After Sluggish Week, All Eyes on Stimulus, Earnings 

It was a muddled week for markets. Positive developments, such as stimulus in the EU and a record rise in existing home sales competed with surging coronavirus cases, mixed earnings reports and a rise in jobless claims. After it all, markets posted a mixed week. Investors may be in a short-term holding pattern awaiting key upcoming events while digesting competing signals in the numbers.

One of those signals is the next round of aid from the federal government. We should hear more details about that this week, and there’s some urgency for policymakers as some unemployment benefits are set to expire Friday. We’re also in the thick of earnings season, with heavyweights such as Amazon, Apple, Alphabet, Visa and Pfizer set to report this week. Of course, markets are also balancing how a surge in coronavirus cases and the potential for new restrictions may weigh on the labor market and recovery.

As we’ve said previously, we’re in a bit of a fog right now. However, we remain constructive about markets and the economy over the next 12 months — as we follow progress on the four key milestones of a recovery we’ve outlined in past commentaries.

WALL STREET WRAP

Initial Jobless Claims Reverse Course: The number of Americans filing initial unemployment claims rose for the first time in nearly four months last week, reaching a seasonally adjusted 1.4 million for the week ended July 18. That’s up 109,000 from the prior week ending July 11. Initial claims had been on a steady, albeit decelerating, decline since March’s peak of 6.9 million. Continuing unemployment claims, however, maintained a downward trajectory — although continuing claims are reported on a week lag.

Keep in mind, weekly claims data can be somewhat lumpy from one week to the next so it’s too early to call a trend reversal. However, the rise in coronavirus cases in hotspots around the country could lead to new restrictions — as seen in California — and complicate the hiring picture. On the bright side, the total number of job postings online surpassed 7 million for the first time since April, according to data from ZipRecruiter. You can expect jobless claims to remain a key headline metric in the weeks ahead.

LEI Rises, Outlook Still Tepid: The Conference Board Leading Economic Index (LEI) increased 2 percent in June to 102, making it two consecutive positive months following a revised 3.2 percent increase in May. The LEI is designed to signal swings in the business cycle, using 10 components (including building permits, stock prices, manufacturing data) to smooth volatility in any single metric.

The increase in June reflects moves around the country to incrementally reopen the economy, with stock prices and labor market conditions (index subcomponents) contributing positively to the 2 percent gain. Still, the index is below February’s pre-pandemic reading of 112.1 and signals some weakness near term.

“Broader financial conditions and consumers’ outlook on business conditions still point to a weak economic outlook,” said Ataman Ozyildirim, senior research director at The Conference Board.

Stimulus Solidified in the EU: After four days of tense negotiations, all 27 European Union leaders on Tuesday reached an agreement on a pandemic fund worth more than $850 billion. The stimulus package will channel loans and grants to the hardest-hit countries in the union. International stocks, along with commodities, rose on the news. In addition to aid, the agreement is viewed as strengthening the solidarity and future of the 27-nation bloc, which had faced challenges this year.

“This was a summit meeting where I believe the consequences will be historic,” said French President Emmanuel Macron.

The EU agreement is in keeping with our view, which we expressed throughout this crisis, that policymakers around the world have and will come together to roll out aid and help their economies weather the storm.

Existing Home Sales Post a Record: U.S. existing home sales posted their largest jump on record in June. Sales rose 20.7 percent, the largest gain since 1968 when the National Association of Realtors started tracking the data. Historically low mortgage rates have helped pull homebuyers into the market after sharp declines in May. Supply of homes for sale fell 18.2 percent, further shrinking inventory levels. That’s helped push the average home price higher by 3.5 percent in June. New home sales also surged to an annualized 776,000 in May, the highest in nearly 13 years.

THE WEEK AHEAD

Powell Presser: On Wednesday the Federal Open Market Committee will meet and Fed Chair Jerome Powell will hold his regular, post-meeting presser. We don’t expect any big policy or rate changes from the Fed this week. However, any color from Powell on the recovery, the state of the economy and future central bank policy actions has potential to move markets. Of note will be Powell’s views on how rising case counts impacts the the central bank’s outlook.

In other Fed news, President Donald Trump’s nominees for the Fed’s Board of Governors, Judy Shelton and Christopher Waller, gained approval from the Senate Committee on Banking, Housing and Urban Affairs. Waller, considered a more traditional nominee, was approved on an 18-7 vote. Shelton, a more controversial pick who has been an outspoken critic of the Fed and a gold standard advocate, was approved 13-12 on a party-line vote. Both head to the full Senate for approval. Senator Mitt Romney has already publicly stated he plans to vote against Shelton.

China Updates Manufacturing, Service: China’s National Bureau of Statistics will release manufacturing and non-manufacturing PMIs from July later this week, followed by Caixin/Markit PMIs on Monday. The official NBS data measures China’s larger enterprises, whereas the Caixin/Markit index features a larger mix of medium- and small-sized companies.

Investors keep an eye on China data for a few reasons. For one, the Chinese economy is serving as a forward-looking coronavirus indicator, as it has been several months ahead of the U.S. in terms of the addressing the crisis. These data are also some of the first released each month, setting the tone for expectations in the following weeks. Finally, China is a major global economy and positive or negative news sends ripples through the rest of the world’s markets.

Consumer Spending on Tap: Another metric we’re watching this week is a new round of spending data for June. Growth is expected to continue, though not at the same pace as May. As we’ve said before in these commentaries, this is a critical gauge of economic health as consumer spending accounts for a significant share of GDP.

A Couple More Items on the Radar: Republican Senators are slated to reveal their aid plan this week, which would kickstart discussions with Democrats. Senate Majority Leader Mitch McConnell said their plan would include a second round of direct payments to Americans, funds for schools and another round of PPP funds for small businesses. Investors will also be watching earnings from tech heavyweights Amazon, Facebook Alphabet and Apple, along with consumer/COVID-19 names such as Pfizer, PayPal, 3M and Shopify.

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