Election Calculus Enters The Equation

This is a week with a ton of first-tier data but will it matter? With the first of three presidential debates set to air on Tuesday evening, election scenarios will move front and center as market drivers ending of course on November 3rd. Or perhaps, not ending on that date as a contested election seems to be a forgone conclusion. How that impacts yields is anyone’s guess but we think the kneejerk reaction should be faded whichever direction it occurs.  It’s inevitable given the divisions in the country that as we move within a month of the election that the expected outcome, will keep the market on edge but we still think a 10-year yield under 1.00% is likely while on the flip side, moving below 0.34% resistance will be a huge challenge as well. Thus, we see the range that has prevailed since March continuing through the election with perhaps some testing of the range but ultimately the reality of the pandemic and the economic headwinds of it will limit any election-inspired volatility. As for the September jobs report, the consensus expectation is for 850,000 new jobs versus 1.371 million in August. Those are impressive numbers in any other time but now they fall short.  The September gain would represent about 11.5 million jobs recovered from the 22 million lost in April/May. The fact that job gains are slowing while 10 to 11 million remain jobless speaks to the long and grinding nature that will be this recovery.

Treasuries
Treasury Curve Today Week Change
3 Month 0.09% +0.01%
6 Month 0.10% -0.01%
1 Year 0.11% -0.01%
2 Year 0.13% -0.01%
3 Year 0.15% UNCH
5 Year 0.27% +0.01%
10 Year 0.67% +0.01%
30 Year 1.42% +0.01%

 

Short-Term Rates
Fed Funds 0.25%
Prime Rate 3.25%
3 Mo LIBOR 0.22%
6 Mo LIBOR 0.27%
12 Mo LIBOR 0.37%
Swap Rates
3 Year 0.243%
5 Year 0.345%
10 Year 0.704%

 

Economic Calendar
Date Statistic For Briefing Forecast Market Expects Prior
Sep 29 Advance Goods Trade Balance Aug -$81.8b -$81.5b -$79.3b
Sep 29 S&P CoreLogic CS 20-City HPA Jul 3.60% 3.60% 3.46%
Sep 29 Conf. Board Consumer Confidence Sep 90.0 90.0 84.8
Sep 30 Pending Home Sales MoM Aug 3.0% 3.0% 5.9%
Oct 1 Personal Spending Aug 0.8% 0.8% 1.9%
Oct 1 ISM Manufacturing Sep 56.3 56.1 56.0
Oct 2 Change In Nonfarm Payrolls Sep 850k 850k 1371k
Oct 2 Unemployment Rate Sep 8.2% 8.2% 8.4%
Oct 2 Factory Orders Aug 1.0% 1.0% 6.4%

calendar icon Top 5 Events for the Week

Sept. 28 — Oct. 2, 2020

1. Election Scenarios Moves Front and Center — All Week
2. September Employment Report — Friday
3. September Consumer Confidence — Tuesday
4. August Personal Income & Spending — Thursday
5. September ISM Manufacturing — Friday

 

1.  Election Scenarios Moves Front and Center — All Week

With the first of three presidential debates set to air on Tuesday evening, election scenarios will move front and center as market drivers ending of course on November 3rd. Or perhaps, not ending on that date as a contested election seems to be a forgone conclusion at this point. How that impacts yields is anyone’s guess but we think the kneejerk reaction should be faded whichever direction it occurs.  It’s inevitable given the divisions in the country that as we move within a month of the election that the expected outcome will keep the market on edge but we still think a 10-year yield under 1.00% is likely while on the flipside, moving below 0.34% resistance will be a huge challenge as well. Thus, we see the range that has prevailed since March continuing into and through the election with perhaps some testing of the range but ultimately the reality of the pandemic and the economic headwinds of it will limit any election-inspired volatility.

 

2.  September Employment Report — Friday

The monthly employment report is returning to its rightful place atop economic reports after the volatility of the spring and early summer months rendered it less useful, and market attention focused on case counts and the like. With some easing in that volatility, the reports are once again becoming critical as a gauge of the economic rebound and that rebound could be losing some steam while millions still seek jobs. The current consensus expectation is for 850 thousand new jobs versus 1.371 million in August. Those are impressive numbers in almost any other time but now they fall short.  The September gain would represent about 11.5 million jobs recovered from the 22 million lost in April and May. The fact that job gains are slowing while 10 to 11 million remain jobless from the pandemic speaks to the long and grinding nature that will be this recovery. That is why the Fed remains cautious about the economy and in full accommodative mode while so many remain jobless and the pandemic remains a threat.

 

3.  September Consumer Confidence — Tuesday

With two-thirds of the economy consumption-based, it’s critical to look at the confidence of said consumer for tells on future spending. While there was a predictable dip at the early stages of the pandemic it never fell to levels of the Great Recession, perhaps due to the stimulus measures and furloughed workers hope for a quick return to work. For September, confidence is expected to bounce considerably from August going from 84.8 to 90.0 and largely recovering the dip from July (91.7).  In any event, even with the expected bounce, the confidence level is expected to remain well off pre-pandemic highs in the  130’s so the little bounce in September is not, in reality, that big a move.

 

Conference Board Consumer Confidence

 

4.  August Personal Income & Spending — Thursday

Personal income is expected to decline for the third month out of four, this time by  – 2.5% month-over-month versus a minimal 0.4% gain in July. Personal spending, meanwhile, is expected to increase 0.8% versus 1.9% increase in July. It’s just another report, outside of housing, with signs of slowing momentum from June to July to August.  Meanwhile, the core PCE, the Fed’s favorite inflation indicator, is expected to rise a bit to 1.4% year-over-year, versus 1.3% in July. It hit a multi-year low of  0.91% in April but has been in rebound mode since then. However, it will still be well below the Fed’s target of 2.0% which seems a long way off at this point. It’s another reason to expect the Fed to remain in ultra-accommodative mode for the next couple years.

 

5.  September ISM Manufacturing Report — Friday

In addition to the jobs report on Friday we’ll get the ISM Manufacturing Index. The manufacturing index is expected to  print a 56.1 versus 56.0 in August. 50 is the dividing line between an expanding sector and contracting one, so continued expansion is expected in a sector that printed a deeply recessionary low of  41.5 back in April.

 

 


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Yield/Duration Relationship

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Published: 09/28/20 Author: Thomas R. Fitzgerald