Economic Gains and Virus Spread Tug at Investors, U.S. Labor Expected to Remain Weak
Global manufacturing and services improved sharply, but some U.S. states are pulling back after virus infections increased.
Last Week Review
Sharp improvements in global manufacturing and service sector activity was balanced with evidence of a still weak labor market as the virus notably strengthened in the U.S. Warnings from the Federal Reserve that some large U.S. banks may push minimum capital levels in worst-case pandemic scenarios underscored virus economic headwinds, while reports of increased trade tensions added to risk asset pressures. Late-week strains on global equities from a rising U.S. case count led to a 2.1% weekly decline. Credit conditions gave back some recent improvement as high yield spreads widened 36 basis points to 6.16%.
U.S. States Reconsider Reopening Plans
Virus case trends continued to deteriorate in southern and western U.S. states as the nation pushed its all-time high for new cases. Texas surged as the city’s director of emergency medical services warned of its overwhelmed hospitals. States in the northeast imposed mandatory quarantines for those returning from a number of states facing a virus resurgence. The spike in cases has prompted many states to consider altering the pace at which they ease lockdown restrictions. Texas and Florida paused their phased reopening plans. Western Europe has largely contained the virus for now, but cases in Latin America continue to surge. Globally, the pandemic is far from dissipating.
Economic Activity Improves from Depressed Levels
Flash Purchasing Managers’ Index data in the U.S. and Europe markedly recovered from historically low prior levels. The upturn was largely expected given the near halt in economic activity the prior month. As monthly economic data improves from battered levels, markets will increasingly focus on the level that the economy can eventually return to and the pace at which it can recover — not point-in-time data readings. The growth outlook should strengthen more quickly with the help of fiscal stimulus. U.S. President Donald Trump recently alluded to more direct stimulus checks for individuals and guided details would be firmed over the coming weeks.
Political Risks Threaten Shaky Market
Early last week, White House trade adviser Peter Navarro claimed that the U.S.-China trade deal was done. Although he later walked back the statement and Trump confirmed the deal is still intact, the comments highlighted the ability of non-virus developments, specifically related to trade, to push equity markets lower. Trade pressures later intensified following reports that the U.S. is weighing new tariffs on $3.1 billion of European Union goods. Virus developments remain the most important driver of markets, but trade relations are crucial to the longer-term growth outlook and will not be ignored by markets.
This Week Preview
Persistent Pandemic Keeps Investors on Edge
Last week, some U.S. states decided to pause planned reopenings in an effort to stabilize a spike in cases. However, in many cases, the immediate risk to economic progress is not government-enforced lockdowns, but decisions from companies and individuals to shield themselves from the virus. Apple (AAPL) recently closed stores in virus hotspots and Disney (DIS) delayed the reopening of its California theme parks. Virus headlines will likely dominate market movements again this week as investors gain better insight into how the uptick in cases is impacting not only government decisions, but also company and consumer behavior.
U.S. Labor Market to Show Continued Weakness
The U.S. jobs report is expected to show that the unemployment rate fell to 12.4%, although data collection issues may continue to understate the true level of unemployment. Recent initial jobless claims figures have hinted at a slowdown in the labor market recovery as continued layoffs counteract rehiring. Initial improvements in economic data will likely be hard to match as the economy deals with medium-to-longer term virus economic consequences.
Fed to Release Meeting Minutes
Federal Reserve meeting minutes are expected to firm unwavering central bank support, while Chair Jerome Powell will likely press for more fiscal stimulus in his testimony before the House Financial services Committee. Brexit negotiations will continue, but markets will mostly only pay mind to virus developments.
See our latest coronavirus insights.
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