposure,” such as hotels, factories, and universities. Under the fourth and final phase, anyone else residing in the U.S. who was not included in a previous phase would then have access to a vaccine.
If it holds true that Pfizer’s vaccine candidate, or any other potential vaccine in the works, is 90% effective, or more, at preventing infection, it could be easier to protect the general population than originally anticipated. A 90% effective vaccine would require vaccinating about 60% of the population, or roughly 200 million Americans, to reach what is known as herd immunity, when enough people have developed antibodies from a vaccine or a previous COVID-19 infection that renders further community spread unlikely. Pfizer said Monday that it expects to produce up to 50 million vaccine doses globally this year and up to 1.3 billion doses next year. The U.S. government announced Wednesday that it has placed an initial order for 100 million doses and that it can acquire 500 million more doses. Volunteers in Pfizer’s vaccine trial received two doses, which means the government’s initial order would cover 50 million people.
Fiscal policy now seen more vital to spur economic rebound
Unlike all the coronavirus vaccination and surge news this week that helped juggle the markets, there has been little to no news on the political and fiscal fronts. President Donald Trump continues to refuse to concede the election, and in fact is making it difficult for the new administration to transition. This tightening partisanship has delayed any further negotiation on any new fiscal package as the country may be headed into more need than any other period so far during the pandemic crisis. This, despite House Speaker Nancy Pelosi’s pre-election optimism that a new fiscal relief package could be struck during the lame duck session, Senate Majority Leader Mitch McConnell’s promise that a relief bill was “job one” as the Senate reconvened after the election, and President Trump’s promise to push for the “biggest package ever” after the election.
Already, an uptick in U.S. government bond yields earlier this week, spurred in part by investor optimism over prospects for an effective coronavirus vaccine, has strengthened expectations for further Fed asset purchases as soon as by year-end. Lowering short-term borrowing rates lower has hit its limits and additional Fed asset purchases can only do so much. There simply is not enough demand in the economy, and monetary policy cannot generate demand.
Three of the world’s top central bankers warned Thursday that the prospect of a COVID-19 vaccine is not enough to put an end to the economic challenges created by the pandemic. “We do see the economy continuing on a solid path of recovery, but the main risk we see to that is clearly the further spread of the disease here in the United States,” Federal Reserve Chair Jerome Powell said during a panel discussion at a virtual conference hosted by the European Central Bank. He added that “with the virus now spreading, the next few months could be challenging.”
Powell was joined on the panel by Bank of England Governor Andrew Bailey and ECB President Christine Lagarde. Both reaffirmed Powell’s caution, and added to recent warnings from other central bankers against fiscal complacency.
Bailey called recent vaccine news “encouraging” and said he hoped it would reduce uncertainty but added “we’re not there yet.” Lagarde said while it is now becoming possible to see past the pandemic, “I don’t want to be exuberant.” The words of warning come as much of the U.S. and Europe is shrouded in a new wave of coronavirus outbreaks. In Europe and the U.K., governments have moved to reimpose lockdowns to limit the spread of the virus. Worldwide, cases top 52.3 million and deaths exceed 1.28 million.
Fed officials next meet December 15th-16th and may tweak their bond-buying program to offer the economy further support, a possibility Powell alluded to following their policy meeting last week. At the conference, Powell added that his “sense is that we will need to do more, and Congress may need to do more as well on fiscal policy.”
The central bank chiefs also suggested longer-term trends impacting the workforce have likely been accelerated by the pandemic, with uncertain effects. “Even after the unemployment rate goes down and there is a vaccine, there is going to be, probably, a substantial group of workers who are going to need support as they find their way in the post-pandemic economy, because it is going to be different in some fundamental ways,” Powell said.
Future federal deficits to run at $2 trillion annually for years
Amid all the focus on a new fiscal relief package, one must not lose sight of another potential fiscal dilemma – record deficits. The next president will begin the year facing not only a growing pandemic, a weak economy, and a projected $1.8 trillion federal deficit, but also a potentially divided Congress where lawmakers have wildly different views about the fiscal outlook.
Democrats had planned to use the budget reconciliation process to pass coronavirus relief and health care measures in the Senate with a simple majority, banking on strong enough election returns to pursue their legislative agenda without help from Republicans. But with their plans of a Senate majority at best delayed until January, if at all, budget reconciliation will be a logjam. Republicans’ success in defending their Senate majority means the upcoming 117th Congress will feature either feeble attempts at bipartisanship or gridlock.
Congressional lawmakers also must fund the government by December 11th to avert a shutdown. McConnell and Pelosi have agreed to try to pass an omnibus appropriations package in December rather than relying on a stopgap measure. Washington faces a tense debate over the fiscal outlook that could divide lawmakers for years. The federal government recorded a $3.1 trillion deficit in fiscal 2020, according to the Congressional Budget Office.
Senate Republicans, after working with Democrats this year to pass roughly $2.4 trillion in aid for the coronavirus-hit economy, are increasingly preaching belt-tightening as the deficit has grown. But House Democrats, hoping to pump money into the economy to aid the recovery, are in no hurry to slash the deficit. House Budget Chairman John Yarmuth, Democrat from Kentucky, said he expects the federal government to record annual deficits of $2 trillion or more for “a few years.” That is partly because of the coronavirus pandemic and partly because the deficit was $986 billion in fiscal 2019, when the economy was much stronger.
Yarmuth said he will produce a fiscal 2022 budget resolution after deciding not to draft resolutions for fiscal 2020 or 2021. The resolution will set discretionary spending levels and is required to project the debt and deficit for at least five years. Annual deficits greater than $2 trillion will not sit well with Republicans, who want to cut spending to reduce the federal shortfall more quickly.
Moderate lawmakers have advocated for a continued focus on reducing the debt compared to the size of the economy, though they have acknowledged the need for deficit spending during crises. The bipartisan Problem Solvers Caucus released a series of budget principles in October advocating for thorough plans to lower the debt-to-GDP ratio. It also supported “pay-as-you-go” requirements to offset the cost of legislation with spending cuts or revenue increases, a process that progressive Democrats have greatly criticized.
U.S. Consumer Price Index unchanged
A measure of prices paid by U.S. consumers was unchanged in October, undercutting forecasts that called for a modest gain and indicating limited inflation as the pandemic drags on.
The reading on the Consumer Price Index (“CPI”) was the tamest in five months and followed a 0.2% advance in September, Labor Department data showed Thursday. On an annualized basis, the CPI rose 1.2%. The closely watched Core CPI, which excludes volatile food and energy costs, was also unchanged from the prior month and up 1.6% from a year earlier.
Median estimates of economists called for a 0.1% monthly increase in the CPI and a 0.2% gain in the Core CPI. The report showed components were mixed as higher airfares and new-car prices helped offset declines in costs of gasoline, medical care, and clothing. Food inflation picked up by the most since June as grocery costs stabilized and consumers continued to dine out.
The data signal inflation remains subdued as the pandemic continues to weigh on demand in some parts of the economy. While inflation stabilized as the U.S. economy picked up in the third quarter, risks of an immediate and broad acceleration are low as weakness in the service sector persists.
Initial jobless claims continue to decline, but stay above the stubborn 700,000 level
A separate Labor Department report showed first-time applications for state unemployment benefits fell by the most in five weeks. Continuing claims also declined as Americans headed back to work and unemployed people rolled onto a federal program that offers additional weeks of benefits.
This report Thursday showed that initial jobless claims hit 709,000 for the week ended November 7th, down from 757,000 claims the week before. Economist surveys had been expecting 740,000 in new claims.
This marked the fourth consecutive week that the total declined from the previous period, though claims remain above the pre-coronavirus pandemic record of 695,000 claims in 1982.
In addition to the decline in the weekly pace, continuing claims also again saw a significant decline, falling to 6.79 million, a 436,000 decrease in claims from a week ago. Continuing claims run a week behind the headline number.
However, the level of those still collecting unemployment benefits remains high as thousands of workers who are seeing their regular benefits expire migrate to the Pandemic Unemployment Assistance program which extends the claims ability for an additional 13 weeks. Initial claims under the program totaled 298,154 for the week, a decrease of 63,805 from the week before.
As of October 24th, 21.2 million Americans were collecting some form of assistance, a decrease of 374,179. A year ago, that total was 1.45 million.
While unemployment remains a significant problem in the U.S. as the economy rebuilds from the coronavirus shutdown, the numbers have been getting progressively better.
Nonfarm payrolls increased 638,000 in October, significantly better than Wall Street expectations. In all, about 12 million of the 22 million positions lost during March and April have been recovered as the unemployment rate has fallen to 6.9% from its high of 14.7%. The jobless rate was 3.5% before the pandemic declaration in March.