We’ve mentioned the recent bi-polar nature of stocks and it has been on full display this week. The Monday rally was fueled in no small part by the positive vaccine news from Moderna (95% effective). In the words of Dr. Fauci the results couldn’t have been better. The Moderna vaccine joins similarly positive Pfizer results a week earlier. A few other vaccines are reportedly nearing trial completion and are expected to post similarly positive results. But yesterday some of that good news looked less so as worries over distribution and what rising case counts will do to the economy before vast swaths of the populace are vaccinated, and that led to a risk-off mood in stocks while bonds rallied. Today it’s risk-on with bonds a bit on the back foot. Where do markets head in the months ahead? Well, in this week's podcast we sit down with Joe Keating, one of today's leading economists. Joe has been a frequent and popular guest and he’ll discuss third quarter GDP, vaccines, his forecast for a post-election world, and where stocks and bonds might be headed in the near future. Be sure to give it a listen as you continue planning for 2021. The itunes link can be found here and the Spotify link here. Note: the show is still in process of posting to itunes so check back later today if it’s not currently listed.
Fed Chair Powell took part in a moderated discussion yesterday at the Bay Area Council Business Hall of Fame Awards Ceremony. In the discussion Powell was asked about additional measures the Fed may employ if a Stimulus Bill 2.0 is delayed into 2021 or stalls altogether in partisan gridlock. The Fed has always tied the health of the economy to public health, and while several vaccines appear to be on the horizon between now and then lies what promises to be a tough road as virus cases continue to soar and the approaching holidays with the inevitable gatherings will only exacerbate that trend. Powell echoed earlier comments that it’s far too early, with the virus still raging, to even think about pulling back on accommodation.
The Fed has acted aggressively in pushing forward policy accommodation throughout the pandemic, and while they would dearly love some help from the fiscal side, that doesn’t appear to be coming in time or in size to provide relief for what looks like a challenging winter. One of the tools the Fed can do, and probably wanted to hold off until 2021, is increasing the maturities of bonds bought in the quantitative easing program. The graph below shows the maturity distribution with Treasury securities in green and MBS in yellow. The weighted average maturity is 11.69 years but as you can see, most of the Treasury holdings are inside five years. Moving new purchases further out the curve would impact all manner of long-term yields that price off Treasuries. That should keep rate-sensitive markets like housing and autos humming along. That’s the hope anyway.
October Retail Sales Disappoints — Is the Consumer Pulling Back?
One of the reports that might bring the Fed back into the market with additional monetary accommodation earlier than they would have liked was the October Retail Sales Report. The numbers were disappointing across-the-board missing modest expectations. Overall sales were up just 0.3% versus 0.5% expected and 1.6% in September. Sales ex-auto and gas were up just 0.2% versus 0.6% expected and 1.2% the prior month. The all-important control group—a direct feed into GDP—was up just 0.1% versus 0.5% expected and 0.9% in September. 5 out of 13 categories rose versus 11 of 13 the prior month.
The pace of sales was the slowest in six months, dating back to April, suggesting consumers are becoming more hesitant amid a surge in virus cases and the absence of another CARES Act-like stimulus package. The economy is two-thirds consumer consumption so any backsliding on their part suggests slower fourth quarter GDP growth than what is expected. Currently, the Bloomberg consensus for fourth quarter GDP is 4.0% and with virus cases spiking, and some rollback in openings already evident in some states, November and December could prove tough as well in getting the expected level of growth.
Agency Indications — FNMA / FHLMC Callable Rates
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