Stocks and Bonds Remain at Odds over Outlook

Jul 20, 2020
Fork in the Road

Stocks and Bonds Remain at Odds Over Outlook

Positive economic news continues despite the drumbeat of increasing virus cases and that has emboldened stock traders to continue building on the multi-month rally. Meanwhile, the Treasury market remains stoically unimpressed, residing in the well-worn range that has held since the beginning of April, three and a half months ago. The 10-year yield has ranged from 0.54% to 0.90% with much more of the time spent between 0.60% and 0.70%. Perhaps it’s the realization that even with decent economic numbers of late, reopenings are slowing in some regions making the bounce in May and June hard to replicate. Or, it could be the upcoming expiration of supplementary unemployment benefits in a week. While Congress is likely to pass some form of extension it could be less than the current $600/week. That might give the 30 million consumers receiving the check a reason to horde more of the benefit and dulling the consumption impact. In any event, stocks and Treasuries continue to trade in  different universes but the time to resolve that disparity could be fast approaching.  Away from virus news, the calendar is light with June existing sales (Wednesday) and new homes sales (Friday) both are expected to post solid results after a disappointing May. The June Leading Index (Thursday) is expected to come off the record-breaking pop in May but a solid result is still forecast. The July Preliminary Markit PMI readings are expected to move both the manufacturing and services sectors from contractionary territory (under 50) to slight expansions (above 50).


Treasuries
Treasury Curve Today Week Change
3 Month 0.11% -0.01%
6 Month 0.12% -0.02%
1 Year 0.13% -0.01%
2 Year 0.14% -0.01%
3 Year 0.16% -0.03%
5 Year 0.27% -0.03%
10 Year 0.61% -0.04%
30 Year 1.31% -0.04%
Short-Term Rates
Fed Funds 0.25%
Prime Rate 3.25%
3 Mo LIBOR 0.27%
6 Mo LIBOR 0.33%
12 Mo LIBOR 0.47%
Swap Rates
3 Year 0.222%
5 Year 0.311%
10 Year 0.593%
Economic Calendar
Date Statistic For Briefing Forecast Market Expects Prior
Jul 21 Chicago Fed Nat Activity Index Jun 4.00 4.00 2.61
Jul 22 FHFA House Price Index MoM Jun 0.4% 0.3% 0.2%
Jul 22 Existing Home Sales Jun 4.83mm 4.75mm 3.91mm
Jul 22 Existing Home Sales MoM Jun 23.5% 21.5% -9.7%
Jul 23 Initial Jobless Claims Jul 18 1.280mm 1.290mm 1.300mm
Jul 23 Bloomberg Consumer Comfort Jul 19 NA NA 44.3
Jul 23 Leading Index Jun 2.1% 2.1% 2.8%
Jul 24 Markit Composite PMI Jul P NA NA 47.9
Jul 24 New Home Sales MoM Jun 3.6% 3.6% 16.6%

calendar icon Top 5 Events for the Week

July 20—24, 2020

1.  Reopening vs. Virus Counts — All Week
2.  June Existing & New Home Sales — Wednesday/Friday
3.  Initial Jobless Claims — Thursday    
4.  June Leading Index — Thursday
5.  July Preliminary Markit PMIs — Friday

 

1.  Reopening/Virus Case Trends — All Week 

Positive economic news continues despite the drumbeat of increasing virus cases and that has emboldened stock traders to continue building on the multi-month rally (see Citi Economic Surprise Index below). Meanwhile, the Treasury market remains stoically unimpressed and residing in the well-worn range that has held since the beginning of April, three and a half months ago. The 10-year yield has ranged from 0.54% to 0.90% with most of the time spent between 0.60% and 0.70%. Perhaps it’s the realization that even with decent economic numbers of late, reopenings are slowing in some regions making the bounce in May and June hard to replicate. Or, it could be the upcoming expiration of supplementary unemployment benefits in a week. While Congress is likely to pass some form of extension, or renewed benefits, it could well be less than the current $600/week. That might give the 30 million consumers receiving the check a reason to horde more of the benefit dulling the consumption impact. In any event, stocks and Treasuries continue to trade in  different universes but the time to resolve that disparity could be fast approaching.

 

Citi Economic Surprise Index

 

2.  June Existing & New Home Sales — Wednesday/Friday

On Wednesday we’ll get June existing home sales—accounting for 90% of the residential market—which are expected to be up 21.5% to 4.75 million houses sold on an annualized basis after a disappointing May. On Friday we get New Home Sales—accounting for 10% of the residential market— with sales expected to increase 3.6% to 700,000 units on an annualized basis. So, in both existing and new home sales a nice rebound after a disappointing May is expected.

 

3.  Initial Jobless Claims — Thursday

The continued spike in virus cases present several downside risks to the tentative economic recovery. Workers in services jobs, such as leisure and hospitality, may see renewed job losses as those establishments close or delay reopening plans.  The Bloomberg consensus expects jobless claims for the week ended July 18 to come in  at 1.290 million down slightly from 1.300 million the previous week.  Bloomberg’s preliminary forecast for the July employment report is a reversal of the positive trend in May and especially in June. Bloomberg expects a drop in nonfarm payrolls of 1 million and an uptick in the unemployment rate, in line with persistently elevated levels of continuing claims that we see here.

 

4.  June Leading Index — Thursday

The Leading Index had been plumbing new depths in March and April, as one would expect, but the stock rally and reopening activity is expected to provide another push higher after the record-breaking bounce in May. The index is expected to print 2.1% for June after the aforementioned record 2.8% pop in May. Equity gains are holding and most other economic  releases have been better-than-expected (see Citi Surprise Index above)  and that should aid the Leading Index in posting another solid month.

 

5.  July Preliminary Markit PMI Readings — Friday

The Preliminary July Markit PMIs will be released Friday and will provide an early tell on whether the May/June economic rebound is continuing into July, despite the rise in virus cases. The Manufacturing PMI is expected to move from 49.8 to 52.0, flipping from a contractionary sector to a slightly expanding one. The Services Sector PMI is expected to have a slightly bigger gain moving from 47.9 to 51.0, also flipping from contraction to slight expansion. If expectations come to pass it’s another sign the recovery is weathering some of the early effects of rising virus cases and still posting positive economic momentum.

 

 


bar graph icon  Yield Universe

 Yield/Duration Relationship 

CenterState Disclosure

 


 

Tom Fitzgerald Signature 

Thomas R. Fitzgerald

Director, Strategy & Research

Tfitzgerald@centerstatebank.com

 

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