July 29, 2020

Markets Today: US heads for fiscal cliff as confidence slides

The US is no nearer to reaching agreement on their fiscal stimulus package.

Today’s podcast


Overview: Gonna make you sweat

  • Cautious mood ahead of the FOMC announcement and key earnings reports from the tech sector
  • Negotiations continue over a US fiscal package; “far apart” but a deal likely give election proximity
  • Equities fall (S&P500 -0.6%), Bonds rally (US10yr yield -3.9bps to 0.58%), Gold recovers (+1.3%)
  • USD up +0.1%; FX safe havens also slightly higher with USD/Yen -0.2% and USD/CHF -0.2%
  • Fed extends US emergency lending programmes by three months to the end of 2020
  • Coming up: AU Q2 CPI, FOMC, US Household Pulse Survey


Bottom line

Cautious mood overall with negotiations continuing over a US fiscal package and as the market waits for the FOMC and key earnings reports from the tech sector (Thursday sees Alphabet, Amazon, Apple and Facebook). The S&P500 fell -0.6%, bonds rallied (US 10yr -3.9bps to 0.58%), while the USD rose slightly (DXY +0.1%) with the AUD outperforming (+0.3% to 0.7158) and tracking the gold price. Coming up today is Australian Q2 CPI figures (likely less market moving than previously) and the FOMC. Good luck.


“Pause, take a breath and go for yours; On my command now hit the dance floor; It’s gonna make you sweat ’til you bleed”, C+C Music Factory 1990


“Gonna Make You Sweat” was the 1990 viral dance-pop hit widely praised for its post-disco vocals and which has survived to become pop culture cliché. So it is with negotiations over the US fiscal stimulus package with three sides (White House, House and Senate) still at loggerheads. One Republican described negotiations as “a mess” (see Politico for details) and a deal may not eventuate until next week. However, given the election proximity we doubt many senators or representatives want to hit the campaign trail empty handed. Markets are cautious given the uncertainty, with two other key events also on the horizon – the FOMC later tonight (4.00am AEST) and key tech earnings on Thursday which sees Alphabet, Amazon, Apple and Facebook. The S&P500 fell -0.6% with tech underperforming (IT subindex -1.2%), along with disappointing earnings from McDonalds (-2.5%) and 3M (-4.8%).

Bond yields fell with US 10yr yields -3.6bps to 0.58%, helped along by a strong 7yr auction, while the yield curve continues to flatten with 2/10s -2.5bps to 43.7bps. Also in rates news, The Fed extended most of their emergency lending programmes by three months through the remainder of 2020 (see link for details). There was little market reaction as there has been little take-up of these programmes – some $100bn compared to the theoretical limit in the trillions – but it was a signal that the Fed remained inclined to offer ongoing support to the economy.

FX moves have been mixed with the USD slightly stronger with DXY +0.1%

The major drivers were the Euro likely consolidating after its sharp rally (EUR -0.3%), while GBP rose +0.4% with no apparent driver. Safe haven’s saw a slight bid with USD/Yen -0.2% to 105.11 and USD/CHF -0.3% with the Swiss Franc briefly touching its strongest level since June 2015.

The AUD bucked the trend, up +0.3% to 0.7158 and tracking the intraday move in the gold price – AUD recovering from yesterday’s dip in the gold price (gold itself recovering to $1,960 after losing a $47 after hitting a record high of $1,981 early yesterday). The NZD didn’t recover though from the dip in gold (gold’s intra-day moves appeared to be a catalyst for moves yesterday) with the NZD -0.3% to 0.6654.

First to US stimulus negotiations

The Republican GOP’s $1Tn coronavirus relief bill was met with little enthusiasm by Democrats with that proposal reducing the current Federal unemployment benefit supplement from $600pw to $200pw and includes another one-off $1200 payment to households. The proposal is well short of the $3.5Tn bill already passed by the Democratic-led House. Negotiations will continue over coming days. Politico reports Republicans are divided, while most do not want to head home for the August recess empty handed given the proximity of the November elections. As such a deal is still likely and markets are still expecting a deal and no fiscal cliff edge.

Data continues to largely take a backseat

US consumer confidence fell by more than expected in July to 92.6 from 98.3, led by a significant drop in the expectations component. No real surprise given the rise in virus cases and the re-imposition of restrictions in some states. The Richmond Fed Manufacturing Index in contrast rose more than expected to +10 from and suggests manufacturing activity expanded in July.

Finally in Australia

Yesterday’s weekly payrolls suggests the labour market weakened in July. Payrolls have now fallen 1.1% over the month to mid-July and a crude seasonal adjustment suggests a 90k fall in official employment in July, reversing around 40% of the 2011k rise in employment in June. Victoria saw the steepest decline in Payrolls, but so did other states except for WA. In more positive news, Victorian virus cases appear to have tentatively peaked with 385 cases yesterday, down from 532. NSW’s track and trace appears to be working effectively.

Coming up today

  • AU: CPI Q2 (11.30am AEST): Historically the most market sensitive pieces of data for Australian rate markets. This time around the impact could be less with the RBA cash rate is already at 0.25%, and the Governor has shown little willingness to alter from this or the 3yr yield curve target. Headline CPI is expected to fall -2.0% q/q and -0.4% y/y (consensus also -2.0% q/q) with the RBA preferred Trimmed Mean measure also soft at 0.0% q/q and 1.3% y/y (consensus a tad stronger at 0.1%). Most of the headline decline is being driven by two components –free childcare and petrol prices; childcare prices will fall 95% q/q due to the government free childcare during the pandemic and is set to subtract around 1.1% points from CPI, while petrol prices have fallen 19.8% q/q and subtracts 0.7% points. We see downside risks to our forecasts with the possibility that rents have fallen more sharply than we have factored in given anecdotes of sizeable rent reductions off market, along with the price of new dwellings where there are very few public indicators. Going forward, next quarter’s CPI (Q3) is likely to bounce sharply given the end of the childcare subsidy on 12 July (we pencil in Q3 at +2% q/q with 1.1 of that coming from childcare). Beyond Q3, inflation is likely to remain very subdued given elevated unemployment, weak housing rents and new dwellings costs which make up around 15% of the CPI basket, along with the disinflationary impetus from China’s factories.
  • US: Household Pulse Survey (from 8.30am local; 10.30pm AEST): The Household Pulse Survey is a weekly survey being conducted by the Census Bureau (see link), tracking various household characteristics during the pandemic. The employment question results peaked in mid-June and has deteriorated sharply since, implying all the employment gains in June have fully reversed in July. We will be watching this survey closely to see whether this trend is confirmed in this week’s data.
  • US: FOMC Decision & Presser (from 2.00pm local, 4.00am local): No change is expected, though Powell’s press conference 30mins after the decision will be closely watched. Recent labour market data suggests the jobs recovery has stalled with the Household Pulse Survey (above) suggesting a rapid deterioration with all of June’s payroll gains more than reversed – the next iteration of that data is also out today (see above). As for when we can expect a change to the Fed’s policy guidance, most participants think we will have to wait until September with the Fed set to more explicitly state it will not lift rates until the 2% inflation target is met. In the meantime rates as per the dots are seen as unchanged at least through the end of 2022. Yield curve control policy is also expected by a narrow majority at some point in the next two years  – those prospects bolstered by recent comments by the Fed’s Brainard.

Market prices



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