Rising Case Counts Should Keep Markets Range-Bound
With Fourth of July falling on Saturday, financial markets will be closed Friday with an early close on Thursday (talk about bankers hours, they should rename it Wall Street hours), the holiday-shortened start to the third quarter will commence amid increasing viral case counts combined with top-tier fundamental data in the form of the June Employment Report. Speaking of which, do any of the economic numbers matter right now? Absent a major shift in the overall tone of the market, 10-year Treasury yields will finish the quarter within the 54 bps to 78 bps range that has prevailed for the vast majority of the second quarter. With equity markets turning more concerned over increasing case counts, it seems the tug-of-war between hopes for better economic results from reopenings versus concern over increasing case counts is swinging towards the latter. News of slowing or delayed openings due to adverse trends in the virus have pushed that to the fore as the leading market driver with all other factors now clearly in the back seat. While equities are repricing as a result of the resurgent virus, Treasuries have been content to remain in the well-worn range that we mentioned above, and until the virus news gets decidedly better or worse, it’s likely that range will continue to prevail as we work through the summer and lightly-staffed trading desks. So take note of the jobs report on Thursday (due to the Friday closure) but know it won’t likely be the catalyst for moving Treasuries out of their familiar range.
|Treasury Curve||Today||Week Change|
|3 Mo LIBOR||0.31%|
|6 Mo LIBOR||0.36%|
|12 Mo LIBOR||0.57%|
|Date||Statistic||For||Briefing Forecast||Market Expects||Prior|
|Jun 29||Pending Home Sales (MoM)||May||18.0%||19.3%||-21.8%|
|Jun 30||S&P CoreLogicCS Home Price Chg (YoY)||Apr||3.86%||3.70%||3.92%|
|Jun 30||Conf. Board Consumer Confidence||Jun||90.8||90.5||86.6|
|July 1||ISM Manufacturing Index||Jun||49.1||49.6||43.1|
|July 1||FOMC Meeting Minutes||Jun 10||NA||NA||NA|
|July 2||Initial Jobless Claims||Jun 27||1.30mm||1.34mm||1.48mm|
|July 2||Change in Nonfarm Payrolls||Jun||3.000mm||3.000mm||2.509mm|
|July 2||Unemployment Rate||Jun||12.3%||12.4%||13.3%|
|July 2||Underemployment Rate||Jun||NA||NA||21.2%|
Top 5 Events for the Week
June 29 — July 3, 2020
1. Reopening vs. Virus Counts—All Week
2. June Employment Report—Thursday
3. June ISM Manufacturing Index—Wednesday
4. June Consumer Confidence—Tuesday
5. FOMC Meeting Minutes —Wednesday
1. Reopening/Virus Case Trends-All Week
With equity markets turning more concerned over increasing case counts, it seems the tug-of-war between hopes for better economic results from reopenings and concern over increasing case counts is swinging towards the latter. News of slowing or delayed openings due to adverse trends in the virus have pushed that to the fore as the leading market driver with all other factors now clearly in the back seat. While equities are repricing as a result of the resurgent virus, Treasuries have been content to remain in the well worn 54bps to 78bps range and until the virus news gets decidedly better or worse, it’s likely that range will prevail as we work through the summer and lightly-staffed trading desks.
2. June Employment Report-Thursday
The June Employment Report gets an early Thursday release due to the aforementioned Friday market closure and will offer some distraction to traders focused on virus case counts. While the headline print gets all the headlines there are two other things to watch in this report. For one, the trajectory of job gains is important. The current consensus expectation is for an impressive 3.0 million jobs which would beat last month's 2.509 million surprise. Given the numbers right now are so far outside the typical range it is wise to put wide error bands around “consensus” expectations. The other item to look for will be the revisions to the May numbers. If the May upside surprise is not revised away, that will be a positive for growth and sentiment but again, that’s all subject to the current trend in the virus and the real-time impact to the pace of reopenings.
3. June ISM Manufacturing index—Wednesday
In addition to the jobs report on Thursday we’ll get the ISM Manufacturing Index on Wednesday that will indicate if the rebound in May is carrying through into the summer. The manufacturing index is expected to print a 49.6 versus 43.1 in May. If that comes to pass it will mark a sector that sunk to 41.5 in April, firmly in recession territory, is now on the verge of returning to an expansionary state. In fact, the New Orders component is expected to jump from 31.8 to 51.9 which would mark a remarkable one-month turnaround.
4. June Consumer Confidence—Tuesday
With the two-thirds of the economy comprised of consumer consumption, measuring consumer confidence gives us an early tell on their future spending habits. It’s no surprise confidence has taken a serious hit but to date the drop has held above the lows set in the Great Financial Crisis of 12 years ago. The chart below details the decline in confidence but as you see the low is holding well above the prior recession and the expectation is that the June result will move higher from May (90.5 vs. 86.6). The wildcard here is the impact the increasing virus cases will have on confidence. While the dramatic increase in virus cases took place after the survey, this month’s number will set a benchmark to consider how the virus trend impacts confidence moving forward.
5. FOMC June Meeting Minutes—Wednesday
The FOMC minutes from the June meeting will be released on Wednesday and they will garner some headlines. Recall the meeting included rate and economic forecasts for the first time since December. The rate forecast foresaw no rate change through 2022 and Powell did strike a somewhat concerned tone in the press conference that the economic damage will take time to heal, despite the positive vibes from the economic bounce in May and what looks like June as well. Thus, we expect a fairly somber and concerned tone to seep from the minutes and if anything should buttress the case that the Fed will be super accommodative for the foreseeable future, or well through 2022.
Thomas R. Fitzgerald
Director, Strategy & Research