Odds for a new round of relief spending are rising and taking markets up with them. Meanwhile, Brexit drama continues with no deal in sight. Vaccine rollouts move down to the third spot and oil and OPEC drops to fourth after a successful meeting last week. Finally, Trump – China tensions are heating up.
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.
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.
Summary and Price Action Rundown
US equities retrenched slightly today after a month of powerful gains that were spurred by positive vaccine news and a relatively clear and orderly US election process, followed by pro-growth cabinet nominations by the incoming Biden administration. The S&P 500 backed off from Friday’s record high, declining 0.5% to shave year-to-date upside to 12.1%. The tech-heavy Nasdaq outperformed as economic fundamentals weighed on the Dow Industrials, which still registered its best monthly performance since 1987. For context, the Dow, which tends to be more sensitive to economic fundamentals, has underperformed significantly during the pandemic but was revitalized by the announcements of effective vaccines throughout November. The Euro Stoxx Index and Asian equities also retreated to close the month. A broad dollar index edged above its multi-year low today, while Treasuries have remained steady, with the 10-year yield hovering at 0.86%. Brent crude prices retreated below $48 per barrel as the ongoing OPEC meeting kept traders in suspense (more below).
US Economic Data Shows More Hints of Softening
With US economic figures providing some garbled signals over the past few weeks, and analysts bracing for further deterioration amid the ongoing resurgence in Covid-19, today’s releases added to the evidence of a renewed slowdown. The MNI Chicago Business Barometer fell to 58.2 in November from 61.1 in October. New Orders dropped 5 points to the lowest level since August, while Production fell 1.2 points. Inventories slipped 2 points to a three-month low. However, Supplier Deliveries jumped 4.9 points to the highest level since May as firms saw delivery delays, while Prices at the Factory Gate surged 9.8 points to the highest level in two years. A special question asked: “Does the outcome of the general election have any effect on your forecast? “A majority 73.2% said that the election results do not influence their forecasts, while 12.5% saw their forecasts increase and 14.3% reported a decrease.” Similarly, the Dallas Fed manufacturing gauge undershot expectations, printing 12.0 versus a consensus estimate of 14.3 and the prior month’s 19.8.
Also, the Small Business Confidence index sank to its lowest level on record at a reading of 48, one-point below the previous low reported in the second quarter (Q2) during the worst of the pandemic-driven economic turmoil. Though responses in the current fourth quarter (Q4) survey, conducted in the period between November 10-17, were impacted by the virulent resurgence in Covid-19, the reinstatement of targeted lockdowns, and the Congressional deadlock in providing additional fiscal relief, survey-data suggests that President-Elect Biden’s victory further compounded the decline in relation to the Main Street outlook on taxes and regulation. Of the 2,200 small business owners polled, 53% expect tax policy to have a negative impact on their business during the next 12 months, and 49% said government regulation will have a negative impact over the same period. While the decrease in outlook is notable, responses from small business owners are heavily skewed by their political affiliations, and the index overall leans conservative. Separated by political connection, 75% of Republicans believe tax policy will have a negative effect and 72% said regulations will be negative, while only 15% and 11%, respectively, of Democrats believe tax and regulatory changes will hinder business operations. Overall, the survey indicates 34% of owners believe Joe Biden will be good for small business, while 55% say the opposite. Though by political affiliation, 89% of Republicans are pessimistic of the Biden administration on small business and 86% of Democrats are optimistic. The stark contrast in business sentiment following the election “reveals how deeply politics has become embedded in the public’s assessment of the economy, and in particular how divided the country is,” stated Laura Wronski, research science manager at SurveyMonkey. She continued to note over the past several quarters that Republican respondents consistently reported a higher degree of confidence than Democrats did, and post-election, that trend has flipped. At the moment however, the feasibility of the Biden team’s tax and regulatory proposals are unclear, and contingent upon Georgia’s runoff Senate races, as a Republican-controlled Senate would surely constrain Biden’s policy agenda.
Lastly, pending home sales in November fell 1.1% month-on-month, well below market expectations of a 1% gain, and following a 2% drop in October. However, this still leaves sales up 20.2% year-over-year following a 20.8% rise in September. Contract activity was mixed among the four major US regions, with the only positive month-over-month growth happening in the South, although each region saw year-over-year gains in pending home sales transactions. Lawrence Yun, NAR’s chief economist said, “The housing market is still hot, but we may be starting to see rising home prices hurting affordability. Both the inventory of homes for sale and mortgage rates are now at historic lows.”
Today’s mixed economic readings follow last week’s pre-holiday data dump that also showed signs of backsliding in weekly jobless claims and October Personal Income.
Vaccine Developments in Focus
With trials showing impressive effectiveness of the various vaccines, investors are now pondering the remaining unknowns of the rollout timeline and public uptake. Moderna’s stock rose 20.2% today on news of its plans to apply for emergency authorization use for its vaccine, a move that could drastically change the course of the pandemic. The results of Moderna’s Covid-19 vaccine trial were released today showing 94.1% efficacy, bolstering hopes of initial vaccine deployment before year’s end. Out of 30,000 participants, only 11 of the 15,000 that received the vaccine developed Covid-19, compared with 185 from the 15,000 who received the placebo. No severe cases emerged in the subset receiving the vaccine compared to 30 in the placebo subset, implying a near 100% efficacy at preventing severe cases. Moderna stated it will file with the FDA on today for emergency authorization of the vaccine following Pfizer’s application on November 20th. The FDA will review both Pfizer and Moderna’s filings on December 10th and 17th respectively, after which, if the panel grants emergency authorization, the process will escalate to the advisory committee from the CDC for recommendations on the first recipients of the vaccine. Once those recommendations are made, vaccines are cleared for distribution and use. Moderna has stated it expects to have 20 million doses by the end of 2020 and as many as 1 billion doses globally in 2021. – MPP view: Investors are still caught in the transition phase between the grim near-term public health reality and its economic consequences, and giddy optimism over the longer term view of widespread distribution of the effective vaccine delivering us from the pandemic.
Additional Themes
Oil Slides with OPEC+ Lacking Consensus – The conclusory cartel meeting was rescheduled from tomorrow to December 3rd as reports suggest continued disagreement over the potential extension of price-supporting output restrictions beyond their scheduled expiry in January. Oil prices reversed a portion of their recent upside today, but remain close to multi-month highs, as caution sets in over the possibility of a less ambitious extension or even a deadlock. For context, prices of international benchmark Brent crude and US benchmark WTI both reattained levels from early March last week amid a confluence of bullish factors, including the brightening demand outlook stemming from the encouraging Covid-19 vaccine developments, a weakening dollar, and indications that Saudi and Russia were set to push their fractious OPEC+ allies to hold to their supply curbs well into 2021, with a three-month extension the consensus expectation. Reports now suggest that the timeframe could be limited to two months or feature a gradual tapering of the curbs over three to four months. The UAE is said to be one of the key holdouts and had reportedly threatened to withdraw from OPEC earlier this month over dissatisfaction with other members’ uneven compliance with the cartel supply cuts. Nigeria and Iraq are the two OPEC members that have struggled to implement the curbs and have been pushed for compensatory cuts. – MPP view: Like stocks, oil prices are in a transition phase as traders try to look past the dire near-term outlook to the post-vaccine demand surge. This will make cartel discipline harder to maintain into 2021, but Russia/Saudi should succeed in securing one last supply curb extension at their meeting this week. As we have expected, anticipation of this last OPEC boost will provide some short-term support to prices, and post-election US stimulus dynamics (when they materialize) should provide some additional lift, but we expect the dismal demand dynamics of the coming quarters to keep prices capped, though this short-term rally has exceeded our expectations. This burst of optimism in oil markets has increased the risk that OPEC fails to deliver meaningful additional support to the market in this week’s pivotal meeting, as member discipline will be questionable.
Reserve Bank of Australia Meeting – This evening the Reserve Bank of Australia (RBA) will hold an interest rate meeting. At the November meeting the RBA lowered its cash rate to an all-time low of 0.1% from 0.25%. Policymakers said they would buy A$100 billion of government bonds with maturities of around five to 10 years over the next six months. The RBA also cut its target for three-year bond yields to 0.1%, from 0.25%, to align with the cash rate, which, it pledged will remain unchanged until inflation is sustainably within its 2-3% target band. GDP growth is expected to be around 6% over the year to June 2021 and 4% in 2022 while the unemployment rate is expected to remain high, but to peak at a little below 8%, rather than the 10% expected previously. This meeting is not expected to see any significant change in policy or statement as the November saw significant loosening in policy. – MPP view: We shall see if the RBA mentions its currency during the meeting, which is at its highest level against its US counterpart since 2018, but even if so, there should be scant impact. We expect the Biden administration, when it takes over, to quietly make the case to US allies that now is a particularly inauspicious time for currency controversies as the US attempts to course-correct on pandemic containment and patch up its raw internal political and socioeconomic divisions.
Summary and Price Action Rundown
Global risk assets are mixed this morning after stellar month-to-date performance, with US equities registering record highs last Friday, as investors assess the latest China-related developments and await a key OPEC decision tomorrow. S&P 500 futures indicate a 0.2% lower open after the index edged to a new record high in Friday’s holiday-shortened session, gaining 0.2% to up its year-to-date gain to 12.4%, while the Dow Industrials has slipped a bit after crossing 30,000 for the first time last week. Equities in the EU are consolidating their recent gains as well, while Asian stocks were mostly lower overnight. A broad dollar index is descending to a new multi-year low, at a level last seen in April 2018, while longer-dated Treasuries are generally steady, with the 10-year yield ticking up to 0.85%. Brent crude is paring its recent upside, dipping below $48 per barrel, ahead of a pivotal OPEC meeting (more below).
China Headlines in Focus
Solid purchasing managers’ index (PMI) figures overnight reflected the robustness of China’s recovery but more potential additions to the US trade blacklist highlight ongoing US-China tensions. China’s official PMI figures for November topped estimates across the board overnight, with the composite reading registering a solid 55.7 versus October’s 55.3. For context, PMI readings over 50 denote expansion. The manufacturing reading accelerated to 52.1, outpacing the consensus forecast of 51.5 and the prior month’s 51.4. Services were even more impressive at 56.4, topping estimates of 56.0 and October’s 56.2. Nevertheless, the People’s Bank of China added liquidity to the financial sector as analysts cited proactive management of year-end cash needs. This positive data has helped support the renminbi near its strongest level versus the dollar since June 2018, which takes pressure off the incoming Biden administration on the currency front, but other key US-China sources of tension persist, with the outgoing Trump administration obviously intent on keeping up the pressure in its final weeks. Reports overnight indicated that the White House is preparing to add more Chinese companies to its trade blacklist due to ties with China’s military, including chip giant SMIC and oil major CNOOC, shares of which fell 2.7% and 14.0%, respectively, on the Hong Kong exchange overnight. Analysts have been pondering the extent to which the Biden administration will continue President Trump’s hardline policy direction against China. – MPP view: We believe the Biden administration will take a more multi-lateral approach to confronting China, focusing more on using its human rights transgressions to marshal international pressure on officials and businesses, while still maintaining the segments of the Trump China policy that cover national security, IP, property rights, and investments. We expect trade and currency to be de-emphasized, or perhaps more accurately, dealt with in a more subtle fashion.
OPEC+ Members Lack Consensus Ahead of Pivotal Meeting
With the cartel and its allies meeting today and tomorrow, traders are highly attuned to signs of disagreement over the key issue of whether or not to extend supply caps into 2021. The full cartel meeting will commence later today following headlines indicating that informal interactions among members revealed rifts over the potential extension of price-supporting output restrictions beyond their scheduled expiry in January. Oil prices are retracing a portion of their recent upside this morning, but remain close to multi-month highs, as caution sets in over the possibility of a less ambitious extension or even a deadlock. For context, prices of international benchmark Brent crude and US benchmark WTI both reattained levels from early March last week amid a confluence of bullish factors, including the brightening demand outlook stemming from the encouraging Covid-19 vaccine developments, a weakening dollar, and indications that Saudi and Russia were set to push their fractious OPEC+ allies to hold to their supply curbs well into 2021, with a three-month extension the consensus expectation. Reports now suggest that the timeframe could be limited to two months or feature a gradual tapering of the curbs over three to four months. The UAE is said to be one of the key holdouts and had reportedly threatened to withdraw from OPEC earlier this month over dissatisfaction with other members’ uneven compliance with the cartel supply cuts. Nigeria and Iraq are the two OPEC members that have struggled to implement the curbs and have been pushed for compensatory cuts. – MPP view: Like stocks, oil prices are in a transition phase as traders try to look past the dire near-term outlook to the post-vaccine demand surge. This will make cartel discipline harder to maintain into 2021, but Russia/Saudi should succeed in securing one last supply curb extension at their meeting this week. As we have expected, anticipation of this last OPEC boost will provide some short-term support to prices, and post-election US stimulus dynamics (when they materialize) should provide some additional lift, but we expect the dismal demand dynamics of the coming quarters to keep prices capped, though this short-term rally has exceeded our expectations. This burst of optimism in oil markets increases the risk that OPEC fails to deliver meaningful additional support to the market in this week’s pivotal meeting, as member discipline will be questionable.
Additional Themes
Black Friday Spending Shows a Resilient US Consumer – US consumers spent $9 billion online on Black Friday, up 21.6% on a year ago. Adobe had originally forecast sales of between $8.9 billion and $9.6 billion. The figure makes Black Friday the second-largest online spending day in US history, after 2019’s Cyber Monday. The National Retail Federation (NRF) has predicted that holiday sales during November and December will increase between 3.6% and 5.2% this year from 2019 to a total of between $755.3 billion and $766.7 billion, up from last year’s 4% gain that totaled $729.1 billion. Of that amount, NRF expects that online and other non-store sales will increase between 20% and 30% to between $202.5 billion and $218.4 billion, up from $168.7 billion last year. Nevertheless, holiday sales metrics can often contrast with overall consumption figures, and the disappointing October retail sales reading suggested a degree of deterioration in demand as the pandemic intensifies into its second winter season.
Signs of Progress Keep Brexit Deal Hopes High – The pound is turning higher again this morning, though remains below recent multi-month highs versus the dollar and euro, amid upbeat assessments of the prospects for an agreement this week between the UK and EU to avoid a disorderly year-end Brexit. The thorny matter of fishing rights apparently remains the key sticking point, though UK Foreign Secretary Raab expressed optimism that a compromise could be found, and indicated greater clarity on possible resolution of UK state aid and “level playing field” issues. – MPP view: Our base case remains a hard and/or disorderly Brexit at year-end, though the renewed pressure from the pandemic is adding further impetus for PM Johnson to compromise and secure a deal, while the sidelining of arch Brexiteer Cummings also suggests a possible softening of the UK position. We do not expect the EU to give much ground from here.
In this week’s Five Minute Macro, global markets remain positive on a Yellen Treasury and continued positive vaccine news. New entrants at 3 and 4 are this week’s OPEC meeting and oil prices along with the Pound and Brexit deal, while US political uncertainty continues to easy.
Stimulus negotiations move back into the first spot as vaccine news moves down to second and political uncertainty moves into third. Brexit negotiations and the pound follows and emerging markets enter at the fifth spot.
Summary and Price Action Rundown
Global risk assets are subdued this morning after yesterday’s losses as investors continue to weigh the grim near-term outlook for the pandemic and the global economy against upbeat medium-term prospects for stimulus measures and eventual vaccine rollout. S&P 500 futures indicate a 0.1% lower open after the index retreated further from Tuesday’s record high yesterday, dropping 1.2% to reduce its year-to-date upside to 10.4%. Equities in the EU are lagging as regional leaders ponder further coronavirus containment measures, while Asian stocks were mixed overnight. A broad dollar index is up slightly from its recent multi-year low, while longer-dated Treasuries are firm, with the 10-year yield dipping to 0.86%. Brent crude is hovering around $44 per barrel despite some bearish signs of OPEC disunity ahead of its pivotal month-end meeting.
Investor Focus Shifts Back to Dire Near-Term Pandemic Dynamics Despite Vaccine Optimism
The announcement of school closures in New York City yesterday due to the accelerating coronavirus outbreak highlighted the downside risks to the economy over the coming quarters before widespread vaccine availability. US stock futures are still in the red this morning after equity losses accelerated yesterday afternoon following the announced closure of schools in New York City due to rising infection rates across the metropolis. The specific trigger was the weekly average rate of positive tests rising over 3%, which some analysts had thought might occur as early as last weekend. Mayor de Blasio characterized the closure as temporary but gave no indication of the timeline for reopening and cautioned a decline in the positivity rate alone may not be sufficient to send city students back to the classrooms. Although President-Elect Biden’s public health advisors have declined to support a strict lockdowns like the one imposed in South Australia this week, or even partial shutdowns like those instituted in Germany and France late last month, more state and municipal leaders are tightening restrictions and calling for families to stay home for the Thanksgiving holiday. Most recently, Kentucky announced statewide school closures this morning as well as a ban on indoor dining. Near-term concerns over the pandemic and its economic fallout are overbalancing more upbeat vaccine news, this time from AstraZeneca and Oxford University. Specifically, this vaccine is said to be highly effective in older adults, who are more vulnerable to this coronavirus and would be a higher priority for immunizations. – MPP view: We expect renewed US fiscal stimulus negotiations in December to be challenging and result in only a mini-deal before year-end (if that) and disabuse more optimistic investors of the notion that a GOP-controlled Senate will go higher than $500 billion for the post-transition pandemic relief deal (minus any amounts agreed next month). This puts the spotlight on the Fed, and we think they will not shy away from signaling augmented asset purchases at their December meeting.
US Jobs Data in Focus Amid Rising Concerns of Double-Dip Recession
Analysts will be attuned to this morning’s jobless claims data for any signs of backsliding after weeks of improvement. After US retail sales for October signaled a warning about consumer fortitude ahead of what is increasingly likely to be a challenging winter from both a public health and economic standpoint, with large swathes of the US beset by the ongoing seasonal Covid-19 surge, labor market dynamics will be a key focus for market participants and policymakers alike. Initial jobless claims for the week ending November 14th are expected to improve slightly to 700K after the prior week’s tally showed that 709K Americans filed for unemployment benefits, down from the previous week’s revised level of 757K and below market expectations of 735K. This is the lowest number since late March but still well above pre-pandemic levels. Also, there were more than 298K new applicants to the Pandemic Unemployment Assistance (PUP) scheme, which covers workers that do not qualify for initial claims, compared with 362K in the previous period. So combined, 1.007 million claims were filed in the last two weeks. Furthermore, 6.79 million Americans filed continuing jobless claims in the week ended October 31st, comparing favorably with market expectations of 6.90 million and marking the lowest level since the pandemic began. All told, as of October 24th, 21.157 million Americans are receiving some fort of Federal assistance, down from 21.531 million in the previous week.
Additional Themes
Fed Nominee Shelton Faces Tough Odds – With the Senate now on recess until November 30th, and the potential for the balance of the Senate to shift with Democrat Mark Kelly being sworn in that day to replace Martha McSally after winning the race in Arizona, Judy Shelton’s nomination to the Fed Board is in jeopardy. For context, the process to confirm her was stalled in the Senate on Tuesday after Vice President-elect Kamala Harris returned to the chamber to cast a key vote today as two key Republicans were absent because of exposure to Covid-19. The other nominee under consideration, Christopher Waller, has broad support and is expected to be confirmed. Analysts have begun to speculate about which candidates the incoming Biden administration might consider if Shelton’s nomination falters and they have the chance to fill the vacancy. – MPP view: This would be a windfall for the Biden White House, particularly given the importance of Fed-Treasury coordination going forward. Even if her nomination fails, the Shelton precedent remains a signal to future administrations to get “your people” onto the FOMC to have your back.
Turkish Lira Spikes on Rate Hikes – Turkey’s volatile currency is up 1.8% versus the dollar this morning, extending its recovery from late September’s all-time low, as the newly installed central bank governor implemented a 475 basis point interest rate hike to 15% at his inaugural meeting. President Erdogan has sent mixed messages regarding his support for the program of the newly installed economic team, and has a track record of interfering with central bank independence and advocating unorthodox economic theories. – MPP view: Emerging market assets have generally received a positive impetus from the Biden win, as he is assumedly more constructively engaged in international cooperation and development goals, along with the boost from a weaker dollar (please see our Market Viewpoints piece on EM from November 8th).
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.
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.”
Summary and Price Action Rundown
US equities climbed higher again today as more positive vaccine news kept investors focused on the encouraging medium-term outlook despite grim near-term pandemic developments. The S&P 500 posted a fresh record high today, gaining 1.2% today with growth-sensitive stocks remaining in the lead, to hoist its year-to-date upside to 12.3%. The Euro Stoxx Index and Asian stocks also registered robust gains. A broad dollar index slid back toward recent lows while Treasuries were little changed, with the 10-year yield hovering below multi-month highs of 0.89%. Brent crude slid back below $43 per barrel.
Vaccine Hopes Continue to Drive Markets Despite Dire Coronavirus Developments
Pandemic outperformers lagged traditional economy stocks again today even as daily infections remained grimly elevated and containment measures in various areas were tightened further. US stock indices soared to record heights today after Moderna announced that its experimental coronavirus vaccine is 94.5% effective at preventing infection, according to recent results from its large-scale Phase 3 trial. Moderna is the second company to announce preliminary data on an apparently successful product, following Pfizer and BioNTech’s announcement last Monday that its experimental dose is 90% effective. Moderna’s trial, including more than 30,000 volunteers, appeared to prevent virtually all symptomatic cases of the virus. The vaccine’s effectiveness was tested by inoculating one study group and giving another placebos. Of the 95 participants who contracted coronavirus, only five received the vaccination beforehand. Statistically, the virus showed no difference in effectiveness in key subgroups, though the test results will still undergo independent analysis before the product is considered for release to the general public. Earlier this morning, Dr. Fauci, director of the National Institute of Allergy and Infectious Disease, stated “these are very impressive and very encouraging and exciting results,” though reasserted the need to continue wearing masks, social distancing, and maintaining Covid-cautiousness.
The virus has now affected more than 11 million Americans directly, with the latest million cases occurring in the last six days alone. Moncef Slaoui, chief scientist for Operation Warp Speed, suggested that should any early vaccine candidates receive permission for emergency use, doses could be distributed as early as this December. However, health officials specified that front-line health workers and those most at risk would receive the initial vaccine, while the general public would likely see expanded access by April 2021. After the announcement, “stay-at-home stocks” slipped, with shares of Zoom, Netflix, Logitech, and Teladoc down 1.1%, 0.8%, 0.3%, and 3.4%, respectively, with these price responses considerably milder than after Pfizer’s announcement last Monday. In contrast, those stocks that have struggled during the pandemic rose, with AMC, Norwegian Cruise Lines, and Royal Caribbean climbing 4.7%, 6.3%, and 6.9%, respectively, and all major airline carriers posted robust gains as well. – MPP view: With these exciting developments bolstering investors’ conviction that a vaccine will be effective and widely available at this time next year but near-term pandemic developments suggesting a virulent short-term economic impact, markets will be in transition mode for the coming quarters as investors attempt to navigate these complex public health and economic cross-currents. It had seemed premature to get really excited about cyclicals and the post-Covid growth story, but today’s estimates of widespread availability were earlier than Pfizer’s projections last week. Meanwhile, we continue to expect the ardor to cool for pandemic winner stocks, but for the moment, the positive tide seems to be lifting almost all boats. Re-upped QE by the Fed early next year, which we expect, will lend support to liquidity/momentum-driven upside in the short run.
Wall Street Ponders Candidates for SEC Head
Investors are speculating over future potential regulations under a Biden administration as Securities Exchange Commission (SEC) Chief Jay Clayton announced he will retire from his post before the end of 2020. An appointee of the Trump administration, Clayton pursued changes to regulations considered by some as burdensome and hindering corporate growth, often in the face Democratic opposition. Clayton’s SEC clipped off rules under the Dodd-Frank law meant to tighten control over Wall Street banks and eased rules for small cap companies to raise capital on the market. The SEC cited rules Clayton ushered in to simplify how information is presented to individual investors and his initiatives towards strengthening the agency’s inspection and enforcement programs.
Several names are currently being discussed as to who Biden will appoint as Clayton’s replacement. The two most concerning to banks and investment firms are Gary Gensler, the head of Biden’s transition team examining federal regulators, and former Manhattan federal prosecutor Preet Bharara. Gensler, former head of the Commodity Futures Trading Commission, has a history of clashing with Wall Street over issues including the manipulation of LIBOR, leaving investors concerned over the regulatory environment under his potential leadership. However, his consideration for other prominent cabinet posts keeps his appointment as SEC chairman far from certain. Bharara is also considered by investors as a worrisome option due to his contributions in the shutdown of SAC Capital Advisors in the wake of the 2008 crisis, though he is also being considered for top positions at the Justice Department. Other names progressives have pushed for include former SEC Commissioner Kara Stein, current SEC Commissioner Allison Lee, and Dodd-Frank contributor Michael Barr. Moderates have advocated for Robert Jackson Jr. who opposed many of the Trump-era rule cuts at the SEC and pushed, along with Preet Bharara, for clearer insider-trading rules to better protect investors.
Additional Themes
Regional Bank Mega-Deal – Regional banking giant PNC announced that it is purchasing Spanish financial group BBVA’s US business for $11.6 billion. The US division has $104 billion in assets under management, with banking subsidiary BBVA USA operating 637 branches in Texas, Alabama, Arizona, California, Florida, Colorado, and New Mexico. The combined bank will have a coast-to-coast presence in 29 of the 30 largest markets in the US. PNC’s all-cash deal is the second-largest US banking acquisition since the 2008 financial crisis, behind only the combination of SunTrust and BBT in December of 2019. The purchase price represents almost 50% of BBVA’s current market cap and is expected to close in mid-2021 and will create the fifth-largest US retail bank with more than $550 billion in assets. The deal is attractive to PNC because it accelerates PNC’s presence in the Southeast and West. Shares of PNC gained 2.2% while US-listed shares of BBVA vaulted 11.4% higher.
Empire State Manufacturing Slackens – The New York Fed’s regional factory gauge for November showed a slower-than-anticipated pace, printing 6.3 versus a consensus forecast of 13.5 and the previous month’s reading of 10.5. This is the slowest rate of expansion since August as the Empire State survey continues to lag other Fed regions in the manufacturing recovery. Although official data remains relatively resilient, tomorrow’s retail sales and industrial production data for October will be scrutinized for signs of backsliding. High-frequency indicators such as restaurant and travel bookings are showing incipient signs of rolling over in recent weeks, corresponding with the nationwide surge in coronavirus cases. – MPP view: Vaccine news this good has also inoculated markets against growth concerns, even if tomorrow’s retail sales data undershoots.
This week positive vaccine news continues to drive market optimism, while political uncertainty falls as a normal transition looks likely. The White House turning up pressure on China moves up a spot and uncertainty about further stimulus moves down. Finally, Brexit negotiations enter the homestretch.
