Stimulus Plans Remain on Life Support

October 16, 2020October 20th, 2020
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The chances for a pre-election stimulus for the U.S. economy from Congress are all but over, with Treasury Secretary Steven Mnuchin pointing to political dynamics undermining the months-long negotiations. With fiscal negotiations dying, House Speaker Nancy Pelosi showed frustration with fellow Democrats who are pushing for a deal.

“At this point, getting something done before the election and executing on that would be difficult,” Secretary Mnuchin said at a Milken Institute event Wednesday. While there has been progress on certain issues, Mnuchin said stimulus talks are still far apart on others. To this point, the Treasury chief added, “there’s a lot of details other than just the top line number that we’re exchanging paper on,” and on some issues “we continue to be far apart.”

Mnuchin was asked whether Democrats are holding back due to optimism they will win a Senate majority and be able to speed through their own bill without having given President Donald Trump something to tout in his re-election campaign. “That definitely is part of the reality,” the Treasury chief commented.

He made the remarks after another in a long series of calls with Speaker Pelosi that have failed to seal a deal. While Mnuchin said he hoped for bipartisan support for Senate Majority Leader Mitch McConnell’s latest idea, a vote on a narrow bill next week to help small businesses, Democratic leaders have shown no appetite for piecemeal measures. Pelosi has stuck with a $2.2 trillion bill, and the two sides remain far apart on several issues of policy as well, including how to deploy health care aid and assistance to state and local governments.

The inability to bring months of negotiations to conclusion has sparked increasing tensions, with each camp seeing internal strains rise as it becomes clear there won’t be a spending bill to take to the public, and investors are increasingly taking note. The S&P 500 Index dropped throughout the week from its high on Monday of 3550, along with Treasury yields that also fell slightly from their Monday highs. Both equities and interest rates saw a comeback on Friday though, off of higher than expected U.S. retail sales growth, discussed below.

After the Senate Majority Leader McConnell publicized his slimmer plan Tuesday targeted at assisting small businesses, Trump tweeted that Congress should “go big or go home.”

Democrats are seeing their own strains. Pelosi became riled during a television interview Tuesday afternoon when asked about a handful of Democrats who are urging her to look again at the Trump administration’s $1.8 trillion stimulus offer. “They have no idea of the particulars. They have no idea of what the language is here,” Pelosi said of some fellow Democrats calling for a deal now. “They’re not negotiating this situation.” Pelosi warned her House colleagues that Democratic priorities would be cut in any deal based on the current White House offer. In the wake of Trump’s “go big” tweet, she told colleagues the Democratic side has more leverage than ever.

The Speaker is seeking to tamp down restlessness among Democrats to take what the White House is offering after Trump enlarged his proposal from $1.6 trillion. A number of Democrats have encouraged her to reach an agreement. “People in need can’t wait until February. $1.8 trillion is significant & more than twice Obama stimulus,” California Democratic Representative Ro Khanna wrote on Twitter. “Make a deal & put the ball in McConnell court.” Pelosi simply responded to this tweet by saying “Ro Khanna, that’s nice. That isn’t what we’re going to do.”

Wholesale and consumer inflation both rose in September

The Labor Department this week reported that the U.S. producer price index (“PPI”), a measure of the prices businesses receive for their goods and services, increased 0.4% on a monthly basis in September, higher than its 0.2% forecast. Excluding the often volatile food and energy categories, the so-called Core PPI also increased at a 0.4% rate last month, above its anticipated increase of 0.2%, as well.

Year-over-year in September, the overall PPI rose 0.4%, the first time this measure posted an increase since March. Excluding food and energy, the Core PPI index climbed 1.2% annually.

The PPI typically tracks the same trends as other broad inflation gauges, though it does not always translate into what consumers pay. The consumer price index (“CPI”) rose 0.2% last month, matching market forecasts. It was the smallest increase since May, suggesting the shock from the coronavirus pandemic on the price of goods and services is starting to fade. Most of the increase last month was tied to the biggest jump in the cost of used cars and trucks in 51 years. The cost of used cars and trucks jumped 6.7% in September, posting the biggest increase since 1969. Used-vehicles prices surged over the summer, probably because so few people were using public transportation while the coronavirus was spreading.

Consumer inflation sank early in the coronavirus pandemic, then snapped back after the economy reopened, but it might be settling into a more stable pattern. Another closely watched measure of inflation that strips out volatile food and energy price changes, known as the Core CPI rate, also rose 0.2% last month, as anticipated. The yearly increase in Core CPI was unchanged at 1.7%.

Jobless claims unexpectedly jump

Applications for state unemployment benefits unexpectedly jumped last week while Americans increasingly moved to longer-term jobless aid. Both are troubling signs for a labor market whose recovery from the pandemic has been slowing.

Initial jobless claims in regular state programs totaled 898,000 for the week ended October 10th, up 53,000 from the prior week that was revised upward to 845,000, Labor Department data showed Thursday. The figure posted the largest one-week increase since July.

Initial claims rose in more than half of U.S. states, pointing to broad-based headwinds for the labor market and the economy as virus cases pick up again and colder weather starts to curb demand for outdoor dining. The report may also reflect tens of thousands of recent job cuts at the nation’s airlines.​

Like in the prior two reports, California’s initial claims number remained frozen at the mid-September level despite the ending of its two-week pause in accepting new claims. A spokesperson for the Labor Department said the data will continue to reuse the prior number until California’s reporting normalizes in the wake of the pause.

Continuing claims, or the total number of Americans claiming ongoing unemployment assistance, fell 1.17 million to 10 million in the week ended October 3rd. But this may partially reflect people exhausting state aid and moving to Pandemic Emergency Unemployment Compensation (“PEUC”), the federal program that provides up to 13 additional weeks of jobless benefits. The PEUC figure rose by 818,054 to 2.78 million in the week ended September 26th. Like the supplemental $600 per week in jobless benefits authorized by the CARES Act in late March that expired at the end of July, the extended PEUC aid will expire at the end of December unless Congress acts. However, with less than three weeks until the November 3rd elections, an agreement is increasingly in doubt, adding risks that declining income will weigh on consumer spending.

The initial jobless claims figures for state programs are now at their highest level since late August, showing the fits-and-starts recovery that has been taking place in recent months as the coronavirus continues to spread and many businesses, especially those in the service industries, remain closed.

The risk for markets in an increase in jobless claims is that it could be foreshadowing a drop in equities. Look at the following chart showing jobless claims and the S&P 500 – this stock benchmark seems to track the labor market fairly closely:

Is the bond market underestimating the economic rebound?

The bond market may be underestimating how strongly the U.S. economy will rebound, and that may lead to a “mini taper tantrum” next year, according to a group of fixed income market analysts.

These strategists see the unemployment rate dropping far more quickly than most forecasters, including the Federal Reserve. That could lead to a shift in investor sentiment that will drive up bond yields, echoing in part the 2013 lurch higher that has since been labeled “the taper tantrum.”

The American economy has been battered by measures to curb the pandemic, and the jobless rate stands at 7.9%, more than double its pre-pandemic level in February. While the Fed has been providing support via near-zero interest rates and monthly bond purchases, questions arise on how sustainable this will be if the labor market rebounds. If the market sees a mini taper tantrum, at some point investors will start challenging the Fed and asking how it can maintain $120 billion of bond purchases per month.

While the consensus estimate of analysts is for the jobless rate to fall to 7.6% this quarter, there are some forecasts that call for this to fall to 6.25% by year-end and continue to sink to as low as 4% or below by the end of 2021, within striking range of pre-pandemic levels. These more optimistic forecasts also estimate that the U.S. economy will contract just 2.4% in 2020.

The recovery, in these views, is unlikely to be as long and arduous as most suggest. When/if the economy begins to reflect this, there could be a shakeup in the Treasury market. At some point, bond “vigilantes”, or investors who protest monetary or fiscal policies that they consider inflationary by selling bonds and thus raising interest rates, will surface. The bond market saw this occur in 2013.

Fed signals money markets may require changes

The Federal Reserve signaled vulnerabilities in short-term funding markets that emerged from disruptions from the coronavirus pandemic may suggest a need for further reforms.

“The runs on prime money funds and commercial paper were particularly disappointing,” Fed Vice Chairman of Supervision Randal Quarles said in a Thursday speech. He added that “it is worth asking whether there may be other steps needed to secure these very important sources of liquidity” and that this year’s tumult raises questions about whether regulations imposed on money market funds after the 2008 financial crisis fell short.

A review taking place at the Financial Stability Board level rather than just at the Fed or other regulators, suggests there may be more agreement on tweaking rules in the future, though it is possible to have some parts of the market subjected to stricter regulations while others remain untouched or are even eased.

In other money market news, three-month dollar LIBOR fell Thursday to a record low of 0.21775%, while SOFR futures saw a surge in activity. A 4,000-contract block trade in SOFR futures, equivalent to around 16% of outstanding open interest, is the latest jump in SOFR derivatives activity. Open interest was 24,933 contracts as of Wednesday, up from around 10,000 contracts in early September.

Strong U.S. retail sales growth tops estimates

U.S. retail sales rose in September at the fastest pace in three months, capping a third-quarter rebound for consumer spending. Friday, Commerce Department figures showed sales rising 1.9% for the month, much better than the 0.7% consensus estimates and up from a 0.6% rise in August. Excluding autos, the gain was 1.5%, ahead of the 0.4% expectation. All but one of the 13 major spending categories increased in September.

The jump in retail sales suggests consumer strength remains robust. The momentum on this front could be a positive for the market as investors look for signs of recovery. The unexpectedly large gain in spending comes after months of historically high savings as consumers retrenched due to the COVID-19. The personal savings rate peaked at 33.6% in April and remained at 14.1% in August, the highest pre-pandemic rate since June 1975.

The recovery from the pandemic-driven downturn is threatened, though, by a new acceleration in coronavirus infections and Congress’s failure to agree on a fresh stimulus package, developments that appear to be weighing on an already slowing labor market. While the $600 weekly bonus payments for jobless Americans expired in July, a temporary program authorized by President Trump provided most benefit recipients about $300 extra a week for a limited time. But funding for that program is dwindling, and the broader drop in payments risks a hit to future consumer spending.

Other data showed U.S. consumer sentiment ticked up in early October to a seven-month high on an improved economic outlook, though confidence remained well below pre-pandemic levels. The holiday shopping season will be a key for what kind of momentum the U.S. sees as the calendar turns into 2021.

Business outlook surprises to the upside

Some other data came out at the same time as the jobless claims numbers. The Philadelphia Fed’s regional business outlook gauge came in better than forecasts at 32.3 for October versus the median estimate of 14.8, which was essentially the same as the prior month’s reading of 15.

This shows at least some areas of the economy are anticipated to continue to perk up.

Keep in mind, though, that the Philadelphia Fed gauge is a “soft” indicator, a subjective gauge of whether survey participants see activity improving or worsening. Jobless claims are a “hard” data point, revealing how many people are actually losing jobs.

Two other regional reports Thursday from the Federal Reserve showed manufacturing is sustaining its recent momentum into the fourth quarter.

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