Top Weekly Themes
- More quantitative easing? The Federal Reserve (Fed) released minutes from its previous FOMC meeting on September 16. Prior to the minutes being released, the post-meeting commentary was mostly focused on the Fed’s key ingredients for raising rates, including 2.0% inflation, maximum employment based on Fed’s labor market assessment, and inflation being on track to modestly exceed 2.0% for a period of time. Interestingly, last week’s minutes also revealed further insight into the Fed’s quantitative easing program. Currently, the Fed is purchasing roughly $120 billion of securities each month, consisting of $80 billion of U.S. Treasury and $40 billion of agency mortgage-backed securities. Chairman Powell acknowledged last week, when speaking to the National Association for Business Economics, that the U.S. economy needs more support. With fiscal authorities failing to reach an agreement on additional economic support, and if the pace of the economic recovery becomes inadequate to support job growth, we believe the Fed will alter its bond purchasing program to provide further market stability in the form of additional liquidity injections into the U.S. economy. The result, in our view, would be additional downward pressure on intermediate maturity yields.
- On again, off again – fiscal stimulus talks continue – Headlines (and markets) have turned optimistic as both sides returned to the negotiating table, but House Speaker Nancy Pelosi and Treasury Secretary Steven Mnuchin remained far apart on the size of another fiscal package. Last Tuesday, in a surprising turn of events, President Trump announced that he had instructed his negotiators to stop the fiscal policy discussions until after the election. The announcement contributed to a quick reversal of the day’s stock market gains and a drop in bond yields. Since then, the market has recovered, and discussions have resumed. President Trump has been participating as well. We believe another round of fiscal stimulus is necessary to help limit the economic shortfall that is expected until the coronavirus is contained. The injection of additional funds into the U.S. economy would support income and consumer spending at a time when the unemployment rate remains elevated. Overall, we believe another fiscal package is still in the cards either before or after the election.
- Initial jobless claims improve, but remain elevated – Initial jobless claims dropped to 840,000 for the week ending October 3, the lowest level since the beginning of March 2020. The weekly data has remained stubbornly high, staying within a range of 840,000 to 893,000 over the past five weeks. The continued improvement is always welcomed, but it’s important to recognize the decelerating decline from week to week. In fact, the number of initial jobless claims was still more than 3.5x’s the weekly claims data recorded this past February. Taking into consideration September’s 7.9% high unemployment rate, it’s a quick reminder the U.S. economy is still in recovery mode, and although improving, it will take time before the U.S. labor market is operating at full employment.
|Week (%)||YTD (%)||1-Year (%)||3-Year (%)||5-Year (%)||Div Yield (%)|
|Russell 1000 Value||3.9||(7.9)||2.5||11.3||42.2||2.55|
|Russell 1000 Growth||0.6||26.6||43.0||80.9||144.5||0.78|
|MSCI EM (Emerging Markets)||3.1||2.4||15.4||10.0||50.9||2.35*|
|Bloomberg Barclays US Aggregate||(0.2)||6.6||6.1||16.5||22.5||1.20|
|Bloomberg Barclays US High Yield – Corporate||1.0||1.8||5.0||14.3||38.4||5.36|
|Bloomberg Barclays Municipal Bond||(0.4)||2.9||2.9||12.9||20.2||1.41|
|Bloomberg Barclays Global Aggregate x US (Country)||0.0||4.9||5.1||11.3||19.3||0.77|
|Crude Oil WTI (NYM $/bbl) Continuous||6.4||(32.5)||(21.7)||(16.4)||(16.7)||41.2|
|Natural Gas (NYM $/mmbtu) Continuous||4.0||20.0||14.8||(8.2)||5.2||2.6|
|Gold NYMEX Near Term ($/ozt)||(1.0)||24.3||26.1||48.5||65.0||1,888.6|
|Copper Cash Official LME ($/mt)||(0.0)||7.4||17.0||(0.4)||28.1||6,611.5|
|1 Week Ago||YTD||1-Year Ago||3-Years Ago||5-Years Ago||Current Level|
|U.S. Dollar per Euro||1.17||1.12||1.10||1.17||1.13||1.17|
|Japanese Yen per U.S. Dollar||105.64||108.68||107.10||112.81||119.86||106.03|
|U.S. Dollar per British Pounds||1.29||1.32||1.22||1.31||1.53||1.29|
As of October 8, 2020 (close) *Dividend Yield For MSCI EAFE and MSCI EM are from 9/30/2020.
Charts of the Week
ISM Services PMI Report on Business Employment (Dec. 31, 2018 – Sept. 30, 2020)
- The ISM Service Index exceeded expectations for September, coming in at 57.8, comfortably above the key expansionary threshold of 50. U.S. services have been slow to regain pre-pandemic levels, with many service industries reliant on person-to-person interactions, so recent data is a welcomed improvement.
- As businesses continue to reopen and service sales improve, service companies have been adding to their payrolls. Within the September ISM Service report, a measure of service employment crossed over the expansionary 50 level threshold for the first time since the onset of the pandemic, another positive for an industry still in recovery mode.
- Although recent economic data has been positive, we continue to believe much more time is needed before the economy fully recovers back to pre-pandemic GDP levels. With COVID-19 cases increasing, headwinds to the current pace of economic growth certainly remain.
Yield Difference Between 30 Year U.S. Treasury Yield and 5 Year U.S. Treasury Yield January 3, 2017 – October 5, 2020
- The U.S. Treasury yield curve between the five-year and the 30-year maturities reached 125 basis points (1.25%) last week, its steepest level since December 2016. With short-term yields well anchored to Fed monetary policy, longer-term yields have recently been more influenced by other factors. For example:
- The potential for more fiscal stimulus, either before and/or after the election, will support economic growth and should help support pushing inflation back to the Fed’s 2% target. Although inflation may struggle in the near-term, longer-term maturities are more influenced by expected future growth and the increased prospects of inflation.
- Increasing U.S. government deficits have also contributed to rising long-term U.S. Treasury bond yields. The U.S. Treasury needs to fill the gap between what it takes in (revenues) and what it distributes (expenses). As the U.S. Treasury increases its borrowing needs, at times using longer-term maturities, the additional supply puts upward pressure on yields as investors absorb the additional bonds.
- Lastly, with the election less than a month away, the likelihood of a clear winner appears to be increasing given recent polling data favoring Democratic Presidential nominee Joe Biden. U.S. Treasury bond prices often rise (prices up, yields down) during times of uncertainty as investors flock to the safety of those assets. Interestingly, as the gap between Trump and Biden has recently widened in certain polls, the flight to safety into US Treasuries appears to have eased as investors discount the potential for a disorderly election outcome.
- There are many variables that impact the shape of the yield curve. The above focused on a few that appear to us as the most relevant given today’s environment. We do believe that the curve will continue to gradually steepen and have taken a cautious approach to duration risk. With that being said, it’s important to keep in mind that the Fed is adamant about low interest rates and has the tools, in our view, to have some influence on longer parts of the yield curve with its forward guidance and most importantly, its asset purchases. Although we expect longer term yields to rise, we believe the process will be gradual until there are notable signs that economic growth and inflation are meeting the Fed’s objectives.