September 29, 2020
There are quite a few Fed members on the speaking docket this week. On the economic front, the major industrial surveys will be released on Wednesday (Chicago PMI) and Thursday (PMI/ISM). Employment takes center stage with ADP on Wednesday and the BLS report on Friday. Politics will also be of importance with the first debate tonight at 9 pm and the likely re-upping of the Cares Act stimulus potentially coming at any time this week or next. Politics aside, the markets will probably do better with a strong Trump/weak Biden debate showing.
ECB President Christine Lagarde sounded the alarm against a stronger Euro and issued a warning about deflation. To wit: “A stronger euro is set to weigh on inflation.” With the Euro sitting at two-year highs, the ECB has likely seen enough euro strength for their liking. This is yet another reason the dollar may continue to break out and head higher versus the euro and other currencies in the coming weeks.
The markets surged yesterday with strong breadth. The VIX was the only fly in the ointment, which despite a 1.6% gain in the S&P 500, was up slightly on the day. With yesterday’s gains, the S&P is sitting at the 50-day moving average (3353) and only 20 points below the 20-day moving average (3373). Those averages may prove to be the only roadblocks on the way to new highs. We added exposure yesterday as the technical situation is improved. We remain cautious as we are very aware of the troubling economic and political environment. But, as they say, markets like to climb a wall of worry.
As shown below, equity volatility (VIX) remains more than two times higher than its recent record lows from 2019 and early 2020. At the same bond volatility (MOVE index) is at all-time lows as the Fed, via aggressive buying, has sharply reduced the daily trading range of U.S. Treasuries. Over the last ten trading days, the difference between the high and low closing yields for the ten-year UST was 2 basis points. Since 1962 the average ten-day difference is 22 basis points.
Evercore, with the help of data from Redfin, shows an 18% jump in homebuyers’ preference to move out of urban areas, in just the last 6 months.