Stimulus Talks Resurrected Once Again

Oct 19, 2020
US Capitol Building

Election Scenarios, Stimulus and Yields

With the week devoid of much first-tier economic releases, Treasuries are likely to drift within the well-worn range that we’ve seen for what seems like forever but stretches back to March. And to be fair, even if we did have some first-tier data to trade around, the market is more interested now in election scenarios and, of course, developments around the virus and a possible vaccine. This morning has the added bonus that stimulus talks have been resurrected with House Speaker Pelosi setting a 48-hour deadline. We shall see.  As we move closer to the election the markets are trading the question of uncertainty. If election night comes and a winner is clearly evident then expect equities to rally and Treasury yields to trend slightly higher. If that decisive win is followed by the Senate moving into Democratic control expect an even greater move as a large fiscal stimulus package becomes a near certainty. On the other hand, if there is no clear winner and we move into contested election territory equities will suffer under that uncertainty while a safe haven trade into Treasuries would follow.  We still think a 10-year yield under 1.00% is likely but if it breaks above there is plenty of resistance to getting above 1.25%. Ultimately, the pandemic and the economic headwinds from it will limit any election-inspired volatility and keep yield moves in from becoming more dramatic.


Treasuries
Treasury Curve Today Week Change
3 Month 0.09% Unch
6 Month 0.11% Unch
1 Year 0.12% Unch
2 Year 0.15% Unch
3 Year 0.19% Unch
5 Year 0.34% +0.01%
10 Year 0.77% +0.01%
30 Year 1.56% +0.01%
Short-Term Rates
Fed Funds 0.25%
Prime Rate 3.25%
3 Mo LIBOR 0.22%
6 Mo LIBOR 0.26%
12 Mo LIBOR 0.34%
Swap Rates
3 Year 0.272%
5 Year 0.412%
10 Year 0.800%
Economic Calendar
Date Statistic For Briefing Forecast Market Expects Prior
Oct 19 NAHB Housing Market Index Oct 83 83 83
Oct 20 Housing Starts Sep 1.455mm 1.460mm 1.416mm
Oct 20 Housing Starts (MoM) Sep 2.8% 3.1% -5.1%
Oct 20 Building Permits (MoM) Sep 2.0% 2.3% -0.5%
Oct 22 Initial Jobless Claims Oct 17 865k 868k 898k
Oct 22 Leading Index Sep 0.7% 0.6% 1.2%
Oct 22 Existing Home Sales Sep 6.30mm 6.30mm 6.00mm
Oct 22 Existing Home Sales (MoM) Sep 5.0% 5.0% 2.4%
Oct 23 Markit US Composite PMI Oct P NA NA 54.3

calendar icon Top 5 Events for the Week

Oct. 19 — 23, 2020

1.  Election Scenarios and Yields — All Week
2.  September Housing Starts & Permits — Tuesday
3.  Initial Jobless Claims — Thursday    
4.  September Leading Index — Thursday
5.  Existing Home Sales — Thursday   

 

1.  Election Scenarios and Yields — All Week

With the week devoid of much first tier economic releases, Treasuries are likely to drift within the well-worn range that we’ve seen for what seems like forever but stretches back to March. And to be fair, even if we did have some first-tier data to trade around, the market is more interested now in election scenarios and, of course, developments around the virus and a possible vaccine.  As we move one week closer to the election the markets are trading around the question of uncertainty. If election night comes and a winner is clearly evident then expect equities to rally and Treasury yields to trend slightly higher. If that decisive win is followed by the Senate moving into Democratic control expect an even greater move as a large fiscal stimulus package becomes a near certainty. On the other hand, if there is no clear winner and we move into contested election territory equities will suffer under that uncertainty while a safe haven trade into Treasuries would follow.  We still think a 10-year yield under 1.00% is likely but if it breaks above there is plenty of resistance to getting above 1.25%. Ultimately, the pandemic and the economic headwinds of it will limit any election-inspired volatility and keep yield moves from becoming more dramatic.

 

2.  September Housing Starts and Permits — Tuesday

The housing market is one sector of the economy that has kept up the momentum from June though the summer, and September is expected to continue gaining after a bit of a pause in August.  Starts are expected to increase 3.1% to 1.460 million units annualized versus August’s dip of –5.1% or 1.416 million units annualized. Permits are expected to increase  2.3% increase to 1.510 million annualized versus 1.476 million in August.  So a solid read is expected in September after a bit of a pause in August. It speaks to the continuing strength in all segments of the housing market.

 

3.  Initial Jobless Claims — Thursday

The weekly change in initial jobless claims continues to be the best real-time indicator of how the economy is recovering and the expectation is that while recovering the recovery is getting shallower.  The Bloomberg consensus expects jobless claims for the week ended October 17 to be 868 thousand, down from 898 thousand the previous week.  Continuing claims are expected to be 9.78 million versus 10.02 million the prior week. While the trend is headed in the right direction the slope is very shallow and that speaks directly to the Fed’s concerns that this will be a long and grinding recovery that spans years, not months.

 

4.  September Leading Index — Thursday

The Leading Index plumbed new depths in March and April, as one would expect, but rebounded smartly in May and June  while July and August saw a little fade from the May/June bounce. For September the index is expected to fade a bit more but still hold above zero,  0.6% expected versus 1.2% in August. The stock rally is helping to hold up the index but the slowdown in reopening activity and hiring is limiting the gains in the index. Still, hanging above 0 is an accomplishment right now so we’ll take it.

  

5.  September Existing Home Sales — Thursday

On Thursday we’ll get September existing home sales—accounting for 90% of the residential market—which are expected to be up 5.0% to 6.3 million houses sold on an annualized basis. The housing sector continues to benefit from near record low mortgage rates and the September numbers should continue to show a housing market hitting on all cylinders.  The 6.3 million annualized figure would be the largest since  December 2006 when sales were coming off the extremes of the housing bubble that peaked at 7.25 million annualized units sold in September 2005. Is the housing sector building towards bubble territory again?

Existing Home Sales

 

 


bar graph icon  Yield Universe

 Yield/Duration Relationship 

 

CenterState Disclosure

 


 

Tom Fitzgerald Signature 

Thomas R. Fitzgerald

Director, Strategy & Research

Tfitzgerald@centerstatebank.com

 

Download / Print as a PDF