US Close: Another record high, Yields rally ahead of Jackson Hole, Delta and vaccines, 5-year auction, USD turns negative

The S&P 500 index made a fresh record high today, topping 4,500, the end of year target for many analysts. Today’s rally stems from positive developments in the fight against, COVID, a decrease in durable goods orders, and optimism that the economy will see a few trillion dollars in additional stimulus at some point over the next month or two.

The US stock market remains excessively bullish, but still ripe for its first 5% percent pullback in almost a year as a potential peak in stimulus is here.  Fed Chair Powell’s Jackson Hole speech will likely emphasize the economic recovery is well past the crisis and that they will shortly announce they are ready to taper asset purchases.  Powell still has a fresh memory of his communication mistake when he said the pace of balance sheet reduction was on autopilot in December 2018.  The bond market didn’t blink when the US stopped its corporate bond buying program, so risk appetite could remain if Powell gives himself many outs.  Powell could list out several conditions that could trigger a return to an accommodative stance.  With the Biden administration coming very close to delivering another $4 trillion in stimulus, the Fed can confidently start normalizing monetary policy.

Virus
The theme over the next several weeks will be Corporate America’s insistence on getting their employees vaccinated.  Delta Air Lines announced any employee who is unvaccinated will pay $200 per month to stay on the company’s health care plan beginning on November 1st.  CEO Bastian said that the average hospital stay for COVID-19 costs the carrier about $50,000 per person.  Many more companies may follow Delta’s lead and this could be just the incentive needed to get the country closer to herd immunity.

FX/Treasuries
The dollar gave up earlier gains as risk appetite runs wild as US stocks continue to rise further into uncharted territory.  Treasury yields rallied early as many fixed income traders begin to price in further bearishness in Treasuries.  A strong five-year auction shows bidding remains solid and that investors are not worried about Fed Chair Powell turning hawkish on Friday.

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