Market Recap

Posted on July 17, 2020 by Gemmer Asset

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Weekly Recap


The equity markets continue to churn in a range between 3,000 and 3250 on the S&P 500. The rapid advance in April and May ground to a halt as infection rates started to trend up in June. On the economic front the general theme is a moderation in the V-like bounce off the March lows.


For example, the latest manufacturing reports from around the country shows that this sector is expanding again (any number above 50 in the chart below), but that the rate of growth has moderated in recent days.



It’s a similar story for the consumer. This week’s retail sales number showed an increase of 7.5% between May and June. Somewhat surprisingly sales are up 1.1% year-over-year. As you can see below, if you take gasoline out retail sales are back to new highs.



However, some of the high frequency data shows a bit of softness. The chart below shows you credit card charges at J.P Morgan Chase. In the last few days activity has slowed, not in a big way, but clearly rising COVID infection rates are weighing on spending again.



You get the same message looking at other high frequency data.



Uncertainty about government policy is also playing a role. As Bank Credit Analyst notes:


“Unemployment benefits for the average American worker are set to fall by more than 60% at the end of July. The funds in the Paycheck Protection Program for small businesses are also running out. To make matters worse, many state and local governments, which began their fiscal year in July, are facing a severe cash crunch due to evaporating tax revenues and rising social spending obligations.”


As you can see below, the $600 federal supplement for unemployment benefits boosted average payments above average weekly earnings. The threat of this going away is serious for a lot of people and has to be weighing on spending.



Will Congress extend the benefit? Certainly, the public supports more stimulus, as you can see below.



The general expectation is that Congress comes up with a plan by early August that contains a number of items:


– Money for states and local governments.
– Possibly another round of ‘one-off’ checks.
– Either a payroll tax cut or extended unemployment benefits – or both.
– Help for struggling colleges.
– A COVID-19 liability shield for businesses.
– Insert your favored cause here – it’s quite likely this bill turns into another ‘kitchen sink’ bill.


Estimates for the cost range from $1tn to over $3tn.


The Fed is Inching Their Way Towards Something Newish


And what about the Fed? They meet again in two weeks. Should we expect something new?


Probably not this month, but Federal Reserve Governor Lael Brainard spoke this week and presented a rather sobering outlook for the U.S. economy. Basically, she anticipates that conditions will be sufficiently weak to generate years of below-target inflation. What does that mean for policy? She provides a roadmap:


“Looking ahead, it will be important for monetary policy to pivot from stabilization to accommodation by supporting a full recovery in employment and returning inflation to its 2 percent objective on a sustained basis. As we move to the next phase of monetary policy, we will be guided not only by the exigencies of the COVID crisis, but also by our evolving understanding of the key longer-run features of the economy, so as to avoid the premature withdrawal of necessary support.”


And she also basically cans the Phillips curve idea that inflation increases as unemployment falls:


“With underlying inflation running below 2 percent for many years and COVID contributing to a further decline, it is important that monetary policy support inflation expectations that are consistent with inflation centered on 2 percent over time. And with inflation exhibiting low sensitivity to labor market tightness, policy should not preemptively withdraw support based on a historically steeper Phillips curve that is not currently in evidence. Instead, policy should seek to achieve employment outcomes with the kind of breadth and depth that were only achieved late in the previous recovery.”


So what’s the solution? Essentially let inflation run hot for a period of time – that is above the 2% target. That’s is very different from 2018 when the Fed started to act proactively to stop inflation hitting 2%. Rather than setting policy on expected inflation, she’d set policy based on inflationary outcomes. That’s a big shift in the world of monetary policy.


We still think the Fed is moving in the direction of yield curve control. This is the idea that the Fed pledges to keep rates below a certain level for an extended period of time. Japan has been doing it for years. Australia started capping 3-year bond rates a few weeks ago.


Back during WWII the Fed capped long-term rates at 2.5% (red line below). Every time rates bumped up against this level they entered the market and drove rates lower.



As we said, the Fed probably doesn’t do this in two weeks. But the fact they are talking about it openly probably means it’s coming this year or early next. Interesting times.


Charts We Found Interesting


1. First time over 70K in a single day.



2. The trend in Contra Costa is a tad more encouraging. Down for two days in a row. Does that count as a trend?



3. Contra Costa now breaks out data for the county as a whole and just for long-term care facilities.



4. Tyler Cowen had and interesting post this week on Sweden and why, despite few apparent moves to control COVID, their infection and death rates are trending significantly lower, as you can see below.




He speculates that maybe they have reached herd immunity. Whether we like it or not we seem to be moving in the same direction. Read more here.


5. 30-year mortgage rates fell below 3% for the first time ever this week.



6. Low rates have led to a massive issuance of corporate bonds this year. The year is only half over and we are double 2016-2018 levels.



7. But this doesn’t mean corporations are in good shape. This week the three big banks took record charges to insure against loan losses.



8. Something is very wrong with this picture. How many kids are going to bail on college this fall??



Have a good weekend.






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