Summary and Price Action Rundown
US equities retrenched slightly today after a month of powerful gains that were spurred by positive vaccine news and a relatively clear and orderly US election process, followed by pro-growth cabinet nominations by the incoming Biden administration. The S&P 500 backed off from Friday’s record high, declining 0.5% to shave year-to-date upside to 12.1%. The tech-heavy Nasdaq outperformed as economic fundamentals weighed on the Dow Industrials, which still registered its best monthly performance since 1987. For context, the Dow, which tends to be more sensitive to economic fundamentals, has underperformed significantly during the pandemic but was revitalized by the announcements of effective vaccines throughout November. The Euro Stoxx Index and Asian equities also retreated to close the month. A broad dollar index edged above its multi-year low today, while Treasuries have remained steady, with the 10-year yield hovering at 0.86%. Brent crude prices retreated below $48 per barrel as the ongoing OPEC meeting kept traders in suspense (more below).
US Economic Data Shows More Hints of Softening
With US economic figures providing some garbled signals over the past few weeks, and analysts bracing for further deterioration amid the ongoing resurgence in Covid-19, today’s releases added to the evidence of a renewed slowdown. The MNI Chicago Business Barometer fell to 58.2 in November from 61.1 in October. New Orders dropped 5 points to the lowest level since August, while Production fell 1.2 points. Inventories slipped 2 points to a three-month low. However, Supplier Deliveries jumped 4.9 points to the highest level since May as firms saw delivery delays, while Prices at the Factory Gate surged 9.8 points to the highest level in two years. A special question asked: “Does the outcome of the general election have any effect on your forecast? “A majority 73.2% said that the election results do not influence their forecasts, while 12.5% saw their forecasts increase and 14.3% reported a decrease.” Similarly, the Dallas Fed manufacturing gauge undershot expectations, printing 12.0 versus a consensus estimate of 14.3 and the prior month’s 19.8.
Also, the Small Business Confidence index sank to its lowest level on record at a reading of 48, one-point below the previous low reported in the second quarter (Q2) during the worst of the pandemic-driven economic turmoil. Though responses in the current fourth quarter (Q4) survey, conducted in the period between November 10-17, were impacted by the virulent resurgence in Covid-19, the reinstatement of targeted lockdowns, and the Congressional deadlock in providing additional fiscal relief, survey-data suggests that President-Elect Biden’s victory further compounded the decline in relation to the Main Street outlook on taxes and regulation. Of the 2,200 small business owners polled, 53% expect tax policy to have a negative impact on their business during the next 12 months, and 49% said government regulation will have a negative impact over the same period. While the decrease in outlook is notable, responses from small business owners are heavily skewed by their political affiliations, and the index overall leans conservative. Separated by political connection, 75% of Republicans believe tax policy will have a negative effect and 72% said regulations will be negative, while only 15% and 11%, respectively, of Democrats believe tax and regulatory changes will hinder business operations. Overall, the survey indicates 34% of owners believe Joe Biden will be good for small business, while 55% say the opposite. Though by political affiliation, 89% of Republicans are pessimistic of the Biden administration on small business and 86% of Democrats are optimistic. The stark contrast in business sentiment following the election “reveals how deeply politics has become embedded in the public’s assessment of the economy, and in particular how divided the country is,” stated Laura Wronski, research science manager at SurveyMonkey. She continued to note over the past several quarters that Republican respondents consistently reported a higher degree of confidence than Democrats did, and post-election, that trend has flipped. At the moment however, the feasibility of the Biden team’s tax and regulatory proposals are unclear, and contingent upon Georgia’s runoff Senate races, as a Republican-controlled Senate would surely constrain Biden’s policy agenda.
Lastly, pending home sales in November fell 1.1% month-on-month, well below market expectations of a 1% gain, and following a 2% drop in October. However, this still leaves sales up 20.2% year-over-year following a 20.8% rise in September. Contract activity was mixed among the four major US regions, with the only positive month-over-month growth happening in the South, although each region saw year-over-year gains in pending home sales transactions. Lawrence Yun, NAR’s chief economist said, “The housing market is still hot, but we may be starting to see rising home prices hurting affordability. Both the inventory of homes for sale and mortgage rates are now at historic lows.”
Today’s mixed economic readings follow last week’s pre-holiday data dump that also showed signs of backsliding in weekly jobless claims and October Personal Income.
Vaccine Developments in Focus
With trials showing impressive effectiveness of the various vaccines, investors are now pondering the remaining unknowns of the rollout timeline and public uptake. Moderna’s stock rose 20.2% today on news of its plans to apply for emergency authorization use for its vaccine, a move that could drastically change the course of the pandemic. The results of Moderna’s Covid-19 vaccine trial were released today showing 94.1% efficacy, bolstering hopes of initial vaccine deployment before year’s end. Out of 30,000 participants, only 11 of the 15,000 that received the vaccine developed Covid-19, compared with 185 from the 15,000 who received the placebo. No severe cases emerged in the subset receiving the vaccine compared to 30 in the placebo subset, implying a near 100% efficacy at preventing severe cases. Moderna stated it will file with the FDA on today for emergency authorization of the vaccine following Pfizer’s application on November 20th. The FDA will review both Pfizer and Moderna’s filings on December 10th and 17th respectively, after which, if the panel grants emergency authorization, the process will escalate to the advisory committee from the CDC for recommendations on the first recipients of the vaccine. Once those recommendations are made, vaccines are cleared for distribution and use. Moderna has stated it expects to have 20 million doses by the end of 2020 and as many as 1 billion doses globally in 2021. – MPP view: Investors are still caught in the transition phase between the grim near-term public health reality and its economic consequences, and giddy optimism over the longer term view of widespread distribution of the effective vaccine delivering us from the pandemic.
Additional Themes
Oil Slides with OPEC+ Lacking Consensus – The conclusory cartel meeting was rescheduled from tomorrow to December 3rd as reports suggest continued disagreement over the potential extension of price-supporting output restrictions beyond their scheduled expiry in January. Oil prices reversed a portion of their recent upside today, but remain close to multi-month highs, as caution sets in over the possibility of a less ambitious extension or even a deadlock. For context, prices of international benchmark Brent crude and US benchmark WTI both reattained levels from early March last week amid a confluence of bullish factors, including the brightening demand outlook stemming from the encouraging Covid-19 vaccine developments, a weakening dollar, and indications that Saudi and Russia were set to push their fractious OPEC+ allies to hold to their supply curbs well into 2021, with a three-month extension the consensus expectation. Reports now suggest that the timeframe could be limited to two months or feature a gradual tapering of the curbs over three to four months. The UAE is said to be one of the key holdouts and had reportedly threatened to withdraw from OPEC earlier this month over dissatisfaction with other members’ uneven compliance with the cartel supply cuts. Nigeria and Iraq are the two OPEC members that have struggled to implement the curbs and have been pushed for compensatory cuts. – MPP view: Like stocks, oil prices are in a transition phase as traders try to look past the dire near-term outlook to the post-vaccine demand surge. This will make cartel discipline harder to maintain into 2021, but Russia/Saudi should succeed in securing one last supply curb extension at their meeting this week. As we have expected, anticipation of this last OPEC boost will provide some short-term support to prices, and post-election US stimulus dynamics (when they materialize) should provide some additional lift, but we expect the dismal demand dynamics of the coming quarters to keep prices capped, though this short-term rally has exceeded our expectations. This burst of optimism in oil markets has increased the risk that OPEC fails to deliver meaningful additional support to the market in this week’s pivotal meeting, as member discipline will be questionable.
Reserve Bank of Australia Meeting – This evening the Reserve Bank of Australia (RBA) will hold an interest rate meeting. At the November meeting the RBA lowered its cash rate to an all-time low of 0.1% from 0.25%. Policymakers said they would buy A$100 billion of government bonds with maturities of around five to 10 years over the next six months. The RBA also cut its target for three-year bond yields to 0.1%, from 0.25%, to align with the cash rate, which, it pledged will remain unchanged until inflation is sustainably within its 2-3% target band. GDP growth is expected to be around 6% over the year to June 2021 and 4% in 2022 while the unemployment rate is expected to remain high, but to peak at a little below 8%, rather than the 10% expected previously. This meeting is not expected to see any significant change in policy or statement as the November saw significant loosening in policy. – MPP view: We shall see if the RBA mentions its currency during the meeting, which is at its highest level against its US counterpart since 2018, but even if so, there should be scant impact. We expect the Biden administration, when it takes over, to quietly make the case to US allies that now is a particularly inauspicious time for currency controversies as the US attempts to course-correct on pandemic containment and patch up its raw internal political and socioeconomic divisions.