Equities fall on Wall Street
US stocks declined as virus angst suggests the rest of the year is going to get very ugly for economic activity and as Congress appears nowhere close to restarting fiscal stimulus negotiations. Wall Street pessimism was today’s theme after a steady flow of cautious Covid comments came from Southwest Airlines, Fed Chair Powell, and NYC Mayor Bill de Blasio. With new US coronavirus cases and the death toll heading towards levels seen during the scarier part of the pandemic, expectations are rising that partial lockdowns and some school closings will happen before the holidays. Even as coronavirus vaccine hopes drive optimism for next year’s second quarter, risk appetite will have trouble coming back since the labor market recovery has lost its momentum and will unlikely be greeted with fiscal support until President-elect Biden takes office. Wall Street wants to buy value stocks but they can’t get too excited as outbreaks across Europe and the US will cripple economic activity for the next two quarters.
US Jobless Claims
The weekly jobless claims figure came in better-than-expected but remains over triple the pre-pandemic average. A surge in Covid cases throughout the winter will trigger restrictive measures that will certainly produce a spike in jobless claims. The US consumer will start to look a lot weaker with no fiscal support happening for the rest of the year. Investors should prepare to see initial claims rise back above the million level by early December.
Inflation remained steady and will likely not be much of a risk as the pandemic worsens. Until the US economy is comfortably beyond the pandemic, inflation is not a concern.
The Treasury’s record USD27 billion in 30-year bonds was nothing to brag about. As fixed income traders buy up the recent rally, demand for these auctions remains fairly steady. Treasury yields will likely remain heavy on the short-end of the curve, but hopes for a return to a pre-pandemic world will eventually mean a much steeper yield curve next year.
The Mexican peso went on a wild ride after the Banxico delivered a surprise hold with the overnight rate. The vote was four to one, with the lone dissenter calling for a 25-basis point cut. The peso initially strengthened but that was temporary as the prospects of a rate cut in early 2021 remain very likely. The Banxico believes they are close to the end of their easing cycle, but they should have one or two more cuts left before they are done. Inflation remains above their target range and while the country emerged from its technical recession, further accommodation will be needed as their major trading partners struggle.