Market Snapshot August 10, 2020


Good Monday AM,


Bonds started weak but have made their way back to unchanged. Stocks are continuing to surge and look to have more room to run from what the technicals show. It is just so counter-intuitive. Huge unemployment, low consumer confidence, low retail sales, negative GDP and stocks continue to surge. I am sure this normalizes at some point. Congress, unable to come to an agreement last week before heading out on break, left 20mm Americans without resolution on their unemployment benefits. Millions more waiting to hear about foreclosures/evictions and student loan forbearances. Mr. Trump signed executive orders on Saturday addressing the major issues (extending bonus unemployment benefits of $300/week and asking states to match with $100/week) but despite congress’s inaction, they will likely file suit to block Mr. Trump form overreaching his authority (Congress retains the power over the budget). Bonds have been on a tear for weeks now that they likely need a rest. Below is a great synopsis from Matt Graham on what is needed for bonds to continue to improve.


What would need to happen for things to go well for bonds in the coming days?


Successful Navigation of Supply.  This is an auction cycle week for Treasuries with record setting levels of 3, 10, and 30-yr bonds being auctioned on Tue/Wed/Thu respectively.  Traders know about auction times and amounts ahead of time, but there is still something to be learned in the strength (or weakness) of the auction process. Think of all the various traders participating in the auction like the owners of many different trucking companies and think of Treasury supply as a mountain that must be moved.  All parties involved know how big the mountain is and they know how many dump trucks they own, but there’s still a lot of variability in the process of getting the mountain from one place to another.


Stimulus Considerations.  This is part and parcel of the Treasury supply considerations above.  The next round of fiscal stimulus means a new mountain is popping up–one that will also need to be moved (Treasury debt is the key source of funding for fiscal stimulus).  As negotiations continue (and as presidential proclamations already roll out), the expected size of the mountain is constantly being tweaked and the threat of it’s arrival is becoming more immediate.  If lawmakers can agree  on a stimulus plan that seems like it would be effective enough while not being bigger than the market expects, that would be good for bonds.  Delays in the process can also help to some extent as they push the “mountain moving date” back.


More Covid and Weaker Data.  These are the basic reaction functions for the bond market.  If Covid numbers begin surging again (they’re arguably leveling off despite remaining elevated in several states) and if economic data is weaker than expected, that would generally (probably) be helpful for the bond market.  That said, as far as this particular week is concerned, econ data is a relatively small concern.  Covid numbers are much more important, but much less likely to do anything beneficial for bonds given the leveling trends in the problem states.


Nonetheless, there are a few econ reports that traders will tune into this week.  The biggest ticket will be Friday’s Retail Sales report for July.  Before that, we’ll get producer and consumer inflation data on Tuesday and Wednesday respectively.  Inflation data hasn’t garnered a market reaction recently, but it’s being watched in a general sense for 2 reasons.  If it keeps falling, the Fed’s green light for stimulus will shine even brighter.  But if inflation unexpectedly begins to increase, it will force a conversation about what the curtailment of Fed policies might look like.  We all remember the taper tantrum?


Loved hearing that the largest mall owner in the U.S. has been in talks with Inc., the company many retailers denounce as the mall industry’s biggest disrupter, to take over space left by ailing department stores. Amazon is already ruling the world but this will also protect commercial real estate values.


Last how about this little fun fact. The big tech stocks (Amazon, Apple, Facebook, Google, Microsoft) have a market capitalization of 8Trillion, roughly the same as ALL of the Dow Jones. WOW!


Please remain safe and stay healthy, make today great!