Author: marketsp

Looking Ahead – Fresh Squeezed 2-5-2021

Looking Ahead – Fresh Squeezed

 

A week ago, when shares of GameStop and other heavily-shorted companies were still soaring and exacting a heavy toll on the hedge funds caught offside, analysts had their heads on a swivel looking around for the next target of the Reddit WallStreetBets short-squeeze mob. The crosshairs locked onto silver, spiking it nearly 15% last Friday morning but, after a half-session head fake, it settled back down, with the CME not waiting long to dial up margin requirements on transactions in the precious metal. Another reason a silver short-squeeze never caught on seemed to be that positioning was not heavily short in the first place, despite what a few posts on Reddit apparently claimed, spurring plenty of dissention in the ranks of fellow Redditors.

In scanning for other areas of heightened investor vulnerability to countertrend price action, plenty of analysts flagged another asset with heavily-concentrated downside positioning that had recently halted its precipitous slide and had been showing signs of incipient reversal. But this was no penny stock or nearly bankrupt retailer but rather an asset that would be particularly insusceptible to even the most concentrated retail speculative energies – the US dollar.

 

Currency markets are notorious for wrongfooting consensus trades and bearish positioning on the dollar has been as consensus as they come. A fiscal flood + determined Fed dovishness + risk on = dollar weakness, right?

Sentiment on the dollar was similarly dire at the beginning of 2018, but positioning was not even as extreme as it is now, and the dollar refused to break lower for a few choppy months and then surged higher, as US economic outperformance took hold. At the time, gold prices sank and oil prices climbed (a somewhat atypical divergence), while the dollar marched upward in an almost uninterrupted two-month, 7% ascent, while US equities ran higher in tandem.

 

A similarly dollar- and risk-positive scenario, with US growth diverging to the upside from the G-10, may be emerging this year to upend consensus bearishness on the greenback. After a run of dismal December data amid the seasonal and mutated Covid-19 resurgence, further backsliding in early 2021 seemed like the clear base case, particularly given that that second pandemic relief bill in 2020 was delayed until late in the year. But recent US economic figures have been surprisingly resilient, despite a slight downside miss on January jobs numbers, and even outright strong in the case of housing market metrics and survey-based gauges like purchasing managers’ indexes (PMIs). Meanwhile, the Biden administration has decided that bipartisanship plays a distant second to their intent and urgency to deploy a super-sized pandemic relief package, while vaccine distribution appears to be picking up momentum after a slow start, with 35 million doses now administered and a trend that hits 100 million by mid-April – plus, the vaccines are deemed to be effective against the current set of mutations. And with the Reddit short-squeeze army regrouping in their barracks for now, the abatement of volatility has allowed investors to refocus on the brightening growth outlook.

 

One key distinguishing factor between the current setup and early 2018 is Fed policy. In 2018, Chair Powell was guiding the policy rate steadily upward, continuing the trajectory of 2017. Now, the FOMC is nearly unanimous in trying to tamp down speculation that they will taper their asset purchase program anytime soon, while “not even thinking about thinking about raising interest rates.” But it seems that the markets are skeptical, as futures continue to reflect expectations for incrementally earlier rate hikes than the Fed is projecting. Economic and market conditions later this year certainly seem aligned to test the Fed’s commitment to their current ultra-dovish formulation in the face of higher inflation and strong growth, which may be pivotal moment for any ongoing dollar rally.

 

Looking ahead to next week, the focus will be on efforts to pass the American Rescue Act through the narrow straits of the slim Democratic majorities in both houses of Congress. On the data front, US inflation figures will be in the spotlight as market-based gauges of inflation expectations advance to multi-year highs. The impeachment trial of former President Trump is also on the docket. Lastly, next week also features the last major concentration of fourth quarter earnings reports, with Twitter, GM, Coca-Cola, Disney, and Expedia among the most high-profile.

 

 

  • US Consumer Price Data
  • Global PMIs
  • Bank of England
  • Reserve Bank of Australia
  • US Initial Jobless Claims

 

 

 

Global Economic Calendar: Price check

 

Monday

The week begins with German Industrial Production. In November, IP rose 0.9% m/m, following an upwardly revised 3.4% increase in October and above market forecasts of 0.7%. Output increased for intermediate and capital goods, while production of consumer goods decreased 1.7%. It is the 7th consecutive month of rising industrial production although it still was 3.8% lower than in February, the month before the pandemic began.

 

The evening brings the National Australia Bank’s Index of Business Confidence, which dropped sharply to 4 in December from an upwardly revised 13 in November, reflecting the impact of the Sydney COVID-19 outbreak. Sentiment deteriorated in all industries, except mining, construction, and transport & utilities. Meanwhile, business conditions rose to 14, the highest since September 2018, from 7 in November, with all three sub-indices were above average for the first time since early 2019. Capacity utilization saw further gains and is now around its long-run average and pre-virus levels, while forward orders pulled back but remain in positive territory. “The rise in the employment index is very encouraging and is consistent with the big gains we’ve seen in the official jobs data,” said Alan Oster, NAB Group Chief Economist.

 

Tuesday

German Balance of Trade kicks off the day. The trade surplus narrowed slightly once again to EUR 17.2 billion in November from EUR 18.5 billion a year earlier. Exports decreased 1.3% to EUR 111.7 billion, the 9th straight annual decline and imports edged down 0.1% to EUR 94.6 billion. Sales to the EU declined 1.7% and those to the Eurozone were down 2.2%. Shipments to China increased 14.3% while those to the US fell 3.1%. Imports from the EU went up 2.6% and those from China 5.4%, while purchases from the US fell 1.5%.

 

The NFIB Small Business Optimism Index fell to 95.6 in December, the lowest since May and compared to 101.4 in November. This month’s drop is one of the largest as the outlook of sales and business conditions in 2021 deteriorated sizably. Small businesses are concerned about new economic policy in the new administration and a further spread of COVID-19 that is causing renewed government-mandated business closures across the nation.

 

The Jobs and Labor Turnover Survey (JOLTS), showed the number of job openings in the US declined by 105 thousand to 6.527 million in November, remaining below its pre-pandemic level of 7 million. Job openings decreased in durable goods manufacturing by 48K, information by 45K, and educational services by 21K. The number of job openings was little changed in all four regions. Meanwhile, the number of hires rose by 67K to 6.0 million, while total separations including quits, layoffs and discharges, and other separations jumped by 271K to 5.4 million.

 

The Consumer Price Index in China closes out the day. In December the CPI rose by 0.2% y/y, after a 0.5% fall a month earlier and compared with market consensus of a 0.1% gain. Food prices increased 1.2%, reversing from a 2.0% fall in November, amid adverse weather and rising demand ahead of the Lunar New Year festival. Pork prices fell less after soaring last year due to the African Swine outbreak. Also, there were rises in cost of health, education, and other goods and services. At the same time, prices of household goods and services were flat for the second straight month, while cost fell for transport, rent, fuel, and utilities, and clothing. On a monthly basis, CPI increased by 0.7%, the most since February, after a 0.6% fall in November. For full 2020, consumer prices rose 2.5%.

 

Wednesday

Continuing the inflation data this week the day begins with the German consumer price index CPI. In January, the CPI increased 1% y/y, the first rise in seven months, preliminary estimates showed. The temporary reduction in the VAT rate aimed to revive the economy during the coronavirus crisis ended on December 31st. Higher CO2 prices and an increase in minimum wages from January also accounted for the CPI rise. On a monthly basis, inflation increased to 0.8% from 0.5%. The harmonized index went up 1.6% year-on-year and 1.4% month-over-month.

 

In the US, CPI increased 0.4% m/m in December, higher than 0.2% in November and in line with expectations, mainly driven by an 8.4% increase in the gasoline index, which accounted for more than 60% of the overall increase. The other components of the energy index were mixed, resulting in an increase of 4% for the month. The food index rose 0.4% in December, as both the food at home and the food away from home indexes increased 0.4%. Other increases were also seen for shelter, apparel, and new vehicles. Furthermore, Core CPI, which excludes volatile items such as food and energy, rose 0.1% m/m, following a 0.2% increase in November and matching market expectations.

 

Wholesale Inventories increased 0.1% m/m in December, following a flat reading in November. Nondurable goods inventories rebounded while durable ones stalled, following a 0.7% rise in October.

 

The day closes with the Westpac Consumer Confidence Index. Consumer Confidence in Australia decreased to 106.99 points in January from 112 points in December.

   

Thursday

The focus on a light data day will be US Initial and Continuing Jobless Claims. In the last week of January, 779K Americans filed for unemployment benefits, a significant decrease to from the previous week’s level of 812K, and also well below market expectations of 830K. It marks the third straight week of falls in claims and the lowest amount since the last week of November, however, still far above pre-pandemic levels of around 200K.

 

Friday

The UK Trade Deficit rose to GBP 5 billion in November from an upwardly revised GBP 2.3 billion in October. It was the largest monthly trade shortfall since April of 2019. Imports surged 8.9% to GBP 55.3 billion, as an 11.9% jump in purchases of goods more than offset a 1.1% decrease in acquisitions of services. Exports rose at a slower 3.9% to GBP 50.3 billion, as goods shipments increased 7.5% while services sales were down 0.3%.

 

UK Industrial Production edged down 0.1% m/m in November, compared to market forecasts of a 0.5% gain. It is the first decline in industrial output since a record 19.6% plunge in April, as the country was under another lockdown during the month of November to prevent the spread of the coronavirus. The decline was led by falls in mining and quarrying, electricity and gas and water and waste. In contrast, factory output rose 0.7%, led by transport equipment. Production output was 4.7% below February of 2020, the previous month of “normal” trading conditions, prior to the coronavirus pandemic. Year-on-year, industrial output sank 4.7%.

 

Eurozone Industrial Production rose 2.5% m/m in November 2020, a seventh consecutive month of growth and compared with market expectations of a 0.2% increase. Capital goods output jumped 7.0% and intermediate goods production advanced 1.5%. Meanwhile, output of durable consumer goods, such as televisions and washing machines, dropped 1.2%, after a 1.5% rise in the previous month. Production also fell for both energy and non-durable consumer goods.

 

The University of Michigan’s Preliminary Consumer Sentiment for February will close out the week. In January the index was revised lower to 79 from a preliminary of 79.2 and below 80.7 in December. There was a decrease in the assessment of current economic conditions, while the expectations component improved slightly. On the price front, both one-year inflation expectations and five-year were unchanged at 3% and 2.5%, respectively. “The overall level of the Sentiment Index has shown only relatively small variations since the pandemic started, averaging 81.5 in 2020, marginally above January’s 79.0. Needless to say, sentiment levels were well below the average of 97.0 from 2017 to 2019. Importantly, the level of key confidence indicators remained well above prior cyclical lows despite the sudden historic collapse in economic activity.”

Morning Markets Brief 2-8-2021

Summary and Price Action Rundown

Global risk assets are building on last week’s gains as optimism continues to build for an impending economic recovery amid upbeat growth signals, upsized US fiscal stimulus, and expanding Covid-19 vaccine distribution. S&P 500 futures indicate a 0.3% higher open after the index advanced 4.7% last week to put gains for the year at 3.5%. Equities in the EU are also continuing upward, while Asian stocks posted robust gains overnight. A broad dollar index is hovering below its recent two-month highs, while longer-dated Treasury yields are continuing to edge higher, with the 10-year at 1.19%. Brent crude prices are extending their gains above $60 per barrel amid rising optimism over demand.

 

Secretary Yellen Advocates Bold Pandemic Relief Bill

The Biden administration and Congressional Democrats move ahead with unilateral approach to the American Rescue Act as Treasury Secretary Yellen makes the case for super-sized stimulus. Investors are noting Secretary Yellen’s strong advocacy for the $1.9 trillion plan on Sunday’s news programs, in which she indicated that a return to full employment would be possible next year with this degree of muscular fiscal support. This follows a series of maneuvers designed obviate the need for GOP support for the program and some high-profile criticism from ex-Treasury chief Larry Summers, who expressed concerns that overdoing stimulus would overheat the economy and spur inflation. Late last week, the Senate approved 51-50 a measure, with minor amendments, allowing Democrats to pass Biden’s relief plan through budget reconciliation. Votes for the measure fell strictly along partisan lines, with Vice President Harris casting the tie-breaking vote. Small amendments, including holding off on minimum wage increases and ensuring that wealthy Americans do not receive the $1400 stimulus payments, were added during the session, though none remain binding. The measure now returns to the House for a vote on the amended measure and, if passed, will proceed to the indicated committees for finalization by March. On Friday, President Biden emphasized that the Covid-19 relief bill stands as a higher priority than bipartisanship, offering his strongest criticism of Republican lawmakers since taking office and indicated that the Democrats would go it alone. if necessary, to get needed aid to struggling Americans. Speaker Pelosi has stated that the budget resolution will be brought to the floor later today and that committees will begin working on the specifics of the bill starting today. – MPP view: Though not every penny is likely to make it through, the Biden administration has strongly committed to the upper end of its stimulus spending range and put the marker down that it will aggressively pursue its legislative agenda, and so far it appears that Dem moderates like Senator Manchin are disinclined to stand in the way, all of which is positive for stocks and growth.

Economic Optimism on the Rise Despite Tepid Payrolls

Although this week’s data calendar is relatively light, market participants are increasingly on the lookout for signs that the US recovery is getting a head start. In January, the US economy added 49K jobs, missing the consensus estimate of a 100K rise but still representing an improvement on December, while the unemployment rate dipped from 6.7% to 6.3%. The nonfarm payrolls print was preceded last week by Thursday’s initial jobless claims tally, which showed that 779K Americans filed for unemployment benefits in the last week of January, a significant decrease to from the previous week’s level of 812K, and also well below market expectations of 830K. It marked the third straight week of falls in claims and the lowest amount since the last week of November but remains far above pre-pandemic levels of around 200K. And on Wednesday, payroll provider ADP estimated that private businesses hired 174K workers, handily outpacing market expectations of an increase of 49K, and recovering from a 78K decline in December. Other US data last week was also solid, with January Purchasing Managers’ Indexes (PMIs) and December factory orders and durable goods reflecting robust activity. January consumer price (CPI) data and weekly jobless claims figures will be in focus this week. Regarding the former, recent inflation readings have been punchier than expected though January’s CPI reading is expected to show little change from December. Market-based gauges of inflation expectations are at multi-year highs, however, revealing investor expectations of rising price pressures. – MPP view: We think inflation data will be noisy after the distortions of 2020 but that the pandemic will, over the medium to longer term, have an inflationary sting in the tail. We expect the Fed to hold to its commitment to be permissive rather than proactive in its policy posture toward the first wave of post-pandemic price pressures that are likely to materialize in the second half of this year. We expect that, around the summer or fall, the Fed passing the test of its new inflation targeting policy will restrain dollar appreciation and keep the Treasury yield curve biased toward steepening.   

Additional Themes

Earnings Season Continues to Provide Little Direction for Stocks – Fourth quarter (Q4) corporate results continue to be overshadowed by overarching market themes, like the GameStop episode and the brightening growth outlook, and today’s calendar is light. This week features the last major concentration of reports, with Twitter, GM, Coca-Cola, Disney, and Expedia among the most high-profile. With 295 of the S&P 500 companies having reported Q4 results so far, 74.5% have topped sales expectations and 81.0% have beaten earnings estimates, continuing the pandemic trend of overly conservative analyst forecasts. To this point, however, upside surprises on these quarterly figures have provided scant support for stock prices, though last week featured broadly more upbeat price action amid the waning volatility in short-squeeze stocks and better-than-expected growth data.

Latest Podcast – On this week’s Macrocast, we unpack the complicated jobs report, discuss the Biden stimulus package and its critics, and take a moment to review the Trump economy — including discussing how the jobs numbers would have played out in an alternate universe with no pandemic. We also chat about the potential for a pandemic-related baby bust and its economic impact. Latest Macrocast

Tom Terrific – In his first year with the Tampa Bay Buccaneers, Tom Brady won his seventh Super Bowl in a lopsided contest last evening against the Kansas City Chiefs. He now has more Super Bowl wins than any franchise in the league, with New England and Pittsburgh having six each. – MPP view: Patriots Nation is strongly represented at MPP and we were rooting heavily for Brady, which was slightly bittersweet but far more sweet than bitter. 

Five Minute Macro 1-25-2021

The Biden Relief Bill remains front and center, while investors wait for the Fed on Wednesday and corporate earnings season continues. Finally, data continue to show the uneven effects of the pandemic and US-China tensions continue to percolate.

Five Minute Macro 1-19-2021

In this week’s Five Minute Macro, the Biden administration lays out a two-stage stimulus plan, while political tensions continue to simmer and Fed sends mixed policy signals. Meanwhile, US economic data continues to weaken and China tensions continue to percolate.

Looking Ahead – The Future’s So Bright, I Gotta Wear Shades 12-18-2020

Looking Ahead – The Future’s So Bright, I Gotta Wear Shades

 

After a year that featured so many surprises, and not many pleasant ones, it is a testament to both the natural human tendency toward optimism, as well as miracles of biomedical science, that 2021 can be a repository for so many positive and tantalizing expectations. The strong prospects for a V-shaped recovery not only in the economy but for our collective well-being are underpinned by a trio (at least) of highly effective vaccines that are being distributed with tireless efficiency by our logistical networks. Anticipation of a return to relative normalcy in the not-too-distant future is not only a psychological bulwark against the stresses and troubles of the present but is also a reasonably likely base-case scenario.

 

The reality could be more nuanced, as uneven supply and tentative public uptake of the vaccine may be factors that lengthen out the timeline for defeating Covid-19. But questions of pacing aside, 2021 seems almost certain to be showing us the way to brighter days ahead, particularly after the dark months of winter finally give way to spring and then summer. Investors are, of course, already flashing-forward to this upbeat future. Market participants know that growth will rebound after tipping into what might amount to a brief double-dip recession this winter. But whether faster or slower than consensus, how can growth not improve alongside increasingly widespread vaccine distribution? Meanwhile, the Fed has promised to stay ultra-easy; more pandemic relief spending is almost certainly on the way from Capitol Hill (with a greater front-loaded magnitude than we had expected, it appears); inflation seems highly likely to remain in abeyance; the trajectory of dollar depreciation is already well established; and the Treasury yield curve steepening trend is gradual but seemingly inexorable; and last but not least, buoyant stocks appear set to either run higher or a lot higher. Through the lens of the markets, 2021 looks almost – dare we say it – predictable?

 

Amid all this apparent predictability resides one glaring unknown – the outcome of the two Senate runoffs in Georgia on January 5th, which will decide control of the chamber. A leading prediction market reflects roughly 2/3 odds that the GOP get at least a split, leaving meaningful residual odds that the Dems sweep and take back control of the Senate by the thinnest of margins. Other aspects also feed the uncertainty:

 

  • Polls are untrustworthy
  • Unprecedented resources are pouring in
  • Large absentee ballot factor again
  • Messaging issues for GOP (local authorities pushing election security, Trump and supporters saying it was rigged and blasting their handling of it)

It is worth noting that moderate Dems may not be too upset to see the GOP keep control of the Senate if that occurs, as it would absolve them of any pressure to “change the world” and they can spend two years setting their policies up, trying them out, and painting McConnell and the Senate GOP as obstructionists for not passing any of the bills they are sent – infrastructure is a good example of this. Then, for the midterm elections in 2022, the Senate electoral math is firmly in the Dems’ favor as they only have to contest 13 seats versus 20 for Republicans.

 

In short, there can only be low conviction about the high-impact outcome in Georgia. The two vastly divergent alternate policy realities of the two possible outcomes are shown below:

Looking ahead, the year-end period will feature at least a few more days of continued drama on Capitol Hill over the pandemic relief bill and government funding deadline. Meanwhile, we expect Brexit negotiations to run over the Sunday deadline, and then the year-end departure date, but be accompanied by both sides trying to play up the “amicable divorce” angle, with promises to keep negotiating, even as the economic reality of the UK’s departure from the EU looks more like a disorderly Brexit. Meanwhile, the entire US political landscape will pivot around the Georgia Senate runoffs on January 5th, with control of the chamber and the Biden administration’s policy wishlist hanging in the balance.

 

The regular macro calendar for the coming weeks until January 8th features some global PMI data and the December nonfarm payroll report on that second Friday in January, when we will publish our first Looking Ahead of 2021. Have the happiest of holidays!

 

  • Nonfarm Payrolls
  • Global PMIs
  • US Personal Income, Spending & Inflation

 

Global Economic Calendar: Auld Lang Syne

 

December 22

The day begins with the GfK Consumer Climate Indicator in Germany. Heading into December the GfK dropped to a five-month low of -6.7, from a revised -3.2 in the prior month and below market consensus of -5, as sentiment was hit by a partial lockdown to curb a second coronavirus wave. The gauge for economic outlook fell 7.3 points to -0.2, the lowest figure since May of this year when it stood at -10.4. Also, the income expectations sub-index declined 5.2 points to 4.6, and the willingness to buy indicator dropped 6.5 points to 30.5. GfK consumer expert Rolf Buerkl stated, “How the infection rate develops in the coming weeks will play a decisive role in determining whether the consumer climate will be able to stabilize again. Only a significant decrease in the number of infections and an easing of restrictions will restore a more optimistic outlook.”

 

The US brings the Final Estimate of US 3rd Quarter GDP. The second estimate showed the US economy expanded by an annualized 33.1%, in line with the advance estimate. It is the largest expansion ever, following a record 31.4% plunge in Q2, as the economy rebounds from the coronavirus pandemic. Upward revisions to business and housing investment, and exports were offset by downward revisions to personal and public consumption and private inventory investment. Still, personal spending was the main driver of growth, helped by checks and weekly unemployment benefits from the federal CARES Act. However, GDP is still 3.5% below its pre-pandemic level.

 

December 23

The focus of the day will be on the US Personal Income and Spending. In October personal income fell by 0.7% m/m, following a downwardly revised 0.7% increase in the previous month and compared with market expectations of a flat reading. The decrease in government social benefits was mostly to blame because of a drop in Lost Wages Supplemental Payments, a Federal Emergency Management Agency program that provides wage assistance to individuals impacted by the pandemic. In contrast, compensation and proprietors’ income rose. On a positive note, personal spending increased 0.5%, following a downwardly revised 1.2% growth in September and slightly beating market forecasts of 0.4%. Personal spending increased 0.5% m/m, following a downwardly revised 1.2% growth in September and slightly beating market forecasts of 0.4%. Real PCE rose 0.5%, boosted by increases in spending for both goods and services. Consumption of goods advanced 0.2%, boosted by recreational goods and vehicles. In addition, spending on services was up 0.6% due to health care spending. Additionally, The PCE price index was unchanged in October, following a 0.2% gain in September, as a 0.1% increase in services cost offset a 0.2% decline in goods prices. Within goods, prices were down for nondurable goods and durable goods. Core PCE, which excludes food and energy, were also flat in October, in line with market expectations. Year-on-year, the PCE price index advanced 1.2% and Core PCE increased 1.4%.

 

December 24

Christmas Eve brings US Durable Goods Orders. In October new orders increased 1.3% m/m, easing from an upwardly revised 2.1% rise in September and above market expectations of 0.9%. It is the sixth consecutive gain in durable goods orders. Excluding transportation, new orders rose 1.3% and excluding defense, new orders went up 0.2%. Orders slowed for transportation equipment and capital goods and computers and electronics. Orders for non-defense capital goods excluding aircraft, a closely watched proxy for business spending plans, increased 0.7%, following a 1.9% rise in September.

 

January 3

The Caixin China General Manufacturing PMI rose to 54.9 in November from 53.6 in October and beating market estimates of 53.5. This was the seventh straight month of growth in factory activity and the strongest since November 2010, as the post epidemic economic recovery continued to pick up speed. Both output and new orders rose at the fastest rate in a decade, employment grew the most since May 2011 and new orders rose further. Also, buying levels increased at the steepest pace since the start of 2011, with stocks of purchases rising the most since February 2010. At the same time, capacity pressures persisted, with the rate of backlog accumulation being the quickest since April. Meanwhile, the active market led to longer delivery times from suppliers. On the price front, the gauges for input and output prices rose further into expansionary territory. Looking ahead sentiment remained strongly positive, despite easing slightly since October.

 

January 5

The ISM Manufacturing PMI fell to 57.5 in November from a two year high of 59.3 reached in October. The PMI came slightly lower than market forecasts of 58, but still pointed to expansion in the overall economy for the seventh month in a row. A slowdown was seen in production, new orders and inventories while employment contracted. On the other hand, new export orders increased faster. Timothy R. Fiore, Chair of the ISM Manufacturing Business Survey Committee said, “The manufacturing economy continued its recovery in November. Survey Committee members reported that their companies and suppliers continue to operate in reconfigured factories, but absenteeism, short-term shutdowns to sanitize facilities and difficulties in returning and hiring workers are causing strains that will likely limit future manufacturing growth potential. Panel sentiment, however, is optimistic.”

 

January 6

The Consumer Confidence Index in Japan edged up to 33.7 in November, the highest since February but below pre-pandemic levels. Two out of the main sub-indices improved, overall livelihood and income growth. Furthermore, the sub-indice of willingness to buy durable goods was stable, while that of employment perceptions weakened.

 

The ADP Employment Report estimated that private businesses in the US hired 307K workers in November, below an upwardly 404K in October and market forecasts of 410K. It is the smallest increase in four months as a rise in COVID-19 infections and further lockdowns slowed down the hiring. The service-providing sector added 276K jobs led by leisure and hospitality with 95K, education and health with 69K, professional and business with 55K, trade, transportation & utilities with 31K, other services with 18K and financial activities with 8K, while the information sector added none. The goods-producing sector created 31K jobs, due to construction with 22K, manufacturing with 8K, and natural resources and mining with 1K. Private payrolls in midsized companies were up 139K, small firms added 110K, and large companies 58K.

 

Australia’s Balance of Trade increased to AUD 7.46 bil in October from an upwardly revised AUD 5.82 bil in September. This was the biggest trade surplus since April, amid improving global demand as more countries reopen their economies following an easing of COVID-19 lockdowns. Exports rose 5% to AUD 35.72 bil, while imports edged up 1% to AUD 28.26 bil. Considering the first ten months of the year, the trade surplus widened slightly to AUD 60.92 bil from AUD 59.24 bil in the same period of 2019.

 

January 7

Canada’s Balance of Trade narrowed slightly to CAD 3.76 billion in October from an upwardly revised CAD 3.82 bil. Exports rose 2.2% to CAD 46.5 bil, the highest since February, partially on higher exports of pharmaceutical products. Meantime, imports increased at a softer 1.9% to CAD 50.23 bil, the highest since October last year in part due to higher imports of cell phones. Canada’s trade surplus with the US widened to CAD 3 bil from CAD 1.7 bil in September, as exports went up 2.0% while imports dropped 2.3%. The trade gap with countries other than the US widened to CAD 6.8 bil from CAD 5.5 bil, with imports rising 9.1% and exports climbing 2.7%.

 

The US Trade Deficit widened to $63.1 bil in October from a revised $62.1 bil and compared to market expectations of $64.8 bil. Exports increased 2.2% to $182 bil in 2020, while imports rose 2.1% to $245.1 bil, reflection both the ongoing impact of the COVID-19 pandemic and the continued recovery from the sharp declines earlier this year.

 

The Ivey PMI for Canada fell to 52.7 in November from 54.5 and missing market expectations of 54.7. It was the lowest reading since May, amid the ongoing tightening of some COVID-19 restrictions to curb a second wave of infections. Employment and supplier deliveries decreased, while inventories rose and price pressures intensified.

 

The ISM Non-Manufacturing PMI fell to 55.9 in November from 56.6, in line with forecasts of 56. The reading pointed to the slowest increase in the services sector in six-months, but it remained above the long-term average of 54.6. Production and new orders slowed, inventories contracted, and price pressures eased while employment rose at a faster pace. “Respondents’ comments are mixed about business conditions and the economy. Restaurants continue to struggle with capacity constraints and logistics. Most companies are cautious as they navigate operations amid the pandemic and the aftermath of the US presidential election,” Anthony Nieves, Chair of the ISM Services Business Survey Committee said.

 

January 8

Germany’s Trade Surplus narrowed slightly to €19.4 bil in October from €21.3 bil a year earlier. Exports shrank 6.5% y/y to €112 bil, the 8th straight annual decline and imports fell 5.9% to €92.7 bil, the 10th consecutive drop. Exports to the Euro Area went down 5.1% and those to the UK sank 11.7%. Sales to the US, which have been hit particularly hard by the coronavirus pandemic, dropped 10.5% while sales to China edged up 0.3%. Imports to the Euro Area decreased 2.9% and those from the UK were down 14.7%. Purchases from China slumped 3.3%, those from the US 18.8% and from the UK 17.6%. Adjusted for calendar and seasonal effects, exports were still 6.8% and imports 5.2% lower than in February of 2020, the month before restrictions were imposed due to the coronavirus pandemic.

 

The Canadian Employment Report showed the economy created 62K jobs in November, well above forecasts of a 20K rise and after an 83.6K increase in October. This is the lowest number since the recovery began six months ago as full-time work went up by only 99K and 37K part-time jobs were shed. Self-employment stalled and compared to public sector and private sector employees, employment in this group remained furthest from the February pre-COVID level. Increases were seen in Ontario, British Columbia and in all four Atlantic provinces. Employment growth resumed in the goods-producing sector in November, with most of the increase in construction. At the same time, employment in the services-producing sector was little changed, for the first time since the recovery began in May. Among youth aged 15 to 24, employment rose 0.9% from October, while the youth unemployment rate fell 1.4 percentage points to 17.4%.

 

The US Nonfarm Employment Report showed that the US economy added 245K jobs in November, easing from a downwardly revised 610K, and well below market expectations of 469K. It was the smallest employment gain since the job market started to recover in May from a record 20.787 mil loss in April. In November, nonfarm employment was below its February level by 9.8 mil, or 6.5%. Employment declined in government and retail trade while gains occurred in transportation and warehousing, professional and business services, and health care. The unemployment rate edged down to 6.7% from 6.9% and compared with market expectations of 6.8%, as fewer people looked for work. The number of unemployed persons fell by 326K to 10.7 mil and the employment level declined by 74K to 149.7 mil. The labor force participation rate edged down to 61.5% in November, 1.9% points below its February level. The employment-population ratio was little-changed at 57.3%, 3.8% points lower than in February.

 

The CPI in China unexpectedly declined by 0.5% y/y in November, after a 0.5% rise a month earlier and compared with market consensus of a flat reading. This was the first deflation rate since October of 2009 as food prices dropped for the first time in nearly three years, with prices of pork tumbling after soaring last year due to the African Swine outbreak. Also, there were falls in cost of transport, rent, fuel, and utilities, and clothing. Meanwhile, prices of household goods and services were flat, while cost rose for health, education, and other goods and services. On a monthly basis, the CPI fell by 0.6%, the steepest drop since May, and following a 0.3% decline in October.

Afternoon Markets Brief 12-18-2020

Summary and Price Action Rundown

US equities slipped from record highs today as wrangling continued today over the US pandemic relief package and UK-EU Brexit agreement. The S&P 500 declined 0.4% today to pare year-to-date gains to 14.8%, as the index adjusts to include Tesla on Monday (more below). The Fed’s announcement after markets closed for regular hours that it would be allowing US banks to resume stock buybacks, but not raise their dividends, lifted shares of JPMorgan 2.9% in after-hours trading as the megabank rushed to announce $30 billion in buybacks. The Euro Stoxx Index broke its four-day rally with modest downside while Asian equities also posted losses overnight. The dollar edged above yesterday’s most recent multi-year low, while longer-dated Treasury yields increased slightly, with the 10-year at 0.94%. Brent crude prices vaulted over $52 per barrel, reaching a new 9-month high, amid stimulus hopes.

 

US Fiscal Stimulus Negotiations Drag On

Pandemic relief talks appear to be grinding slowly toward a deal, perhaps as early as this weekend, but in the meantime, Congress will either need to pass an omnibus spending bill or another funding extension by midnight tonight or trigger a partial government shutdown. In the final hours ahead of tonight’s midnight deadline to pass a stimulus package alongside the omnibus spending bill, a push led by Republican Senator Toomey to include terms seeking to block the Federal Reserve’s pandemic lending facilities has stymied a final compromise. A provision to prevent the Fed from restarting any of the five lending programs, or create similar ones in the future, has become the main sticking point for Republicans now that the two controversial elements of direct funding for state and local governments and liability protections for businesses have been omitted. “It’s not acceptable for anybody to decide that they’re going to circumvent this law, restart these programs and turn them into something that they were never intended to be,” said Toomey on Thursday. While Senator Toomey asserted that the provision would exclusively target the five programs, Democrats have accused Republicans of specifically constricting the incoming Biden administration and limiting the ability of the Federal Reserve to respond to economic distress in the future. With Republican’s seemingly entrenched over this issue, it is likely lawmakers will fail to reach a compromise this evening, and will either trigger a partial government shutdown when the current spending authorities expire, or Congress will seek to approve another stopgap funding measure through the weekend, allowing more time to resolve the remaining differences. Should any pandemic relief bill fail to pass this weekend, Congress will have until the end of the month when nearly 12 million workers will lose their benefits, on top of the 4.4 million who have already exhausted their benefits, which would further pressure an already distressed economic backdrop. – MPP view: The New York Times reported yesterday that McConnell’s surprising reversal on individual payments and the overall size of the relief bill was spurred by indications that the two GOP candidates in the pivotal Senate runoffs in Georgia are taking heat over the delay of fiscal support. But even with rising economic and political urgency, a deal is still stalled – we see this as a preview of the extreme difficulty the Biden administration will face getting anything through a GOP-led Senate and do not buy the narrative that Majority Leader McConnell will morph into a dealmaker with his old friend Joe Biden in the White House. Our base case has been for something less ambitious than $748 billion lame duck session compromise stimulus (which could be tacked onto the omnibus spending bill) and a somewhat larger deal post-election, but this sequencing could be flipped and total amounts meaningfully larger.

Brexit Talks Enter Another Pivotal Weekend

With negotiations coming down the wire ahead of the year-end deadline for the UK to depart the EU, European officials are calling for a deal by Sunday or face a no-deal Brexit. The pound retreated from its recent highs against the dollar and euro as signals over the prospect for a deal turned more mixed today, with comments from a Bank of England official suggesting the possibility of negative interest rates adding to the downside impetus. EU chief negotiator Barnier expressed continued hope for a deal in remarks earlier today but highlighted the remaining challenges, saying “the path… is very narrow.” Last evening, UK negotiators characterized negotiations as stalled over the thorny issue of fishing rights, as Prime Minister Johnson called the EU position on the issue “not reasonable.” Meanwhile, the European Parliament indicated that Sunday would be the final day for an agreement that could be ratified by the December 31st deadline. This comes after a burst of optimism earlier in the week amid reports that the UK and EU had ironed out most of their differences on the so-called “level playing field” issue involving state subsidies. – MPP view: We are retaining our out-of-consensus call for a hard and/or disorderly Brexit at year-end, as fishing rights remain intractable and the timeline is rapidly dwindling. In such a case, both sides appear to be steering toward the halfway house of a “friendly no-deal,” whereby promises to continue negotiating soften the blow to the pound and financial markets, even if the real-world economic consequences look more like a hard Brexit. Optimism for a deal is riding high, but we do not expect the EU to give much ground from here.

Additional Themes

Tesla Joins the S&P 500 – Electric carmaker Tesla is set to join the S&P 500 on Monday, but the shares of Tesla stock that will be needed to rebalance the index were purchased today at the close of trading in unprecedented volumes. The S&P 500 indexers bought around $85 billion worth of Tesla stock, but other investment funds that track the S&P 500 also purchased the stock, resulting in over 200 million shares traded on the day, as opposed to its normal volume of 40 million. Conversely the same amount of other stocks in the index was sold. Tesla is now the seventh largest stock in the S&P 500, making up 1.52%, which means that for every $11.11 dollar move in the price of Tesla, the S&P 500 will move one point. Shares closed up 0.37% on the day but are also up 65% since it was announced they were joining the index.

Our Latest Podcast! – On this week’s Macrocast, which we produce with our friends at Hamilton Place Strategies, we discuss the last-minute stimulus drama, what to expect in the bill, and the impact this will have on the economy. We also discuss the news coming out of the Fed’s recent FOMC meeting and what this means for its changing monetary mandate heading into 2021, the (continuing) Brexit drama, and the important consumer metrics to look for next week. Please remember to subscribe, rate, and share. Macrocast: “Bad Economics Is Never Good Politics” – Hamilton Place Strategies

Looking Ahead – Next week could feature 11th hour negotiations over both the US pandemic support bill and Brexit, in the event that resolutions to both remain elusive. The holiday-shortened economic data calendar features November personal income, spending, and inflation figures, as well as durable goods orders, and a final reading of third quarter US GDP. Following today’s publication, our next Looking Ahead will be published on January 8th and Sunday’s Market Viewpoints will be the final one of 2020, with the next installment due on January 10th.