With Stimulus 2.0 now a decidedly after-election event, if even then, the market has turned squarely to virus trends and those haven’t been good. Combine that with no stimulus anytime soon and that has led to a decent bout of risk-off action this week. As case counts and hospitalization rates continue to increase, combined with similar trends in Europe, the market is rethinking whether the recovery has proceeded as far as it can for the time being. Treasuries rallied in the risk-off tone, but not as much as you would expect, which leads us to believe the market still wants to push yields higher once this bout of concern passes, assuming it does. But that is quite an assumption as we head into colder weather and increasing odds that virus case counts and the like will continue to move higher. Thus, we are squarely back in the range that has prevailed since March with possibly a surprise election result the only thing that might break the stranglehold.
Not that the market is paying a lot of attention to economic releases this close to the election, it will once we get passed next week. But for now a trio of reports yesterday still point to an economy that is either doing better-than-expected or right on most consensus estimates. First, September Durable Goods Orders came in higher-than-expected with overall orders up +1.9% month-over-month, much better than the +0.5% consensus expectation and the 0.4% gain in August. Ex-transportation the gain was +0.8% versus +0.4% anticipated. Within the details, orders of nondefense ex-air outperformed at +1.0% in September versus +0.5% expected while August was better at +2.1%. The one modest disappointment was in the shipments of the same core category (a proxy for business equipment), but at +0.3% in September it just missed the +0.4% consensus. Overall, it’s a solid reading that underscores a manufacturing sector that continues to strengthen from the steep drop in the spring. It shows demand stabilizing after global supply chains were disrupted by the pandemic.
This week is full of housing-related readings and one that we received yesterday continues to show home prices heading in a steeper trajectory. The S&P CoreLogic Case-Shiller 20-City Home Price Index rose 5.2% year-over-year when a gain of 4.2% was expected and better than the 4.12% in July. The 5.2% rate is the highest since July 2018 when the annual gain was 5.91%. From there annual gains started ebbing to 3.14% in August 2019 before starting their present climb. So, price gains are not in bubble territory yet but heading in that direction.
Consumer Confidence Remains Over 100 But Well off Pre-Pandemic Levels
With two-thirds of the economy consumption-based, and we’ll see that in the GDP numbers due tomorrow, it’s critical to look at the confidence of said consumer for tells on future spending and hence GDP. While there was a predictable dip at the early stages of the pandemic it never fell to levels of the Great Recession, perhaps due to the stimulus measures and furloughed workers hopes for a quick return to work. For October, confidence mostly maintained the bounce in September slipping a bit to 100.9 from 101.3. September saw a sizeable improvement in confidence jumping from 86.3 or 15 points, so mostly maintaining the bounce from September is notable. However, with confidence levels hovering around 100 they are well off pre-pandemic highs in the 130’s as shown in the graph so maintaining the bounce from September is not in reality that big a move. We really need it to continue higher.
For comparison purposes, the October 2016 reading, before that November election, was 100.8, nearly the same reading. Not sure what to make of that as the index was range-bound for much of 2016 and that is certainly not the case in 2020. In any event, confidence is off pandemic lows it seems to be plateauing around 100 which may limit consumer spending in the weeks and months ahead and with colder weather and rising virus cases, it’s hard to envision the index heading materially higher until we get into 2021 and hopefully see real improvement in virus trends and possibly an effective vaccine.
Agency Indications — FNMA / FHLMC Callable Rates
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