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.”

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.

Looking Ahead – The Dragon and the Ant 11-20-2020

Looking Ahead – The Dragon and the Ant

It has been an eventful few weeks, even by the standards of 2020, which has not lacked for consequential occurrences. As the post-election legal challenges wind down, this unprecedented US political season seems to be heading toward the likely resolution of a grudging (to put it mildly) transition from the Trump administration to the Biden White House, though the actual endgame of the electoral college and physical departure of the incumbent have yet to play out, leaving residual but disquieting tail risks. Meanwhile, initial polls for the Georgia Senate runoffs show that both races are essentially tied, for what that is worth, but we expect markets to grapple with that uncertainty closer to the day of the election. Our base case remains a split decision at best for the Democrats, allowing the GOP to retain control of the Senate, though we expect that the apparent tightness of the races, skepticism in the polls, and the unprecedented political backdrop will force investors to seriously contemplate the possibility that the Dems win back the Senate by running the table on January 5th.

In the meantime, market participants have been weighing the near term Covid-19 autumn/winter nightmare against the encouraging longer-term outlook for widespread distribution of a highly effective vaccine from Pfizer/BioNTech and Moderna, and probably AstraZeneca as well. A focus in financial markets on the heartening prospect of herd immunity being achieved at some point in 2021 predominated for much of last week but the immediacy of the unfolding public health disaster across the US and its economic consequences have dampened the investor mood for much of this week.

The rest of the world has not stood still during all of this, of course, and one of the most consequential recent developments has been the delay of the planned $34 billion Ant Financial IPO on the Shanghai and Hong Kong stock exchanges earlier this month, which was set to eclipse the $29 Saudi Aramco offering as the largest in history. Initial reports citing some regulatory shortcomings did not seem to square with a process that would have surely been so involved and thorough, and with only a matter of days before the offering date of such a high-profile and historical stock market debut. Subsequent reports indicating that President Xi himself had ordered the IPO pulled cemented suspicions that this was no mere regulatory matter and that crossing a few more t’s and dotting a few more i’s on the compliance front would not provide a solution.

What could have been the motive? Clearly Ant Financial’s role in disintermediating the Chinese state-owned banking sector, by competing for deposits and loan business, was obviously one potential consideration. China’s state banks our more than just financial institutions, they are in effect the circulatory system of the state capitalist model and a major wellspring of power for the Chinese Communist Party (CCP). Many of the loans they make are well understood to be on non-commercial terms in the furtherance of policy goals and propagation of often sclerotic state-owned companies and local government funding structures. The fact that Ant Financial was offloading its balance sheet risks on to these lumbering giants while eating off their plate of potential deposits and quality lending opportunities surely had the attention of Beijing. Analysts are speculating that pulling the IPO is in part designed to hamper Ant Financial’s rise while allowing some of the state banks to potentially catch up, and the tighter regulatory standards being applied suggest a meaningful dent in Ant’s profitability advantage.

Meanwhile, Ant Financial’s dominance and sheer size is surely a factor as well. The CCP has always been sensitive to the potential for competing power structures in China, and President Xi’s tenure has featured pronounced assertiveness on this front. While Jack Ma is not Bo Xilai, some major Chinese conglomerates have been taken down in recent years when they fell afoul of the Chinese leadership, with Dalian Wanda and Anbang Insurance being the most prominent examples.

Lastly there is the issue of the digital renminbi. It was always assumed that this innovation, which is putting China out in front of its sovereign competitors in digitizing its currency, would necessarily be competing with WeChat and Alipay, but analysts were unsure the degree to which Beijing was intent on vigorously competing with these popular platforms. This may be a signal that the fight for share of digital payments in China is heating up, with the state looking to capture a meaningful slice, which would not be out of character.

From the US regulatory perspective, this is marvelous news. Beijing is helping make the case that so many policymakers in Washington have pressed recently that Chinese companies are subject to state directives, or even outright agents of Beijing in some cases, routinely fall short of western accounting and disclosure practices, and often feature malign ties to espionage activities. This example will certainly be cited as the new administration carries on the job of attempting to force a higher standard of compliance with accounting rules for Chinese companies listed in the US. This seemingly capricious delay of the Ant Financial IPO is an object lesson that even China’s private sector giants enjoy no enforceable legal protections or property rights in their domestic market, except at the pleasure of President Xi.

Looking ahead, next week’s calendar in the US is dominated by the Thanksgiving holiday, which will occur against the dangerous backdrop of the virulent autumn resurgence of Covid-19, but there will still be plenty of data for analysts to chew on. The preliminary readings of November’s global purchasing managers’ indexes (PMIs) are due, along with US income, spending, and inflation for October.

 

 

  • Preliminary Global PMIs for November
  • US Income & Spending
  • US Inflation
  • US Initial Jobless Claims
  • Q3 Corporate Profits

 

Global Economic Calendar: Thanks(giving) but no thanks(giving)

 

Monday

This week brings a heavy dose of global manufacturing purchasing managers’ index (PMI) data, beginning with the IHS Markit/BME Germany Manufacturing PMI. The October PMI was revised higher to 58.2 from a preliminary of 58, pointing to the strongest expansion in factory activity since March of 2018. New orders rose at record pace amid stronger demand both domestically and abroad, with rising sales to Asia, specifically China, helping lift new export orders to the greatest extent since December of 2017. As a result, output growth was the third-fastest on record and reflected sharp increases in consumer, intermediate and investment goods. On the other hand, employment fell for the twentieth month. On the price front, average factory gate charges rose modestly and for the first time since May 2019, as stronger demand allowed some goods producers to pass on the burden of higher costs to clients. On the other hand, business confidence slowed slightly from a 32-month high in September, but companies remained positive in general.

 

Later in the morning the IHS Markit Eurozone Manufacturing PMI for November will be released. October was revised slightly higher to 54.8, from an initial estimate of 54.4 and compared with September’s final 53.7. The latest reading pointed to the steepest month of expansion in the manufacturing sector since July 2018, as output growth accelerated to an over two-and-a-half-year high and new orders rose by the most since the start of 2018.

 

Next is the IHS Markit/CIPS UK Manufacturing PMI. October was revised higher to 53.7, from a preliminary estimate of 53.3 and compared to September’s final reading of 54.1. The latest number pointed to solid expansion in the UK manufacturing sector, for five months running, with both output and new orders rising amid stronger demand from both domestic and overseas sources. Meanwhile, employment declined for the ninth successive month, and at a faster pace, due to redundancies, recruitment freezes, the non-replacement of leavers, cost reduction strategies and workforce restructuring. On the price front, input cost inflation was the highest since December 2018, while output charges also increased. Looking ahead, business optimism hit the highest level since January 2018 on hopes of economic recovery and a reduction in COVID-19 disruption.

 

Finally, the IHS Markit US Manufacturing PMI ends the PMI data dump. October was revised higher to 53.4, from a preliminary estimate of 53.3. The reading pointed to the 4th consecutive month of growth in factory activity and the strongest since January of 2019. Output growth was the sharpest since November of 2019, driven by stronger client demand and higher new order inflows. New order growth picked up due to more robust client demand, with some firms noting larger orders being placed. Although domestic demand ticked higher, new export orders fell for the first time since July due to reimposed coronavirus lockdown restrictions in Europe. Reflecting weaker pressure on capacity, firms increased their workforce numbers at a softer pace. Meanwhile, average cost burdens increased at the steepest rate since January of 2019. Business expectations remained positive, improving on September’s 4-month low, as firms foresee a rise in output over the coming year.

 

The Chicago Fed National Activity Index dropped to +0.27 in September 2020 from an upwardly revised +1.11. Three of the four broad categories of indicators used to construct the index decreased from August. Production-related indicators contributed -0.24 to the CFNAI in September, down from +0.31 in August; and the contribution of the sales, orders, and inventories category to the CFNAI edged down to +0.07 from +0.10. Also, employment-related indicators contributed +0.35 in September, down from +0.71 in August, while the contribution of the personal consumption and housing category to the CFNAI moved up to +0.09 from a neutral value in the previous month.

 

Tuesday

The day begins with the Final Estimate of German Third Quarter GDP. The previous estimate showed the German economy grew by a record 8.2% q/q, trying to recover from the historic 9.8% slump seen in the second quarter and beating market consensus of 7.3%. The expansion was supported by a rebound in household consumption, strong fixed investment in machinery and equipment and a sharp increase in exports. Year-on-year, the economy shrank by 4.3%, easing from a record contraction of 11.3% in the previous period. The economy was also 4.2% smaller when compared with Q4 2019, the quarter before the coronavirus pandemic hit. Meanwhile, Germany’s government has revised upwards its 2020 GDP forecast. It now expects the economy to shrink by 5.5%, compared to an initial estimate of 5.8% decline, before rebounding by 4.4% in 2021.

 

Also, in Germany the Ifo Business Climate indicator will be released. October Ifo dropped to 92.7, from a seven-month high of 93.2 in September. Companies were considerably more skeptical regarding developments over the coming months following the imposition of tougher restriction measures to curb the spread of the COVID-19 pandemic. In contrast, firms assessed their current situation as better than in the previous month.

 

In the US, the Conference Board Consumer Confidence Index will be the focus of the day. In October, the index declined slightly, after increasing sharply in September. The Index now stands at 100.9, down from 101.3 in September. The Present Situation Index, based on consumers’ assessment of current business and labor market conditions, increased from 98.9 to 104.6. However, the Expectations Index, based on consumers’ short-term outlook for income, business, and labor market conditions, decreased from 102.9 in September to 98.4.

 

Wednesday

The day opens with the Second Estimate of US GDP. The first estimate showed the US economy expanded by an annualized 33.1% in Q3 2020, the biggest expansion ever, following a record 31.4% plunge in Q2. Personal spending surged and was the main driver of growth, helped by checks and weekly unemployment benefits from the federal CARES Act. Growth also reflects increases in private inventory investment, exports, nonresidential fixed investment, and residential fixed investment that were partly offset by decreases in federal government spending, reflecting fewer fees paid to administer the Paycheck Protection Program loans.

 

The day also will digest US Durable Goods Orders. In September, new orders surged 1.9% m/m, well above a 0.4% rise in August. Orders rose for the 5th straight month, led by transport equipment, as the economy recovers from big plunges in March and April due to the coronavirus pandemic. Orders rebounded for transportation equipment, namely motor vehicles, and fabricated metal products, and continued to rise for capital goods, and computers and electronics. On the other hand, orders fell for machinery, and electrical equipment, appliances and components. Orders for non-defense capital goods excluding aircraft, a closely watched proxy for business spending plans, increased 1%, following an upwardly revised 2.1% rise in August.

 

Third Quarter US Corporate Profits come next. In Q2, corporate profits tumbled by 10.7% to an over four-year low of $1.59 tril. It was the sharpest decline in corporate profits since the last quarter of 2008, amid the coronavirus crisis. Undistributed profits slumped by 43.8% to $230 bil and net cash flow with inventory valuation adjustment, the internal funds available to corporations for investment, dropped by 9.5% to $2.10 tril. Also, net dividends were 1.1% lower at $1.36 tril.

 

Weekly Initial and Continuing Jobless Claims. The number of initial claims for state unemployment benefits rose by 742K in the week ending November 14th, surpassing market forecasts of 707K, and registered as the fifth consecutive week that claims remained in the 700K’s territory. The reading climbed by 31K from the prior report’s revised level of 711K and was the first rise in claims in over a month amid a resurgence in coronavirus cases and targeted lockdowns across the country. Continuing claims fell by 429K to 6.37 million in the week ending November 7th, slipping below market forecasts of 6.47 million, and marked the lowest total since the pandemic-induced turmoil in March. The increase in initial claims was most severe in Louisiana, where filings more than quadrupled to 42K. Massachusetts, Texas, and Virginia also saw notable increases, while Illinois, Florida, New Jersey, and Washington saw the greatest declines. Although total state claims have fallen, the number of Americans claiming extended non-state benefits is continuing to rise. For the week ending November 14th, the Pandemic Unemployment Assistance (PUA) reading rose by 320K. The Pandemic Emergency Unemployment Compensation (PEUC) program, which provides an additional 13 weeks of support, added 233K claims in the week ending October 31st, summing to nearly 4.4 million Americans receiving extended aid through the program. The total persons claiming unemployment benefits including non-state programs fell by 841K to 20.3 million ending the same period.

 

The Personal Income and Spending Report comes later in the morning. In September, personal income rose by 0.9% m/m, rebounding from a revised 2.5% slump in August. The monthly gain was boosted by increases in proprietors’ income, compensation of employees, and rental income of persons, which were partly offset by a decrease in government social benefits. Personal spending increased 1.4%m/m, following a 1% rise in August. Real spending went up by 1.2% or $159.2 bil, reflecting an increase of $109.9 bil in spending for goods and a $61.0 bil rise in spending for services. Within goods, clothing and footwear as well as motor vehicles and parts were the leading contributors to the gain. Within services, the largest contributors were spending for health care as well as recreation services, led by membership clubs, sports centers, parks, theaters, and museums.

 

The report also contains the Personal Consumption Expenditure (PCE) Price Index. Headline PCE rose 0.2% m/m in September, following a 0.3% gain in August, boosted by an increase in services cost, while goods prices fell 0.1%, led by a 0.3% drop in nondurable goods. Core PCE, which excludes food and energy and which the Fed has a 2% target, rose 0.2%, in line with market expectations. Year-on-year, Headline PCE advanced 1.4% and Core increased 1.5%.

 

New Home Sales follows as sales dropped 3.5% m/m to a SAAR of 959K in September, from the previous month’s 14-year high of 994K. The level of home sales remained elevated as the housing market has been supported by record low interest rates and increasing demand from people moving away from big cities due to the coronavirus crisis. In September, new home sales declined 4.7% to 563K in the South, 4.1% to 93K in the Midwest and 28.9% to 32K in the Northeast but rose 0.7% to 284K in the West.

 

The day closes with Final Estimate of the University of Michigan’s Consumer Sentiment. The preliminary estimate decreased to 77 in November from 81.8 in October and against market expectations of 82. It is the lowest reading since August as consumers judged future economic prospects less favorably, 71.3 vs 79.2 in October, while their assessments of current economic conditions remained largely unchanged. Meanwhile, inflation expectations for the year ahead increased to 2.8% from 2.6% and the 5-year outlook to 2.6% from 2.4%. The outcome of the presidential election as well as the resurgence in COVID-19 infections and deaths were responsible for the early November decline. Interviews conducted following the election recorded a substantial negative shift in Republicans’ expectations and no gain among Democrats.

 

Thursday

The focus of Thursday will be the GfK Consumer Climate Indicator in Germany. The index fell to -3.1 heading into November from a revised -1.7 in October. This was the weakest reading since July, amid fears over another lockdown following a resurgence of COVID-19 cases in the country. The gauge for economic outlook tumbled 17 points to 7.1, the income expectations sub-index fell 6.3 points to 9.8, and the willingness to buy indicator dropped 1.4 points to 37. GfK consumer expert Rolf Buerkl said, “Consumers apparently assume that the much more active infection process in Germany will slow down the previously hoped for rapid recovery of the German economy.”

 

Friday

The week closes with the Eurozone Economic Sentiment Indicator for November. In October, the indicator was unchanged at 90.9but remaining well below pre-pandemic levels, as rising COVID-19 cases across the region forced many European governments to impose fresh restrictive measures. By sector, confidence deteriorated among service providers and consumers, while morale improved among manufacturers, retailers and constructors.

Looking Ahead – Is It Over Yet? 11-6-2020

Looking Ahead – Is It Over Yet?

The concept of Election Day was already antiquated when this year’s enormous preponderance of early and mail-in voting elongated the process into an election month, while the tightness of the presidential race, as well as other key contests, has dragged the nation through an excruciating ordeal of piecemeal and halting ballot tabulation this week (though this is in no way the fault of the great people who are doing the hard work of ballot monitoring and counting). And even though a win looks highly likely for Joe Biden at this point, the Trump campaign is insisting that the race is not over, and recounts and legal challenges are sure to drag on, alongside a litany of unsubstantiated charges of fraud from the President and some of his ardent supporters.  

Our base case had long been for narrow and disputed results in the presidential race and key Senate contests, with uncertainty dragging on beyond election day. And though this is how events played out this week, it is a great relief to us, and to financial markets, that the worst case scenario of a breakdown of our obviously creaky electoral system accompanied by major civic unrest has been avoided (thus far, at least). Whether or not the final state tallies will leave any feasible room for doubt, the Trump campaign will surely continue with an array of seemingly desperate legal challenges. The next few weeks will reveal the extent to which the process will remain orderly and legitimate amid massive partisan pressures.

Even if cooler heads continue to prevail in the political arena, as we hope and expect, salient policy questions remain. Most importantly, how does this charged political environment impact the prospects for a pandemic relief bill before year-end? In this bizarre interregnum, Senate Majority Leader McConnell has indicated that passing a stimulus bill is his number one post-election priority, but he is unlikely to take a magnanimous position given the continued uncertainty over control of the Senate. Meanwhile, House Speaker Pelosi has shifting incentives as she prepares to stave off internal challenges to her leadership and eyes the possibility of a better post-transition deal. Last but not least, an obviously distracted President Trump must sign off on the agreement at a time when chief dealmaker Secretary Mnuchin is likely focused on his post-Treasury trajectory.      

The other key uncertainty involves control of the Senate. The twin Georgia runoffs in January could be the deciding factor for control of the chamber, and in that case there will obviously be a flood of money and resources into those contests. Both GOP candidates will go in as favorites but with Georgia looking like it may tip for Biden, investors should prepare for uncertainty. So while a Blue Wave certainly did not materialize, the Democrats’ tide still might go high enough to secure control of both houses of Congress and the White House.

In short, this fraught election cycle is far from over, but at least we have made it to the weekend. Cheers!

Looking ahead, next week’s calendar is mercifully light and non-market moving most likely, with third quarter earnings season pretty much a wrap. 

 

  • US Price Data, Consumer Confidence & Initial Jobless Claims
  • German and Australian Economic Sentiment Gauges      
  • UK Q3 GDP
  • EU Industrial Production

 

Global Economic Calendar: Nada Mucho

 

Monday

The week begins with German Balance of Trade for September. In August, Germany’s trade surplus declined to €12.8 bill, from €16.4 bil last year, as the coronavirus pandemic hit global demand. Exports dropped 10.2% due to lower sales to the European Union and to third countries, in particular the UK, the US and China. Imports fell at a softer 7.9%, as purchases from the EU dropped 5.4% and those from third countries tumbled 10.5%. Among these, imports fell from the UK and the US, while imports from China were unchanged. On a seasonally adjusted basis, exports rose 2.4% from a month earlier, beating expectations of 1.4%, while imports were up 5.8%, compared to forecasts of a 1.4% gain.

 

The evening brings National Australia Bank’s Index of Business Confidence. September rose to -4 from -8 in August, pointing to the highest reading since June, amid improving business activity as the economy opens up. Confidence rose in all industries except finance, business & property services which was flat. Business conditions also strengthened to levels not seen since the COVID-19 pandemic brought a nationwide lockdown. All three sub-components rose, with trading and profitability in positive territory while the employment index remaining negative as businesses were not yet ready to add new positions. Alan Oster NAB Group chief economist added, “Meanwhile, forward orders improved while capacity utilization ticked higher to 76.9%. “While the improvement in conditions and confidence in the last few months has been promising, it is important to remember that in a levels sense, things are still weak.”

 

The day closes with China’s Annual Inflation Rate. September eased to 1.7% from 2.4% in August and slightly below market expectations of 1.8%. This was the lowest reading since February 2019, amid a marked slowdown in prices of food. Furthermore, cost of non-food products was flat, after a 0.1% gain in August. There were declines in cost of transport, rent, fuel, and utilities, household goods and services, and clothing. At the same time, prices increased for health, other goods and services, and education, culture & recreation. On a monthly basis, consumer prices edged up 0.2% in September, the lowest in three months, following a 0.4% gain in August.

 

Tuesday

The day begins with UK Claimant Count Change. In August, the number of people claiming for unemployment benefits in the UK rose by 28K to 2.7 mil, following a downwardly revised 39.5K increase in July and below market expectations of a 78.8K gain. This added to a rise of 120.3% since March, or 1.5 mil, as the coronavirus pandemic hit the labor market.

 

The ZEW Indicator of Economic Sentiment for Germany for November follows. October dropped by 21.3 to 56.1, from the previous month’s 20-year high and well below market expectations of 73. Investors voiced concerns about the recent sharp rise in the number of COVID-19 cases and the prospect of the UK leaving the EU without a trade deal. The current situation in the run-up to the presidential election in the US further fuels uncertainty. By contrast, the assessment of the economic situation in Germany improved again, and currently stands at -59.5 points, 6.7 points higher than in September.

 

The day closes with the Melbourne Institute and Westpac Bank Consumer Sentiment Index for Australia. October increased 11.9% m/m to 105 points, following an 18% jump in September. This was the highest reading since July of 2018, amid the ongoing success across the nation in containing the COVID-19 outbreak and the response to the October Federal Budget. All components of the Index were higher in October, the most striking improvements were around the outlook for the economy, with the surge in the five-year outlook taken this sub-index to its highest level since August 2010. In addition, there was a stunning lift in confidence around job security, with the Index improving by 14.2% to be back around the levels of early 2019. Also, confidence in the housing market boomed, the ‘time to buy a dwelling’ index increased 10.6% to its highest level since September 2019.

 

Thursday

Thursday begins with the UK Balance of Trade for September. In August, the UK trade surplus shrank to £1.36 bil from an upwardly revised £1.69 bil in July and was the smallest monthly trade surplus in five months. Exports rose 1.5% to £51.83 bil, boosted by a 2.7% rise in services exports and a 0.4% increase in goods shipments. On the flip side, imports surged 2.2% to £50.46 bil driven by a 3.7% increase in purchases of goods, while services declined 1%.

 

At the same time, the Preliminary Third Quarter GDP Growth Rate will be released. In the second quarter the British economy shrank 19.8% q/q, slightly less than a preliminary estimate of a 20.4% drop. This remains the largest contraction ever and the second consecutive quarterly decline in GDP, officially entering a recession, due to the COVID-19 pandemic and the government measures taken to reduce transmission of the virus. Gross fixed capital formation fell, while both household consumption and government spending shrunk precipitously. Private consumption accounted for more than three-quarters of the fall in GDP, reflecting the implementation of public health restrictions, the mandated closures of non-essential shops and forms of social distancing. Net external demand contributed positively as imports fell more than exports.

 

Later in the morning Eurozone Industrial Production (IP) will be released. In August, IP rose by 0.7% m/m, following an upwardly revised 5.0% growth in July. An increase in production of durable consumer goods, intermediate goods and energy was partially offset by declines in output for capital goods and non-durable consumer goods. On a yearly basis, IP shrank by 7.2%, compared to a 7.1% contraction in July.

 

In the US, the Consumer Price Index (CPI) for October will be released. In September, Headline CPI increased 0.2% m/m, easing from a 0.4% advance in August and was the lowest reading in four months. Used cars and trucks cost jumped 6.7%, its largest monthly increase since February 1969, as people avoid public transportation. Energy prices went up 0.8%, boosted by a 4.2% climb in natural gas prices. At the same time, food cost was flat. Additional upward pressure came from shelter, new vehicles, and recreation, while declines were seen in prices for motor vehicle insurance, airline fares, and apparel. This put Headline CPI up 1.4% from 1.3% in August. Meanwhile, Core CPI, which excludes the more volatile items such as food and energy, rose 0.2% m/m after larger increases in July and August, pushing up the yearly rate from 1.3% to 1.4%.

 

Friday

Friday begins with the Second Estimate of Third Quarter Eurozone GDP. The preliminary estimate showed the Eurozone economy grew by 12.7% in third quarter, recovering from a record slump of 11.8% seen during the second quarter and easily beating market expectations of 9.4 percent. It was the steepest pace of expansion since comparable data started to being collected in 1995, boosted by a rebound in activity and global demand after European countries lifted lockdowns imposed to contain the spread of the coronavirus pandemic. All major economies in the region posted record increases in GDP.

 

At the same time Eurozone Balance of Trade will be released. In August, the Eurozone’s trade surplus widened to €14.7 bil from 14.4 bil in July. Imports fell 13.5% to €141.6 bil, due to lower purchases of mineral fuels, lubricants & related materials, machinery & transport equipment, miscellaneous manufactured articles, chemicals & related products, manufactured goods classified chiefly by material, crude materials, inedible, except fuels and food, drinks and tobacco. Export fell 12.2% to €156.3 billion, as sales went down for mineral fuels, lubricants & related materials, manufactured goods classified chiefly by material, machinery & transport equipment, miscellaneous manufactured articles and crude materials, inedible, except fuels.

 

In the US we will get the Producer Prices Index (PPI) for October. In September, Headline PPI increased 0.4% m/m, following a 0.3% rise in August. Cost of goods advanced 0.4%, after increasing 0.1% in August, led by a 14.7% rise in cost for iron and steel. Prices of services went up 0.4%, lower than 0.5% in August, led by a 3.9% advance in the index for traveler accommodation services. Year-on-year, Headline PPI went up 0.4%, after falling 0.2% in the prior month. Core PPI, which excludes food and energy, went up 0.4% m/m, the same as in August, while the annual rate increased to 1.2% from 0.6%.

 

At the same time Initial and Continuing Jobless Claims will be released. Last week 751K Americans filed for unemployment benefits, above consensus expectations of 732K but down from the previous week’s revised level of 758K. Initial claims are now at their lowest level since the pandemic began but part of the decline is due to expiration of eligibility. However, those people are still able to apply for help from the Pandemic Unemployment Assistance scheme, which runs out of funds in December if Congress does not pass another relief bill. Close to 363K workers applied for PUP assistance, compared with 359K in the previous period. Furthermore, the number of continuing jobless claims fell to 7.29 mil in the week ended October 24th, compared with market expectations of 7.20 mil, also the lowest level since the pandemic began but also due to the same expiration issue. In total, there are 21.508 mil Americans on some sort of Federal assistance, down from 22.661 mil in the previous week.

 

The week closes with the University of Michigan’s Consumer Sentiment for November. In October, sentiment was revised slightly higher to 81.8, reaching the highest since March. Still, the sentiment remains much below 101 reported in February. Improvements were seen in both expectations and current conditions. On the price front, one-year inflation expectations were revised lower to 2.6% from 2.7% and five-year expectations were unchanged at 2.4%. Surveys of Consumers chief economist, Richard Curtin added, “Consumer sentiment remained virtually unchanged from the first half of October (+0.6 points) and was insignificantly different from last month’s figure (+1.4 points). Fear and loathing produced this false sense of stability. Fears were generated by rising Covid infection and death rates, and loathing was generated by the hyper-partisanship that has driven the election to ideological extremes.”

Looking Ahead 7-17-2020

Looking Ahead – Do You Like Surprises?

This year has featured a jarring array of unexpected events, most of them decidedly unpleasant, and market participants are bracing for more to come. To borrow Donald Rumsfeld’s now-famous formulation, “unknown unknowns” are, by definition, impossible to predict, though nobody seems to be ruling anything out at this point given what 2020 has already thrown at us. Meanwhile, the “known unknowns” are certainly still capable of producing significant shocks.

Corporate reporting for the second quarter was almost certain to produce surprises both the upside and downside given the dearth of management guidance due to impenetrable Covid-19 uncertainties. Although earnings season is still in its early stages, surprises have indeed been the norm, as US megabanks blew estimates out of the water on the trading and investment bank side, but also exceeded the expected levels of credit provisioning, highlighting downside risks to the economic outlook. This wide dispersion around estimates is expected to continue with next week’s dense calendar of earnings announcements.

Questions still surround the two high-profile fiscal packages that are in the process of being negotiated in the US and EU, with both generally expected to be finalized by the rapidly approaching month-end. The wrangling is expected to be intense on both of these pandemic relief bills, but the expectation is for eventual compromise and agreement on a significant figure for each that is capable of providing real support to both economies. The predominant risk in the EU negotiation is for disappointment if the so-called Frugal Four countries (Netherlands, Denmark, Sweden, and Austria) refuse to compromise. In the US, there is upside and downside potential for the bill given the propensity for recent budget negotiations to expand the pie rather than make tough decisions, but there is certainly a meaningful risk of disappointment as well as the House Democrats, Senate Republicans, and Trump administration are finding less common ground than in the case of the CARES Act.

The Federal Reserve is working hard not to surprise the markets, with a veritable barrage of communications on a seemingly daily basis, but investor nonetheless remain wary of anticipated details of what seems to be an impending policy pivot. The constant din of fed speakers is not entirely unanimous but appears to be pointing broadly toward a shift in favor of enhanced forward guidance, predicated upon their traditional inflation target of 2%. It does seem unlikely, particularly ahead of an election when major monetary policy making tends to be inauspicious, that the Fed would make any sudden moves to startle investors, such as unexpectedly instituting yield curve control or taking interest rates into negative territory.

Last year featured a steady diet of nasty surprises on the US-China front, but ultimately with the Phase One trade deal being signed early this year, expectations for a tense equilibrium have settled in. Recent Trump administration actions to counter China on the tech and investment fronts, as well as retaliation for Beijing’s posture toward Hong Kong and repression in western China, have increased the degree of uncertainty among market participants regarding this key relationship. Speculation over a major White House policy escalation against China tend to be linked to the belief that President Trump may have to pull a spectacular October surprise in order to close the polling gap between himself and Joe Biden.

Polling data has been likened to intellectual junk food – quick and easy to digest, sometimes quite tasty, but ultimately unsatisfying and genuinely bad for you if you consume too much. Skepticism over the validity of political polls has increases significantly due to its notoriously spotty track record in recent years, with high-profile misfires over Brexit and the US election in 2016. On its face, President Trump’s current deficit to Joe Biden looks substantial enough to subsume any statistical oddities, but market participants are well aware that polls in swing states, which will decide the outcome, look meaningfully closer. They also note that Trump voters are thought to be quite shy with pollsters about their intentions, and that races traditionally tighten into the actual election day, which is still an eternity away in from a political standpoint. In short, this race is far from over.

Still, an October surprise by President Trump is seen as highly likely and the most common areas of speculation tend to be, as mentioned above, some kind of anti-China policy barrage, with some even floating the potential for outright geostrategic confrontation. More likely, we believe, is that Trump’s major moves in the fall designed to tip the political scales will be more targeted at Joe Biden in terms of alleged dirt or announced investigations. Unlike an offensive against China, this sort of approach has less likelihood of major market blowback.

Looking ahead to next week, the economic calendar is relatively light, with global PMIs for July featuring prominently, as Q2 earnings reporting season rolls on.

 

  • Corporate Earnings Reports
  • Global Purchasing Managers’ Indexes
  • China Central Bank
  • US Initial Jobless Claims & Housing Data

 

US Second Quarter Corporate Earnings:

 

Next week is dominated by ongoing US corporate earnings reporting, with the calendar featuring results from IBM, Halliburton, Coca-Cola, Lockheed Martin, Snap, Capital One, KeyCorp, Northern Trust, CSX, Tesla, Microsoft, Southwest Airlines, AT&T, Twitter, American Airlines, Honeywell, Verizon, Schlumberger, Royal Caribbean, and Intel.

 

Global Economic Calendar: Summer lull

 

Sunday

This upcoming weekend starts the weekend with the Loan Prime Rate Decision in China. The People’s Bank of China held its benchmark interest rates steady for the second straight month at its June fixing after the central bank maintained borrowing costs on medium-term loans last week, as policymakers adopted a wait-and-see approach amid tentative signs of economic recovery. The one-year loan prime rate was left unchanged at 3.85% from the previous monthly fixing while the five-year remained at 4.65%.

Monday

The focus on Monday will be Japanese Inflation Rate for June, which comes out after markets close that day. Japan’s consumer price inflation stood at a three-year low of 0.1% year-on-year (y/y) (flat, month-on-month (m/m)) in May, in line with market estimates, as the pandemic continued to hamper consumption. Prices fell further for transport & communication (-1.7% versus -1.2% in April), amid slumping oil prices. In contrast, inflation edged up for housing (0.8% vs 0.7%) while it remained unchanged for medical care (at 0.5%); clothing & footwear (at 1.4%) and food (at 2.1%). Core consumer prices, which exclude food and energy, dropped 0.2% y/y (the same pace as in April) and compared with market consensus of a 0.1% drop.

Tuesday

Tuesday morning, the focus will be on the Chicago Fed National Activity Index for June. The index rose to a record high of 2.61 in May from a downwardly revised record low of -17.89 in April as some lockdown restrictions caused by COVID-19 epidemic were lifted. All four sub-indexes made positive contributions in May with production and employment-related indicators leading the gains.

 In the evening, Japanese manufacturing for this month will be the focus. The AU Jibun Bank Japan Manufacturing PMI was revised higher to 40.1 in June from a flash reading of 37.8, amid the prolonged impact of the COVID-19 pandemic on activity. The latest reading signaled a 14th consecutive month of contraction as new orders, output, employment and purchasing activity continued to fall at sharp rates. On the price front, selling prices dropped as businesses strived to stimulate sales, while input cost rose following a decline in May. On the other hand, sentiment jumped back into positive territory for the first time since February. Meanwhile, the Services PMI was revised higher to 45.0 compared to May’s 26.5. It was the highest reading since February as restrictions lifted.

Wednesday

The priority Wednesday will be the number of US Existing Home Sales last month. Sales of previously owned houses in the US dropped 9.7% m/m (26.6% y/y) from the previous month to a seasonally adjusted annual rate of 3.91 million units in May, below market expectations of 4.12 million. It is the lowest reading since 2010 and the steepest annual drop in nearly forty years. Declines were seen in all regions, although the Northeast experienced the greatest drop. The median existing-home price for all housing types in May was $284,600, up 2.3% from May 2019 ($278,200).

 Thursday

Early Thursday morning we’ll get a look at consumer confidence in Germany. The GfK Consumer Sentiment indicator for Germany rose to -9.6 heading into July from an upwardly revised -18.6 in the previous month and compared with market consensus -12.0. Both economic and income expectations improved, as well as propensity to buy, following the gradual lifting of restrictions imposed to contain the coronavirus. The gauge for business cycle expectations jumped 18.9 points to 8.5, the highest reading since January 2019 and far above its long-term average of zero.

 Just before markets open, Initial Jobless Claims will be released. The number of Americans filling for unemployment benefits stood at 1.30 million in the week ended July 11th, little-changed from a revised 1.31 million claims in the prior week and above market expectations of 1.25 million. This was the smallest week-on-week decline since claims started to fall after peaking in March. The latest number lifted the total reported since March 21st to 51.3 million.

Shortly after, we will get a look at Consumer Confidence in the Eurozone. The consumer confidence indicator in the Eurozone was confirmed at -14.7 in June, compared with May’s -18.8, on the back of households’ much improved expectations in respect of their financial situation, their intentions to make major purchases and, particularly, the general economic situation. Same as in May, households’ assessments of their past financial situation deteriorated, but on a much smaller scale.

 Friday

Friday starts with several Markit PMI datapoints, beginning with the Eurozone. The IHS Markit Eurozone Composite PMI was revised higher to 48.5 in June from a preliminary estimate of 47.5 and compared to 31.9 in May. The reading pointed to the softer contraction in private sector activity in four months, as restrictions related to the coronavirus pandemic eased. Both manufacturing output (PMI at 47.4 vs 39.4 in May) and services activities (48.3 vs 30.5 in May) shrank at the weakest pace in four months. Though the Manufacturing PMI was revised higher to a four-month high, the latest survey suggested the Eurozone manufacturing sector remained in contraction territory for the past 17 months. Output and new orders declined at a softer pace as more businesses restarted operations following weeks of closure due to the coronavirus pandemic. Backlogs of work outstanding fell for a twenty-second successive month and employment dropped for a fourteenth month in a row. Purchasing activity also remained depressed. On the price front, both input costs and output charges continued to decline. Finally, confidence about production in the year ahead returned to positive territory and services optimism hit a four-month high during June.

Not long after the Eurozone, we will get Markit PMI for the United Kingdom. The IHS Markit/CIPS UK Composite PMI came in at 47.7 in June, little-changed from a preliminary estimate of 47.6 and compared to the previous month’s 30.0. Manufacturing production rebounded 9.4 points to 50.1 and service activity contracted at a softer pace, 47.1 compared to the previous month’s 29.0, in June as the economy reopened following months of disruption caused by the coronavirus pandemic. Manufacturing production rose slightly for the first time in four months, while new order intakes and employment fell at softer rates. On the price front, input costs rose the most in a year, although at mild pace, while output charges also increased. Looking ahead, business sentiment rose to a 21-month high in June due to clients reopening, an expected further loosening of COVID-19 restrictions and hopes that markets would revive at home and overseas to help recover growth lost during the pandemic.

Coming back to an American focus, lastly, we’ll get US Markit PMI. The IHS Markit US Composite PMI was revised higher to 47.9 in June from a preliminary estimate of 46.8 and compared to the previous month’s 37.0. Much softer rates of contraction were reported across the manufacturing and service sectors as the economy began to reopen following the coronavirus-related restrictions. New order inflows stabilized, and employment fell at softer pace, while excess capacity remained as backlogs of work continued to decline. On the price front, cost burdens were up for the first time since February, with private sector firms partly passing on higher costs to clients. Finally, companies expressed optimism towards the outlook for output over the coming year for the first time since March.

Next week, our interest concludes with New Home Sales in the United States. Sales of new single-family homes in the United States jumped 16.6% m/m (12.7% y/y) to an annualized rate of 676 thousand in May, beating forecasts of a 2.9% rise. However, data for April was revised sharply lower to 580 thousand from 623 thousand. Still, May’s figure is the highest in three months. There were 318,000 new homes on the market, down 2.2% from April. At May’s sales pace it would take 5.6 months to clear the supply of houses on the market. The median new house price rose $5,200 from a year ago to $317,900.

Looking Ahead – A Lack of Discipline 5-8-2020

Looking Ahead – A Lack of Discipline

Take it from us, Wall Street is not the only place where complacency can set in during a big rally in the S&P 500. US equities can seem to policymakers like a tick-by-tick opinion poll, particularly at a time like this when the fiscal and monetary might of the government is playing such a central role in driving risk asset prices. Plus, the Trump administration has more expressly tethered their fortunes to the stock market than any other in recent memory and under that formulation, buoyant equity prices can easily be taken as a validation of whatever policy prescriptions are currently being administered.

In short, policymakers can easily read too much into a stock market rally, as equities are a fickle friend. Though the S&P 500 might appear to “like” accelerated efforts to reopen segments of the US economy, that does not mean that it would not turn on a dime and head southward again if infection rates shoot up, threatening a re-imposition of lockdowns. The staunchest defender of the efficient market hypothesis still cannot claim that stocks are a crystal ball.

Even if policymakers take price action with the appropriate grain of salt, it remains the case that rising US stocks inevitably drain some of the urgency out of the proceedings in Washington DC. Market price action, particularly high profile, headline grabbing, 401K bashing stock market declines, can be very effective at focusing the minds of Congress, the Federal Reserve, and the administration on attempting to address the problems at hand. When a warning siren is blaring on Wall Street with equities in freefall, officials scurry around trying to figure how to silence it. Now, the S&P 500 is not even down 10% year-to-date and the Nasdaq is already back in positive territory for the year, so if stocks are telling everyone the coast is clear, why do we need another $1 trillion plus stimulus package?

A former Treasury official once recounted a story – during one of the later repetitions of the tedious debt ceiling showdowns, Wall Street had completely tuned out and stocks were rallying steadily even as Tea Party rabble rousers threatened a sovereign US default. A concerned member of Congress asked why stocks were so upbeat in the face of this significant threat, and the Treasury official explained that investors had seen this movie before a few times and figured they knew how it would end. The response was “don’t investors know that the less they worry about a debt ceiling accident, the more likely it becomes?” In other words, without the market performing a disciplinary function, policymakers are more apt to misbehave.

There seems to be a similar dynamic developing with regard to the next version of a pandemic relief bill (the latest CARES Act sequel). One of the key pillars of the turnaround in market sentiment is the massive fiscal response from Congress, but the very existence of the rally makes additional follow-through on the fiscal response less likely. Without conspicuous stock market losses to hold Congress’ collective feet to the fire, the less likely anything further gets done. The partisan armistice that was achieved during the torrid weeks of March and April looks like it may not hold as the House Democrats, Senate Republicans, and Trump administration officials head back to their entrenched positions and prepare for battle over policy turf while unemployment is at Depression levels. Earlier today, National Economic Council Director Kudlow said that negotiations are officially on pause for this month.

For policymakers looking for a more accurate market-based gauge of economic expectations, we would suggest focusing on the prescient Treasury market, which is signaling deep and persistent US economic doldrums, rather than on flighty and emotional equities, which are notorious for overshooting at inopportune times.

Looking ahead to next week, market participants will attempt to look past more horrendous economic data amid an overriding focus on the prospects for recovery.

 

  • US Retail Sales, Industrial Production & Consumer Confidence
  • US Initial Jobless Claims
  • China’s April Economic Readings
  • UK Q1 GDP

 

 

Global Economic Calendar

 

Monday

The week begins in Australia with the National Australia Bank’s Business Confidence Index. In March the index crashed to a record low of -66 from -4 in February. The index of business conditions plummeted to -21 from 0 the prior month, dragged down by sharp declines in sales, profits and employment. April is expected to be -70.

 

Tuesday

Tuesday’s focus will be on the Consumer Price Index for April. In March Headline CPI fell 0.4% m/m to 1.5% y/y. This is the lowest level since February 2019 and the largest monthly drop since January 2015, driven by a 10.2% slump in gasoline and a 1.6% drop in apparel prices. Core CPI, which excludes the more volatile food and energy components, fell 0,1% m/m putting it up 2.1% y/y but below market consensus of a 2.3% advance. March marked the first monthly drop in Core CPI’s since January 2010.

In Australia on Tuesday the focus will be on the Melbourne Institute and Westpac Bank Consumer Sentiment Index. In April the index fell 17.7% to 75.6, the biggest monthly fall in survey history, taking the index to its lowest level since February 1991. Outlook on Economic conditions for the next 12 months dropped 31% to 53.7 points, the lowest since the Financial Crisis, and conditions for the next 5 years fell 3.8% to 87. In addition, time to buy a major household item tumbled 31.6 % to the lowest on record of 76.2.

 

Wednesday

Wednesday brings the first estimate of First Quarter GDP in Great Britain. 4Q19 GDP was flat as household consumption was unchanged, marking the first period that it has not increased since the 4Q15, while gross fixed capital formation dropped the most in nearly two years, led by a contraction in business investment. Meanwhile, government consumption rebounded firmly, driven by education and health, and net trade contributed positively to the GDP as exports rose more than imports. On the production side, services activity grew at a softer pace, while production output fell due to declines in manufacturing, and mining and quarrying. In addition, construction output dropped into contraction territory. Expectations are for a 2% contraction in the first quarter as the UK implemented a lockdown to battle the virus.

In the US we will see Producer Price Index (PPI) for April. In March PPI fell 0.2% m/m but increased 0.7% y/y, after declining 0.6% m/m but increasing 1.3% y/y in February. March PPI was the lowest level since September 2016. Cost of goods fell 1%, mainly due to a 6.7% drop in energy costs. In contrast, prices of services increased 0.2%, mainly due to an 8.1% rise in margins for apparel, jewelry, footwear, and accessories retailing. Core PPI came in 0.2% m/m higher, after falling 0.3% in February, and above forecasts of a flat reading.

Wednesday also features the Australian Employment Report for April. In March the Australian economy added 5,900 jobs to 13,017,600, following a 25,600 gain in the previous month and easily beating market forecasts of a 40,000 fall. Australia’s seasonally adjusted unemployment rate edged up to 5.2% in March from 5.1% in February but less than market expectations of 5.5%. The number of unemployed people rose by 20,300 to 718,600. By the end of this quarter, the Employment Change in Australia is expected to be a loss of 65,000 persons and the Unemployment Rate in Australia is expected to be 9.00%.

 

Thursday

Thursday brings a host of data on the Chinese economy starting with Industrial Production for April. March production dropped by 1.1% y/y, after a 13.5% plunge in January-February, but far less dire than market expectations of a 7.3% fall. Output fell at a softer pace for both manufacturing and utilities, while a rebound was seen in mining.

We also will see Retail Sales for April. March sales declined 15.8% y/y in March, following a 20.5% slump in January-February, worse than market expectations of a 10% fall. Sales continued to decline for most categories, while sales rebounded for personal care, office supplies, and telecoms.

On Thursday in the US the focus will be on Initial Jobless Claims. Last week 3.169 mil Americans filled for initial unemployment benefits, compared to 3.846 mil in the prior week and above market expectations of 3.0 mil. Last week’s filings lifted the total reported since the beginning of the coronavirus crisis to 33.5 mil, equivalent to a 22% unemployment rate. The largest increases were seen in California, Texas, Georgia, and New York, while continuing jobless claims hit a new record of 22.647 mil. Tomorrow the BLS will release the April Employment Report where consensus expectations are for a loss of 22 mil jobs and a 20% unemployment rate.

 

Friday

Friday’s focus will be on US Retail Sales for April. March sales plunged 8.4% m/m and 5.8% y/y and was the largest monthly decline on record and the largest decline in trade since 2009. Excluding autos, retail sales fell 4.2% m/m. The biggest decreases were seen in clothing, furniture, restaurants & bars, motor vehicles & parts, sporting goods, hobby, musical instrument & books, and electronics & appliances. Receipts at gasoline stations also fell sharply as consumers cut back spending on fuel and as oil prices plunged. On the other hand, sales of food & beverages and health & personal care products rose.

We will also see Industrial Production for April. March production slumped 5.4% m/m and 5.5% y/y, the largest monthly drop since January 1946, and worse than market expectations of a 4% dive. Manufacturing output fell 6.3%, the most since February 1946. The declines were led by a 28.0% tumble in motor vehicles and parts output.

Finally, the week ends with the Michigan Consumer Expectations Index for May. In April the index fell to 71.8, the lowest reading since 2011. Surveys of Consumers chief economist, Richard Curtin stated that “In the weeks ahead, as several states reopen their economies, more information will reach consumers about how reopening could cause a resurgence in coronavirus infections. The necessity to reimpose restrictions could cause a deeper and more lasting pessimism across all consumers, even those in states that did not relax their restrictions.”

 

 

 

 

 

 

 

 

 

Looking Ahead – Political Economics of a Pandemic 3-6-2020

The coronavirus outbreak may not yet fit the scientific definition of a pandemic but it is clearly heading in that direction, according to some leading public health officials. Global financial markets are certainly not waiting for the official notification. Price action this week in Treasury markets is consistent with an exceedingly grim economic outlook and acute risk aversion, while the previously resilient S&P 500 is under increasing pressure.

Policymakers are not standing idly by. This week has seen a raft of rate cuts from global central banks, including an emergency 50 basis point reduction from the Fed on Tuesday. Meanwhile, the Trump administration is deploying an $8 billion spending package, which the President signed this morning after its swift trip to approval in Congress, and National Economic Council Director Kudlow is indicating that more fiscal measures are in the pipeline.

Meanwhile, US politics played out as a side-plot to the main narrative of the unfolding outbreak and the official responses being marshaled against it. There was plenty of debate among market participants over the extent to which US politics played a role in last week’s selloff, as Senator Sanders gained momentum in the Democratic field, and this week’s twin rallies on Monday and Wednesday, of 4.6% and 4.2%, respectively, which bookended a storming Super Tuesday comeback for Joe Biden, who is back as the presumptive frontrunner.

Many market contacts opined that Wednesday’s surge in the S&P 500 was specifically driven by Biden’s big win, and we certainly agree that healthcare stocks in particular received a boost given Biden’s opposition to Medicare-for-all. Shares of UnitedHealth and Anthem, two managed care giants, are up 9.2% and 6.8% this week despite all the chop in broader indexes. The degree of Joe-mentum in broader indexes and financial markets, however, is debatable.

Whether Medicare-for-all and other more radical healthcare reform proposals really are going to disappear with the Sanders campaign is also not so clear. Analysts are noting that a true pandemic has the power to shape societal norms and ideas, supporting (as one put it) “collectivist notions.” Calls from even Republican quarters that coronavirus patients should receive free treatment even if not insured may be just politicking, or it may represent a real shift. Bailouts for the service sector are unworkable, so perhaps direct payments to service sector workers (aka “helicopter money”) might be considered. It is certainly the time for policymakers to try to think creatively about responses to the epidemic, some of which might be difficult to entirely reverse when the coronavirus mercifully abates.

Looking ahead to next week, the European Central Bank is set to ease and global economic data will be scrutinized for any impact from the coronavirus epidemic.

  • US Economic Data
  • European Central Bank
  • EU Economic Data
  • China Economic Data

US Economic Data: Focus on consumer sentiment for virus impact  

Wednesday’s focus will be on the US Consumer Price Index (CPI) for February. January Headline CPI rose 0.1% m/m, coming in below forecasts of 0.2%. Shelter accounted for the largest increase, with cost of food and medical care services also rising. These increases offset a 1.6% decrease in the gasoline index. On a year-over-year basis CPI climbed to 2.5% from 2.3% in December and is the highest rate since October of 2018, mainly boosted by a 12.8% jump in gasoline cost. Core CPI, which excludes volatile items such as food and energy, increased 0.2% m/m, following a 0.1% gain in December and matching market expectations. Core CPI has risen 2.3% y/y, the same as in December.

The Producer Prices Index (PPI) for February will be released on Thursday. In January the PPI jumped 0.5% m/m, coming is well above market expectations of 0.1% rise. This was the largest monthly gain since October 2018, as services prices rose 0.7% and boosted by apparel, jewelry, footwear, and accessories retailing. On the other side, goods cost only advanced 0.1%. Year-on-year, the PPI rose 2.1%, the largest advance since May 2019. Core PPI also rose 0.5%, also well above the 0.1% forecasted.

On Friday the University of Michigan Consumer Sentiment Index for March will be released and will provide one of the first readings on how the coronavirus is affecting the consumer. February was revised slightly higher to 101 from a preliminary 100.9 and is the highest reading since March of 2018. The gauge for current conditions was higher than expected, while expectations rose less. One-year inflation expectations were 2.4%, while the five-year outlook was 2.3%. The coronavirus was mentioned by 8% of all consumers in February although on the last days of the February survey, 20% mentioned the coronavirus due to the steep drop in equity prices, as well as the CDC warnings about the potential domestic threat of the virus. While too few cases were conducted to attach any statistical significance to the findings, it is nonetheless true that the domestic spread of the virus could have a significant impact on consumer spending.

European Central Bank: No time to waste 

On Thursday the ECB will hold their Interest Rate Decision. At its January meeting the ECB left the key interest rate on the main refinancing operations steady at 0%, which was widely expected. The marginal lending facility was also kept at 0.25% and the deposit facility at -0.50%. During the press conference, ECB President Lagarde failed to provide any new information on the monetary policy, economic outlook and strategic review. Lagarde added that incoming data is in line with the ECB baseline scenario and there are some signs of moderate increase in underlying inflation. She added that the governing council stands ready to adjust the instruments if needed. At a subsequent speech in February, Lagarde called for fiscal stimulus measures in the Eurozone, warning that monetary policy isn’t “the only game in town” and the longer the accommodative measures remain in place, the greater the risk that side effects will become more pronounced.

EU Economic Data: Feeling contractions 

Thursday begins with Eurozone Industrial Production (IP) for January. December IP plunged 4.1% y/y, following a 1.7% contraction and compared to market forecasts of a 2.3% decline. The latest figure matched the December 2018 drop, which was the biggest since November 2009. Capital goods output led the fall, followed by intermediate goods, energy and durable consumer goods. Among the bloc’s largest economies, there was a contraction in Germany, Italy and France, while Spain’s output was little changed. For full year 2019, IP shrank 1.7%, the steepest contraction since 2012.

Chinese Economic Data: Price check  

The week begins with China’s Consumer Price Index (CPI) for February. January CPI jumped to 5.4% y/y from 4.5% in December and above market consensus of 4.9%. This is the highest inflation rate since October 2011 due to rising pork prices, stronger demand during the Lunar New Year holiday and the ongoing coronavirus outbreak. Food prices went up 20.6% y/y, the most since April 2008, with pork prices rising for the 11th month in a row and at a steeper rate. Pork prices have been rising during the last year amid a prolonged African swine fever epidemic and in January 2020, several lockdowns and transport restrictions due to the coronavirus outbreak weighed on the pork cost even more.

Friday begins with Chinese Foreign Direct Investment (FDI) for February. In January FDI into China rose 4% y/y to CNY 87.57 bil, or 2.2% to $12.68 bil. In yuan terms, foreign investment in high-tech industries went up 27.9 percent and accounted for 35.8 percent of the total FDI, with investment in high-tech service increasing 45.5 percent. Among the main sources of investment, FDI into China rose mainly from Singapore (40.6 percent), South Korea (157.1 percent), and Japan (50.2 percent); while FDI from the countries along the “Belt and Road” and ASEAN advanced by 31.3 percent and 44.8 percent, respectively.

Morning Markets Brief 3-13-2020

Summary and Price Action Rundown

Global financial markets are attempting to stabilize this morning after historic levels of volatility this week began to translate into more disorderly trading conditions and rapidly rising systemic risks, prompting an increasingly proactive response from central banks, though fiscal measures, particularly in the US and Germany, remain lacking. S&P 500 futures point to a 4.4% jump at the open, though this is dwarfed by yesterday’s plunge of 9.5%, which was the heaviest percentage point decline for the index since “Black Monday” in 1987. The index’s year-to-date losses stand at 23.2% while the downside from the mid-February record high is 26.7%. For context, investor optimism over prospects for synchronized stimulus from global central banks and governments to counteract the economic costs of the coronavirus epidemic evaporated yesterday as wrangling continued over US fiscal support and central bank action failed to support broad investor confidence. But nerves are steadying a bit this morning as headlines suggest that Congress and the administration may be closing in on an emergency spending deal today, while investors are focused on potentially dramatic stimulus from the Fed at their meeting next week, if not before. Equities in Asia posted steep losses overnight but today’s equity rebound began this morning in the EU. After the Fed stepped in yesterday to address some trading dislocations in Treasuries, the 10-year yield is up to 0.86%, and the dollar is hovering near top of its recent trading range. Brent crude is bouncing to $35 per barrel.

Hope Reemerges for a More Concerted US Government Response to the Pandemic  

After market confidence was progressively undermined by this week’s lagging US efforts to marshal a significant fiscal response to counter the economic fallout from the pandemic, investors will be intently focused on the US spending bill expected to be finalized today. With fiscal support widely deemed to be the most effective means for governments to diminish the human and economic toll of the outbreak, a sizeable and strategic US emergency budget that is emblematic of bipartisan unity would be a key step toward stabilizing market sentiment. Lack of apparent progress and partisan bickering over government budgetary support to help address the growing economic impact of the pandemic has been a significant downside catalyst this week, alongside President Trump’s Wednesday address to the nation, which focused on travel restrictions from the EU rather than domestic economic support or progress on virus testing capabilities. Meanwhile, fiscal stimulus measures have been ramping up overseas this week. The UK unveiled a $39 billion spending package, Australia announced a $10-13 billion plan, and Italy upped its program to $28 billion, which includes tax credits to hard-hit companies as the EU provides fiscal leeway to the indebted country. Also, Japan is marshalling a $15.6 billion anti-virus budget and Germany’s central bank president Weidmann advocated deficit spending. Meanwhile, the governments of Spain, Italy, and South Korea took a step reminiscent of the global financial crisis and banned short-selling of certain equities.    

 

Focus on the Fed as Extraordinary Easing by the European Central Bank Rings Hollow 

Monetary accommodation is being deployed in an attempt to blunt the deepening economic impact of the coronavirus and address liquidity issues, but the European Central Bank (ECB) underwhelmed yesterday, putting additional pressure on the Fed to step up its stimulus. The adverse market reaction to central bank easing yesterday highlights the difficult situation for monetary policymakers who lack cover due to stalled fiscal efforts. The ECB did not cut rates as expected but augmented its extraordinary monetary support by creating a new concessionary loan facility for small businesses and upping the asset purchase program, though some analysts were unimpressed with the temporary nature of the increase as well as well as ECB President Lagarde’s remarks that suggested a less permissive stance toward stabilizing the sovereign market pressures in the EU. Italian bonds sold off sharply following the ECB decision but have stabilized this morning. Later in the day, the Fed announced that $1.5 trillion would be on offer to address liquidity strains in short-term funding markets, as well as indicating that its balance sheet expansion program would now include purchases beyond three months, although this was not explicitly labeled quantitative easing. While short-term funding markets were soothed, broader markets received only a temporary lift from the targeted action. Futures markets project at least 75 basis points (bps) of Fed rate cuts by next week’s meeting and market participants are broadly expecting the official restart of quantitative easing.

 

Additional Themes

Overseas Monetary Easing – Overnight, central banks in Australia, China and Sweden released further liquidity into their banking systems, while Norway enacted an emergency 50bps rate cut. The Bank of Japan is reportedly mulling buying commercial paper and corporate bonds.

US Consumer Confidence in Focus – This morning, the March U. Michigan Consumer Sentiment index will be one of the earliest indicators of how the US economy is weathering the epidemic.

 

Looking Ahead – Tariff Man or Davos Man?

Looking Ahead – Tariff Man or Davos Man?

The new year has gotten off to a disquieting and dispiriting start in many ways, although through the lens of financial markets, the view is considerably rosier. Investors have remained quite calm in the face of a potential US-Iran war and now a deadly virus outbreak from China, with the quiet interim between these two worrisome developments featuring big equity gains.

The array of upside catalysts for US equities are well understood: easing global trade tensions, the positive tone of fourth quarter earnings reports, some encouraging global economic readings in recent days, and ultra-easy monetary conditions in the US and abroad.

On the last point, some Fed officials have recently sought to refute the idea that their massive asset purchases, which restarted in October and coincide with a ruler-straight uptrend in the S&P 500 since their inception, are anything but a technical tweak to lubricate front-end funding and bank reserve dynamics. But it seems that most market participants roundly disagree with this hair-splitting and see Fed liquidity operations as a key factor in fueling asset price upside.

Given ongoing uncertainty over funding market issues and prevailing belief that the Fed is effectively engaged in quantitative easing (QE4), we believe it is highly unlikely that the Fed will cease or even taper its balance sheet expansion as the program extends into 2Q and beyond. It is inauspicious for the Fed to make consequential policy decisions too close to an election, and that is all the more true now, as the Fed already blundered by overtightening in 2018 and has had President Trump on their case ever since, regularly lambasting them on Twitter.

While President Trump is sure to keep up rhetorical pressure on the Fed, his performance this week in Davos was considerably more balanced than some of his prior appearances. Attendees have told us that his speech was viewed as more of a campaign event than a real statement of global leadership on specific issues, but it was relatively restrained on the subjects of trade and geopolitics. He even put his hand up to join the Trillion Tree initiative.

However, Tariff Man was not entirely sublimated to Davos Man, as President Trump reiterated his threat to slap 25% tariffs on EU auto imports absent a trade deal. But he and French President Macron agreed to a tariff truce until year-end, past the US election, over digital taxes that US officials say unfairly single out US tech companies. And with the EU in a scramble to negotiate a post-Brexit trade deal with the UK, it is not clear that the negotiations with the US can be prioritized despite the US auto tariff threat.

Given the amorphous timeline for negotiating an EU trade deal and the lingering uncertainties over the executive authority to impose those particular auto tariffs, a full-blown US-EU trade fight seems unlikely to metastasize into a major market-mover this year, unlike the US-China tariff brawl from 2018 through last December. But that certainly does not mean that this week’s declines in shares of BMW or Daimler represent a great buying opportunity. EU auto stocks are undoubtedly suffering in part from fears that the virus in China will weaken demand in that key market for their vehicles, along with stocks of luxury goods companies and airlines. The evolution of the coronavirus outbreak trumps tariff considerations, and most other global macro factors, for the foreseeable future.

Looking ahead to next week, more 4Q earnings are due alongside US and Chinese economic data and meetings for the Federal Reserve and the Bank of England.

 

  • Corporate Earnings
  • US Economic Data
  • US Housing Data
  • Federal Reserve
  • Bank of England
  • EU Economic Data
  • China Economic Data

Corporate Earnings Reporting: Packed calendar

Peak Earnings Season moves into its third week on Monday beginning with D.R Horton and Whirlpool. Tuesday will focus on Apple, AMD, eBay, Harley Davidson, 3M, Pfizer and Starbucks. Wednesday is one of the busiest reporting days of the season with ADP, Boeing, Facebook, General Dynamics, GE, Hess, Mastercard, McDonald’s, Mondelez, Microsoft, Nasdaq, PayPal, AT&T, T. Row Price and Wynn Resorts. Thursday brings Amgen, Amazon, Biogen, DuPont, MSCI, Northrop Grumman, Raytheon, Sherwin-Williams, UPS, Visa and Verizon. Friday closes out the week with Caterpillar, Colgate-Palmolive, Chevron, Honeywell and Exxon Mobil.

Of the 86 S&P 500 companies that have reported 4Q19 results, 73% have topped earnings expectations and 66% have beaten sales estimates.

US Economic Data: Big figures

Tuesday will revolve around US Durable Goods Orders for December. In November new orders unexpectedly fell 2% month-on-month (m/m) while the market was expecting a 1.5% rise. This also followed a weak October where orders only grew 0.2%. Demand for transportation equipment led the fall, while declines were also seen in orders for machinery and primary metals.

With the signing of the Phase 1 trade deal with China last week, the US Trade Deficit has become a little less market-moving, but still important. In November the deficit narrowed to $43.1 bil from $46.9 bil. The trade gap shrank for the third straight month to the lowest since October 2016. Imports dropped 1% to the lowest level in 2 years due to falling purchases of aircraft, computers and cell phones. Exports increased 0.7% to $209 bil, boosted by sales of drilling and oilfield equipment, jewelry, autos and aircraft engines. The goods trade deficit with China narrowed 15.7% to $26.4 bil, with imports dropping 9.2% and exports jumping 13.7%. Year-to-date, the total deficit has narrowed $3.9 bil.

On Thursday in the US we will get the first estimate of US 4th Quarter 2019 GDP. In 3Q19 the US economy grew by an annualized rate of 2.1%, following a 2% expansion in 2Q19. The increase reflected positive contributions from PCE, federal government spending, residential investment, exports, and state and local government spending that were partly offset by negative contributions from nonresidential fixed investment and private inventory investment. Imports, which are a subtraction in the calculation of GDP, increased. Consensus estimates are looking for GDP growth of 2.1%.

Friday’s focus will be on US Personal Income and Spending for December.  In November Personal Income rose 0.5% m/m, following a 0.1% advance in October. Consumer Spending rose 0.4% m/m, following a 0.3% rise, as purchases of motor vehicles increased, as well as spending on healthcare. The Fed’s preferred inflation measure, the Personal Consumption Expenditures (PCE) Price Index, is also included in the same report. November PCE rose 0.2% m/m, the same pace as in October. Services prices advanced 0.2%, while goods prices were flat, after rising 0.3% in the prior month. Prices slowed for non-durable goods along with fell for durable goods. Year-on-year, the PCE price index advanced 1.5%, above the 1.4% rise in October. Core PCE, which excludes prices of food and energy, increased 0.1% m/m, the same pace as in October. Core PCE is the Fed’s preferred measure of inflation and they target a 2% level. Year-on-year, Core PCE went up 1.6%, easing from a 1.7% increase.

The week closes with the MNI Chicago Business Barometer. In December the PMI rose to 48.9 from 46.3 in November. The index remained in contraction territory for the fourth straight month. Production, new orders, order backlogs, employment and inventories indexes continued in negative territory. Supplier delivery times was the only component among the main five remaining above the 50-mark, which denoted expansion. Prices at the factory gate jumped 9.2% to 58.4, hitting the highest level since August. Business sentiment dropped by 1.2 points to 46.2 in the fourth quarter, marking the lowest quarterly reading since 2Q09.

US Housing Data: Safe as houses 

New Home Sales for December will be released on Monday. In November sales rose 1.3% m/m to a seasonally adjusted annual rate (SAAR) of 719K, recovering from a 2.7% drop in October and handily beating market expectations of a 0.3% fall. Analysts are crediting low mortgage rates supporting the housing market.

Wednesday will see Pending Home Sales for December. November sales climbed 7.4% year-on-year (y/y), the largest annual increase in pending home sales since June 2015. Contracts rose in all 4 regions, with the West up 14.0%, the South 7.7%, the Midwest 5.0% and the Northeast 2.6%. On a monthly basis, pending home sales rose 1.2%, rebounding from a 1.3% fall in October.

Federal Reserve: How easy is too easy?

Wednesday’s focus will be on the Federal Reserve’s first Interest Rate Meeting of the new year.  At its meeting in December the FOMC left the target range for the federal funds rate unchanged at 1.5-1.75%, as was widely expected and following a 25bps cut at the October meeting. Policymakers consider the current stance of monetary policy appropriate to support sustained growth, strong labor market conditions, and inflation near the 2% target. They also kept their growth forecasts unchanged for this year at 2.2%; 2% for 2020; 1.9% for 2021 and 1.8% for 2022. Inflation is projected at 1.5% in 2019; 1.9% in 2020; 2% in 2021 and 2% in 2022, same as the September projection. Regarding the future path of the fed funds rate, most participants expect no changes in 2020, although a hike is still seen in 2021, while the market is currently pricing in one cut in the back half of 2020. At next week’s meeting the market is pricing in 86% odds that the Fed keeps rates at the current levels and 14% chance that they hike 25bps. Investors will be attuned to any discussion by Chair Powell of financial conditions or, more specifically, asset price inflation. Expressions of concern on either of these points are unlikely but would have a material impact on investor sentiment.

Bank of England: Coin flip

On Thursday the Bank of England (BoE) holds their own Policy Meeting. At their December meeting the BoE’s Monetary Policy Committee (MPC) voted by a majority of 7-2 to hold the Bank Rate at 0.75%, as policymakers took a wait-and-see approach following Prime Minister Boris Johnson’s election victory and its possible implications on Brexit. Two members voted for a second month in a row for a rate cut amid concerns about the job market. With the House of Lords dropping their opposition to Prime Minister Johnson’s bill this week and the Queen signing it into law, the UK is now set to formally leave the EU at the end of the month. However, the agreement needs to be formally ratified by the European Parliament on Jan. 29, following which Britain will enter a transition period, scheduled to last until the end of the year, during which it will continue to be bound by EU laws until it negotiates a new trade deal with the remaining 27 member states. On the back of these recent developments the market is pricing in 46% odds that the MPC votes to cut rates by 25bps next week and 54% odds they hold steady.

EU Economic Data: Winter thaw?

On Monday in Germany the focus will be on the Ifo Business Climate Index. December rose to 96.3 from 95.1 in November and easily beating market expectations of 95.5. This is the highest reading since June and was boosted by an improvement in companies’ assessment of the current situation, as well as their expectations of the future. Across sectors, sentiment improved among manufacturers and service providers, but deteriorated among traders and constructors.

Wednesday brings a glimpse into the state of the German Consumer with the GfK Consumer Sentiment Indicator. January edged down to 9.6, which is the lowest level since November 2016. Economic expectations dropped 6.1 points to -4.4, far below the long-term average of 0, as Germans were less optimistic about the growth outlook. Furthermore, income expectations fell 10.5 points to 35.0, the lowest since October 2013, amid fears of more job cuts in some industrial sectors, mainly in the car industry and its suppliers. However, the willingness to buy went up 2.2 points to 52.2.

Thursday will show how the European business sector is feeling about the economy with the Business Climate Indicator for the Euro area for January.  December fell by 0.04 points to -0.25, the lowest level since August 2013, as managers’ assessments of past production and stocks of finished products declined sharply. Also, their assessments of overall order books and export order books deteriorated, while production expectations improved firmly.

Chinese Economic Data: Pre-outbreak reading

Also, on Thursday is the Official NBS Manufacturing PMI in China. In December the PMI was unchanged at 50.2. The latest reading pointed to the second straight month of expansion in factory activity, supported by government stimulus measures and optimism surrounding a trade war truce with the US. Output growth accelerated and new orders continued to rise, boosted by a rebound in exports. However, employment fell further. Future expectations softened slightly from November’s seven-month high. January’s readings are expected to settle slightly lower and manufacturing is forecast to barely avoid dipping back into contraction.

 

Looking Ahead – 12/6/19

Just OK is Not OK

Today’s highly-anticipated nonfarm payroll report featured a blockbuster number of 266k new jobs, handily topping an estimate of 183k and giving the many traders who were playing for a mildly disappointing reading a case of whiplash. But the reflexive selloff in Treasury markets settled down quickly and futures markets are still projecting that the Fed will be back cutting interest rates in the second half of next year. That bond market price action is consistent with a pretty sober outlook for growth in 2020, which matches the broad consensus among economists that US GDP is going to soften modestly to 1.8% from this year’s 2.3%. Continue reading “Looking Ahead – 12/6/19”