ABS Report (Premium Edition) – Nov. 30, 2020

It’s month-end and that could generate some volatility as positions are squared. Stocks and bonds rallied to end a shortened session on Friday with more new highs on the S&P 500 and the NASDAQ, with the Dow holding just under the 30k level hit last week. Treasury rates richened measurably ahead of a big month-end duration extension where the index is estimated at 0.16 years, the largest since 2009.

The S&P 500 and equities continue a very strong bullish trend. The chart above shows the S&P 500 and Vix which is extremely low. That being said, we have a very big week ahead of data which could cause a dip below 3500 (R1) if the data is disappointing.

It’s going to be a busy week of data and events to kick off December, with the jobs report on Friday headlining. There’s also testimony on the CARES Act from Fed Chair Powell on Tuesday, Wednesday. Today’s slate includes the Chicago PMI, the Dallas Fed manufacturing index, and pending home sales. Tuesday’s slate has the ISM, vehicle sales, and construction spending. ADP is reported Wednesday, while the ISM services index and jobless claims are out Thursday. Nonfarm payrolls, factory orders, and trade are slated for Friday.

• Vaccine developments boost optimism, but virus a near term headwind
• Wall Street rallied to record highs, Dow hit 30k on promising vaccines
• Bond rates likely capped by ongoing central bank accommodation
• U.S. employment and ISM reports likely to show some loss of momentum
• Fed Chair Powell testifies on CARES Act Tuesday, Wednesday,
• Canada monitors employment, GDP, and trade reports
• Attention on Asian PMI reports from China, Japan, India, Korea
• RBA expected on hold at 0.10%; RBI seen steady at 4.0%
• Brexit uncertainties continue, ongoing risk of no-deal scenario
• Eurozone releases PMIs, CPI, jobless, retail sales PPI
• German HICP, unemployment, manufacturing orders awaited
• Switzerland reports retail sales, inflation, KOF leading indicator, PMI

Key Market Trends

S&P 500 Sectors

Week Ahead: Game Changer? – November 30, 2020

Equities rallied last week and have posted strong gains in November thanks to positive vaccine developments that should be a major game changer in 2021. Indeed, the increasing prospect that a distribution could begin as soon as early December have boosted optimism for a return to normalcy sooner rater than later. Investors have cheered and global stocks (ex-China) have posted double digit gains on the month even as record spikes in virus cases and more restrictive measures pose significant threats to the durability of the recovery. And even under the most optimistic vaccine scenarios, global economies will face a challenging winter. That realization, and ongoing central bank accommodation should cap bond yields if not knock them lower. There are plenty of key data reports this week, but amid the contrasting vaccine/virus dynamics, none are likely to alter general outlooks. On the other hand, a heavy slate of central bank speak that could provide clues on further accommodation.

With Wall Street hitting fresh record highs last week, including Dow 30k, profit taking and month-end rebalancing could could weigh. However, dip buying should limit selling pressure. A lot of focus will be on the November nonfarm payroll report given renewed shutdowns and layoffs. ISMs and vehicle sales will also be monitored for further insights on the economy through November. Fed Chair Powell testifies to Congress, where he is expected to reiterate his call for more fiscal stimulus while maintaining that the Fed has plenty of tools remaining. A gaggle of ECB speakers are expected to maintain the message that economies still need substantial monetary and fiscal support, with the bank readying a package of measures for the December meeting. In Asia, Japan has its usual month end data dump while China releases the always closely followed manufacturing PMIs.

NORTH AMERICA

The U.S. slate is heavy with data and Fedspeak that will provided timely insights into the impact of cross-currents at play in the economy during November. We’ll also be monitoring retail sales as the holiday shopping season kicks off. We suspect pent up demand will be a major source of support. However, the November employment (Friday) will be front and center. We expect a 540k November nonfarm payroll gain, moderating from the increases of 638k in October, 672k in September, and 1,494k in August. The jobless rate should be steady from 6.9% in October, versus a 14.7% peak in April. Hours-worked are assumed to rise 0.5% after a 0.8% October gain, with the workweek steady at a 20-year high of 34.8 for a third consecutive month, from 34.7 in August. Concerns over the labor market have been stoked by rising initial claims that have suggested renewed restrictions are having a negative impact. ns are hampering the growth rebound. However, we’d caution that powerful seasonal patterns for claims between mid-November and late-January will be disrupted this year by the holiday behavioral shifts due to the virus, so we are hesitant to read too much into the two-week initial claims rise.

The ISM reports are expected to indicate a loss of momentum heading into winter. The ISM manufacturing index (Tuesday) is expected to ease to a still strong 57.5 in November from a 2-year high of 59.3 in October. The index saw an 11-year low of 41.5 in April. The ISM services index should tick down to 56.5 from 56.6 in October, versus a 17-month high of 58.1 in July, an 11-year low of 41.8 in April, a 13-year high of 61.2 in September of 2018, and an all-time low of 37.8 in November of 2008. Other reports this week include auto sales (Tuesday), construction spending (Tuesday), initial jobless claims (Thursday), factory orders (Friday), and the trade deficit (Friday).

Fedspeak will be of interest with Chair Powell headlining. He’ll be testifying on the CARES Act on Capitol Hill, first to the Senate Banking Committee (Tuesday), and then to the House Financial Services Committee (Wednesday). We expect him to argue for more fiscal stimulus, especially with the expiration of more programs at the end of the year, and as the surge in virus cases and increased restrictions threaten the pace of the recovery. We do not expect him to give any indication, and front run the FOMC decision on QE at the December 15-16 meeting. The FOMC minutes from the November 4-5 meeting threw some cold water on expectations for a near term increase, though several policymakers have suggested they support more buying if the economy appeared to be stumbling and/or interest rates were rising. Other Fedspeakers include governors Brainard (Tuesday) and Bowman (Friday), along with presidents Daly (Tuesday), Evans (Tuesday), and Williams (Tuesday).

The corporate earnings remain lean this week: Monday has BHP, Zoom, and Autohome. Tuesday brings Salesforce.com, Bank of Nova Scotia, Bank of Montreal, Veeva Systems, Trip.com, HP, and NetApp. On Wednesday, results are due from RBC, CrowdStrike, Synopsys, and Splunk. TD Bank, Dollar General, CIBC, Marvell Technology, Kroger, Cooper Companies, and Ulta Beauty are due Thursday. There are not any reports due Friday.

A busy calendar is on tap in Canada this week. Q3 GDP, September GDP, November employment and October trade will provide insights into the size of the rebound in Q3 and the impact of the spike and infections and renewed restrictions that began in October and accelerated in November. Q3 GDP (Tuesday) is expected to rebound 48% after the -38.7% plunge in Q2 that came as the economy was nearly shut down. September GDP is seen rising 0.9% after the 1.2% bounce in August. Employment (Friday) is projected to rise 40k in November following the 83.6k gain in October. The unemployment rate is seen at 8.8 from 8.9%. The trade deficit (Friday) is anticipated to narrow to -C$3.0 bln in October from the -C$3.3 bln shortfall in September. The Q3 productivity report (Wednesday), Q3 current account (Monday), October industrial product price index (Monday) and October building permits (Monday) are also due out this week. While the relative deluge of data is of interest, we suspect it will not materially change the outlook for moderation in Q4 growth due to the fresh restrictions that have come as virus cases pick-up, followed by a return to “normal” next year as the vaccine takes hold. Notably, there have been whispers that the economy could be setting up for a surge in inflation if demand returns quickly next year — something the BoC is likely to monitory closely.

ASIA

This week’s calendar is very busy with key reports around the region with much of the focus on PMIs. Japan has its month-end data deluge that includes industrial production, retail sales, and unemployment. China’s ecnomy remains at the forefront of the recovery and this week’s reports on November manufacturing and services PMIs should confirm that. Elsewhere, production, trade, growth and price data populate the calendar. For central banks, Australia’s RBA meets, with no change to the 0.10% OCR expected. India’s RBI meets as well, also expected to leave policy unchanged at 4.00%.

In Japan, it’s a heavy slate of month-end releases. Preliminary October industrial production (Monday) is seen slowing to a 2.5% y/y pace from 3.9% previously. October retail sales (Monday) should see large retailers expand 5.0% y/y after a -13.9% rate of decline, and total sales increase 5.5% y/y following the -8.7% drop in September. October housing starts and construction orders are also due Monday. October unemployment (Tuesday) is expected unchanged at 3.0%, with the job seekers/offers ratio steady at 1.03. The Q3 MoF capex survey (Tuesday) is forecast at -14.0% y/y from -11.3% y/y. November auto sales are due Tuesday. November consumer confidence (Wednesday) is expected at 33.1 from 33.6. The November services PMI (Thursday) should dip to 48.3 from 48.7. China official November CFLP manufacturing PMI (Monday) is seen improving to 51.7 from 51.4. The November Caixin/Markit manufacturing PMI (Tuesday) is forecast rising to 53.9 from 53.6. The November Caixin/Markit services PMI (Thursday) is projected to dip to 56.5 from 56.8.

South Korea October industrial production (Monday) is expected to slow to a 0.5% y/y pace from 8.0% previously, while revised Q3 GDP (Tuesday) is seen unchanged at -1.3% y/y. The November trade report (Tuesday) should see the surplus widen to $7.0 bln from $6.0 bln. November CPI (Wednesday) is estimated to have warmed to 0.4% y/y from 0.1%. October current account figures are due Friday. India’s RBI meets (Friday) and is expected to leave policy unchanged, with the repo rate at 4.00%, where it’s been since the 75 bp easing in March. Growth has been picking up steam of late, making further cuts unnecessary for now.

Thailand‘s October trade and current account figures are due (Monday). November headline CPI (Friday) is seen unchanged at -0.5% y/y. Indonesia November CPI (Tuesday) is estimated at 1.6% y/y from 1.4%. Hong Kong October retail sales (Tuesday) are seen falling -11.0% y/y from -12.9% on a value basis, and down -12.0% from -13.4% on a volume basis. Singapore November PMI is due Thursday. In the Philippines, November CPI (Friday) likely edged up to 2.6% y/y from 2.5% previously. Unemployment is due Friday.

Australia’s calendar has the RBA’s meeting (Tuesday), expected to result in no change to the 0.10% rate setting. At the last meeting, the bank cut its key interest rate to 0.1% from 0.25%, as was widely anticipated. It also announced a package of measures designed to secure a rapid recovery from the crisis now that lockdowns have lifted. Governor Lowe appears before the House of Representatives Standing Committe on Economics (Wednesday). The economic data slate is busy this week, with Q3 GDP (Tuesday) highlighting — we anticipate a 3.0% rebound after the -7.0% drop in Q2 (q/q, sa). Retail sales (Friday) are seen rebounding 0.3% in October after the -1.1% drop in October. The trade surplus is projected at A$6.0B in October from A$5.6 bln in September. The current account for Q3 (Tuesday), October building approvals (Tuesday) and October housing finance (Thursday) are also due out this week.

New Zealand’s docket has the trade price indexes (Wednesday) and building permits (Thursday). The next RBNZ policy meeting is February 24 of next year. Earlier this month, the RBNZ topped up stimulus with a new Funding for Lending Program to start in December, aimed at reducing banks’ funding costs and lowering interest rates. The bank’s economic projections were less pessimistic on growth and inflation and cut back the projections for peak unemployment. The cash rate was left unchanged at a record low 0.25% and the Large Scale Asset Purchase program remained at NZD 100 bln. The statement reiterated the commitment to use additional tools if necessary, but markets have started to price out expectations that the bank will move towards a negative rate regime next year, on the back of the less pessimistic outlook. The balance of risks remains tilted to the downside, but it seems that in the central scenario further rate action won’t materialize.

EUROPE

Eurozone: euphoria over vaccine developments has eased somewhat amid the realization that despite the progress, there remain open questions and that European economies are likely to face further misery over the winter and well into next year even under the most optimistic vaccination scenarios. At the same time, Brexit talks still don’t seem to be going anywhere and the risk of a no-deal scenario remains on the table, which leaves markets cautious and the ECB on course to strengthen asset purchase and conditional loan programs at the December 10 meeting. With that in mind, comments from ECB officials including Lagarde ahead of the start of the blackout period ahead of the meeting will continue to sound dovish.

Data releases this week are highly unlikely to change the ECB’s dovish posture even if preliminary inflation data for November are likely to show a slight uptick in the headline rate. At an expected -0.4% y/y (median same), the German HICP rate (Tuesday) would still remain firmly in negative territory and the same holds for the overall Eurozone CPI (Tuesday), which is seen rising to -0.2% y/y from -0.3% y/y. Variations in energy prices continue to play a very large role in headline inflation numbers and Eurozone PPI (Wednesday) is expected to lift to -2.2% y/y, with officials concerned that the prolonged inflation undershoot will ultimately lead to a change in inflation expectations and real deflation down the line.

Final PMI readings for November meanwhile are expected to confirm that lockdowns have plunged the services sector into a deep recession that is also dragging down overall activity, even if manufacturing continues to benefit from the ongoing recovery in major export markets and to a certain extent stock building ahead of the end to the U.K.’s transition period. The manufacturing PMI (Tuesday) should be confirmed at 54.8 and the services reading (Thursday) at just 46.9, which would leave the composite at 50.0, signaling stagnation.

Against that background, the recovery in the labour market is likely to have come to an end again and we see the German sa unemployment number (Tuesday) rising by 10K in November, which should see the sa rate rising to 6.3% from 6.2%. The overall Eurozone jobless number is even more backward-looking but also expected to lift to 8.4% in the October reading from 8.3% in September.

Eurozone October retail sales and German manufacturing orders for the same month are still expected to show improvements over the month, but with the former boosted by consumers preparing for lockdowns and the latter not reflecting the misery in the services sector. In our view, positive surprises will not change the overall outlook.

There are once again plenty of ECB speakers, which are likely to collectively stress that even with vaccines underway, economies will still need substantial monetary and fiscal support and that the ECB is readying a package of measures for the December meeting. A strengthening of PEPP and TLTRO programs remains the most likely scenario for the next meeting.

U.K.: market participants have been continuing to wait in vain for a concrete development from the EU and UK future relationship negotiations. On Friday, the BBC cited an unnamed source saying face-to-face talks will take place in London over the weekend, though the EU’s Barnier would not travel unless the UK changed its negotiating stance. Fishing and level playing field rules remain the major blocks. What is clear, deal or no deal is that EU and UK’s relationship will be an ever-evolving and complicated one when the UK exits its transition membership of the common market and customs union at year-end. The UK wants to diverge from EU rules, while EU states are concerned that the UK will undercut their markets. The relationship will be subject to dispute arbitration with the possibility of retributive measures. This is why markets are anticipating only a narrow free trade deal, which would be centered on manufacturing.

Note that the EU is considering a stopgap measure for UK financial services to kick in on January 1. The European Commission reportedly told member states yesterday that a decision on equivalence won’t be ready until next year (the UK financial markets must maintain equivalent rules to access EU markets).

Pressure on the UK government is intense. Brexit ideologues in PM Johnson’s party are demanding that no quarter is given to the EU, while a leaked Whitehall document this week warned of a “perfect storm” of chaos in the event of a no-deal in the Covid-19 era. U.S. president-elect Biden warned London that the scope for a deal with the U.S. would be compromised if there is a return of a hard border on Ireland — which is what could happen in a no-deal. In the no-deal scenario, the UK government would have the choice between respecting the withdrawal agreement it signed with the EU to maintain a free-flowing border on Ireland, at the price of imposing a border down the Irish Sea between Northern Ireland and the rest of the UK. Such a scenario would likely spark protests and quite possibly violence from loyalist militants, or break the EU withdrawal agreement, which would result in a hard Irish land border and a lot of bad faith between the UK and EU and the UK and the U.S., and quite possibly violence from republican militants. The stakes are high, which is why we expect a deal.

The UK data calendar this week is highlighted by the BoE’s monthly lending and money supply report, along with the final November PMI reports, which should affirm the picture of a double-dip recession-bound UK economy, albeit much shallower than the first recessionary dip that was seen earlier in the year. The UK is coming out of national lockdown on Thursday, with the exception of Northern Ireland, with localized tiered levels of restrictions to replace. The net effect will be increased economic activity.

Switzerland: the Swiss data calendar is busy, featuring the latest reports for retail sales, inflation, the KOF leading indicator, and the manufacturing PMI survey.

Economic Data & Calendar

We have a heavy slate of releases following the holiday weekend, culminating in the November jobs report that we expect will include a 540k payroll rise and a jobless rate that remains at 6.9%. An array of October reports should reveal a widening in the trade deficit, a solid climb in factory orders both with and without transportation, and a big rise for construction spending. We expect November down-ticks for ISM and ISM-NMI from elevated October levels.

Week of November 30

The hefty U.S. data dump in advance of the Thanksgiving holiday provided some clarity on how the cross currents of rising production to feed restocking inventories alongside mounting coronavirus restrictions will play out in the Q4 economic reports. The claims report provided a first indication that increased restrictions are hampering the growth rebound, though the powerful seasonal patterns for claims between mid-November and late-January will be disrupted this year by the holiday behavioral shifts with the virus, so we can’t read too much into the two-week initial claims rise. Modest pull-backs in consumer and producer sentiment in November are probably a clearer indicator that there are some disruptive effects that will presumably linger into December.

We also saw another robust durables report in October that left a new all-time high for nondefense capital goods shipments excluding aircraft, as business investment continues to rebound sharply despite a shift away from commercial construction. We also got news last week that the 737 MAX is now clear for take off, though Boeing will need to coax its customers to take delivery, and they estimate that about half of the 450 inventoried aircraft will be delivered by the end of 2021. We may see a batch of these shipped before 2020 is over that would top off what is otherwise a solid 22% estimated growth clip for equipment spending in Q4.

The advance indicators report documented a continued steep climb in both the foreign trade data and inventory data through October, leaving a clear sign that activity centered Q4 at levels well above the Q3 average, leaving a likely big Q4 GDP gain that we peg at 6.4%, even if growth slows into year-end with the coronavirus. If there is going to be a GDP hit from a “second wave,” it will primarily be seen in Q1.

And finally, it’s now clear that the housing sector is posting an historic boom through the second half of 2020 and likely the first half of 2021, with a wide array of new 14-year highs and all-time highs unfolding across all of the major metrics. The various sales measures are challenging or exceeding the peak years of the 2006 housing market frenzy, with fundamental drivers that will likely extend for some time. The sales data are now way ahead of construction, leaving considerable building activity in the pipeline from sales that have already been booked. The population is rapidly becoming more suburban and home-bound with the combination of the coronavirus and heightened fears about the efficacy of urban policing, and this may take time to reverse course. The shift leaves a housing stock that is now inconsistent with preferences, and hence the need for substantial new construction.

Construction Spending: 0.8%

Construction spending is expected to rise 0.8% in October after a 0.3% September increase. We expect a 2.7% private residential construction increase after a 2.8% September rise, a -1.0% decline for public construction after a -1.7% September decrease, and a -0.3% private nonresidential drop after a -1.5% September decrease. We expect construction spending to grow at an 8.2% pace in Q4, matching the Q3 pace, following a -15.2% Q2 contraction rate, but a firm 11.2% growth pace in Q1. Construction hours-worked from the jobs report rose 1.1%, in October, and construction jobs jumped 84k. The building material sales component of retail sales rose by 0.9% in October. We saw a solid round of October housing starts data, a 4.3% October surge in existing home sales to a 15-year high, and a small October new home sales dip that left a four-month stretch of the strongest rates since 2006. We’re seeing a moderation in the MBA purchase index and pending home sales from prior all-time highs. All the housing measures rebounded sharply in Q3, and this should translate to a lagged construction spending climb into year-end.

ISM/ISM-NMI: 57.5/56.5

The ISM index is expected to fall to 57.5 in November from a 2-year high of 59.3 in October, versus an 11-year low of 41.5 in April, a 14-year high of 60.8 in August of 2018, and a low from the last recession of 34.5 in December of 2008. The all-time low for the measure is 30.3 in June of 1980. The ISM-NMI index should tick down to 56.5 from 56.6 in October, versus a 17-month high of 58.1 in July, an 11-year low of 41.8 in April, a 13-year high of 61.2 in September of 2018, and an all-time low of 37.8 in November of 2008. We’re seeing a modest November pull-back in available producer sentiment measures to still-elevated levels, as output continues to rise in the face of plunging inventories and rising sales, though with an emerging headwinds from from new coronavirus restrictions.

Initial Jobless Claims: 770k

Initial jobless claims for the week of November 28 should remain elevated, though we assume an -18k decline in the weekly pace to 770k, after a 30k bounce to 778k from 748k. Claims should average 749k in November, after averages of 786k in October, 855k in September and 992k in August. The 748k November BLS survey week reading undershot recent BLS survey week readings of 797k in October, 866k in September, and 1,104k in August. We assume a 540k November payroll rise, after gains of 638k in October, 672k in September, and 1,494k in August.

Continuing claims fell by -301k to 6,071k in the week of November 14, following a minor downward revision in the prior week’s reading that left a 6,372k figure. We expect a -250k decrease to the 5,821k area for the week ending on November 21, as workers continue to return to work and leave the jobless pool, alongside the inflow of newly unemployed, and the loss of benefits to some workers who were laid off early in the pandemic. Continuing claims fell by -1,752k between the October and November BLS survey weeks. We saw prior declines of a hefty -4,924k in October BLS, -1,745k in September, -2,459k in August, -2,280k in July, and -1,610k in June.

Employment: 540k

We expect a 540k November nonfarm payroll increase, after gains of 638k in October, 672k in September, and 1,494k in August. We assume a 55k factory jobs increase in November, after a 38k October rise. The jobless rate should be steady from 6.9% in October, versus a 14.7% peak in April. Hours-worked are assumed to grow 0.5% after a 0.8% October gain, with the workweek steady at a 20-year high of 34.8 for a third consecutive month, from 34.7 in August. Average hourly earnings are assumed to rise 0.1% in November, with a headwind from further unwinds of the April distortion from the concentration of layoffs in low-wage categories slows. This translates to a y/y gain of 4.2%, down from 4.5%. We previously saw a 3.5% expansion-high pace for y/y wage gains in both February and July of 2019, before the pandemic-boost in March and April. We expect the payroll rebound to continue through year-end, though the climb is leaving a net drop for employment for 2020 overall.

Trade Deficit: -$65.2 bln

The trade deficit is expected to widen in October to -$65.2 bln from -$63.9 bln in September, versus a 14-year high of -$67.0 bln in August. We expect exports to grow 2.5% to $180.7 bln, while imports grow 2.3% to $245.9 bln. The trade deficit should average -$66.8 bln in Q4 after gaps of -$64.8 bln in Q3, -$55.0 bln in Q2 and -$39.7 bln in Q1. For the year, we expect a -$57.2 bln average deficit, versus a -$48.1 bln average in 2019. A minor October petroleum price dip should weigh on both exports and imports of petroleum. We saw further gains for vehicle trade that extended huge increases from a May bottom, but large declines in each prior month since February. We expect a sustained high October bilateral goods deficit between the U.S. and China of about -$30 bln as businesses rebuild inventories, as signaled by strong Chinese bilateral export data. The bilateral gap previously posted a pull-back between mid-2019 and March to an -$11.8 bln March deficit that marked the smallest gap since 2004. We saw a -$43.1 bln all-time wide bilateral gap in October of 2018.

Factory Orders: 1.1%

Factory orders are expected to grow 1.1% in November, with a 1.1% ex-transportation increase. Shipments should rise 1.1%, while inventories grow 0.1%. The forecasts reflects an 1.3% durable goods orders rise with a 1.3% ex-transportation rise and a 1.2% transportation increase. The factory goods I/S ratio should ease to 1.41 from 1.42 in September and an all-time high of 1.70 in April, versus a 1.46 level in March that matched the high of the last recession. We saw a prior all-time high of 1.66 at the start of the series in January of 1992. The durable goods I/S ratio fell in October to 1.70 from 1.72, versus an all-time high of 2.24 in April, a 1.88 high from the last recession, and a prior all-time high of 2.05 in January of 1992. We expect gains in factory orders, shipments and inventories going forward as companies continue to dig their way out of the deep April hole.

Week of December 7

We have a thin economic calendar in the first full week of December. The November inflation reports should reveal lean headline figures for both CPI and PPI, alongside 0.2% core price gains, with a modest downdraft from gasoline prices. We expect solid October wholesale gains of 0.9% for inventories and 1.0% for sales. The GDP and employment data imply a slight Q3 productivity growth trimming to 3.9% from 4.9%, after a hefty 10.6% Q2 pace.

Productivity, Q3 Revised: 3.9%

The GDP data imply a Q3 productivity growth trimming to 3.9% from 4.9%, after an unrevised 10.6% Q2 gain. We expect an unrevised 43.5% Q3 growth rate for the BLS output measure, following a -36.8% Q2 contraction rate. We expect a 37.8% (was 36.8%) Q3 growth rate for hours-worked, after an unrevised -42.9% Q2 drop. We saw big upward compensation revisions in the Q2 and Q3 GDP data, and we now expect Q3 growth in compensation per hour of -2.2% (was -4.4%), after a 21.9% (was 20.0%) Q2 clip. The mix should leave Q3 unit labor cost growth of -5.7% (was -8.9%), after a revised 10.4% (was 8.5%) Q2 pace.

Wholesale Inventories: 0.9%

Wholesale inventories are expected to grow 0.9% in October after a 0.7% September increase, as seen in the advance indicators report. Sales are estimated to rise 1.0%, after a 0.1% September climb. The I/S ratio should hold at 1.32 from September (was 1.31), versus an all-time high of 1.68 in April, leaving a ratio back near the pre-pandemic reading of 1.31 in January and February, and well below the prior all-time high of 1.41 in January of 2009 for a data set extending back to 1992. Business inventories should rise 0.6% in October, with other component gains of 0.1% for factories and 0.8% for retailers. The inventory and sales data will be restrained by a downdraft in gasoline prices. Wholesale inventories faced big Q2 headwinds from a plunge in imports that was reversed through Q3. We’re now seeing solid wholesale sector gains with the recovery in imports from China, following a big pullback in imports from China between mid-2019 and March of this year. International trade is disproportionately captured at the wholesale level of production.

CPI/Core: 0.1%/0.2%

We expect a 0.1% November gain for the CPI headline and a 0.2% core price rise, following flat rates for both in October. CPI gasoline prices look poised to fall -0.4% in November, leaving a headwind for the headline. As-expected November figures would result in a 1.1% headline y/y increase, following a 1.2% October rise. Core prices should show a 1.6% y/y rise, as seen in October. As with PPI, the headline inflation figures were lifted by oil prices over the summer, while the core figures face divergent pressures from diminished demand but growing supply bottlenecks that remain problematic in Q4. We expect headline y/y gains for CPI to remain around the 1.2% area into early Q1, alongside 1.6% y/y core price gains, with slightly smaller y/y gains for the PCE chain price metrics. With average inflation targeting, the Fed will face no pressure to withdraw accommodation any time soon.

PPI/Core: 0.0%/0.2%

We expect a flat November PPI headline figure with a 0.2% rise or the core, following gains of 0.3% and 0.1% respectively in October. As expected readings would result in a y/y headline PPI metric of 0.6%, up from 0.5% in October. We expect a 1.5% y/y rate for the core, up from 1.1% in October. A small trimming in energy prices should restrain the headline. The y/y core reading is assumed to ease to the 1.5% area into early Q1, with a downward hit from reduced aggregate demand but a boost for prices from supply disruptions. Supply constraints for some sectors remain problematic in Q4. Oil prices have flattened, after bottoming in April and climbed sharply through August, thanks to a better supply-demand balance in the petroleum sector.

Michigan Sentiment, Preliminary: 77.0

The Michigan sentiment report for December is expected to tick up to 77.0 from 76.9 in November, versus a 7-month high of 81.8 in October, as coronavirus headwinds inhibit the climb back toward the 89.1 March reading. We saw an 8-year low of 71.8 in April and a 14-year high of 101.4 in March of 2018. Expectations are pegged at 70.6 from 70.5 in November and a 7-month high of 79.2 in October. We saw a 7-year low of 65.9 in July that was also seen in May. Current conditions should edge up to 87.1 from 87.0 in November and a 4-month high of 87.8 in September. The 1-year inflation measure should tick down to 2.7% from 2.8% in November, while the 5-10 year inflation measure remains at 2.5% for a second month versus a 7-month low of 2.4% October. We’ve seen divergent oscillations in the various confidence metrics since June around levels that are in expansion territory, despite huge fluctuations with the pandemic, on-and-off stimulus, vaccines, and the elections. Restraint in confidence with rising coronavirus restrictions should cap gains in spending into year-end.

Week of December 14

We have a heavy release slate in the middle week of December. We expect flat November retail sales readings alongside a further steep climb in business inventories. Industrial production is expected to rise sharply in November, alongside an elevated housing starts level and a rise in permits to a new 14-year high. Trade prices are expected to post moderate November gains, while the Empire State and Philly Fed indexes oscillate around firm levels. The current account balance is expected to widen sharply in Q3 as imports fueled the start of the inventory reversal, wile the leading economic index extends its climb with gains across most components.

Empire State/Philly Fed Index: 7.0/20.0

The Empire State index is assumed to rise to 7.0 in December from 6.3 in November, after plunging to an all-time low of -78.2 in April, versus a bottom from the last recession of -33.7 in March of 2009. The Philly Fed index is seen falling to 20.0 in December from 26.3, versus a 40-year low of -56.6 in April. The Philly Fed index posted a bottom in the last recession of -40.9 in November of 2008. These diffusion indexes should remain elevated as factory activity continues to ramp up, though we have emerging coronavirus headwinds since late-November that may restrain the indexes into year-end. Conditions have improved rapidly since Q2 however, as producers face remarkably lean inventories and rebounding demand in many industries above pre-pandemic levels that should sustain production increases despite new retail coronavirus restrictions.

Import/Export Price Index: 0.3%/0.4%

Import prices are estimated to rise 0.3% in November, with a 0.4% export price rise, after October figures of -0.1% imports and 0.2% for exports. We expect a November boost from petroleum prices, alongside support from a decline in the value of the dollar since Q2. Ex-petroleum import prices are expected to grow 0.2%, while ex-agriculture export prices grow 0.4%. Oil prices rose between April and August, as major OPEC+ production cuts and reduced drilling activity brought balance back to the petroleum sector, though prices moderated between August and October before a bounce into late-November. The rebound in global production has been associated with bottlenecks and shortages in some industries that have raised some prices, though weakness in aggregate demand has limited upside inflation pressure.

Industrial Production: 0.9%

Industrial production is projected to rise 0.9% in November, following the 1.1% October headline increase. We saw a October increases of 1.0% for manufacturing and 3.9% for utilities, but a -0.6% decrease for mining. In November, we expect a 0.8% gain for manufacturing, a 1.5% rise for mining, and a 1.0% rise in utilities. We expect a vehicle assembly rate climb to an 10.9 mln clip in November from 10.6 mln in October, versus a 0.1 mln trough pace in April. We saw a 3.7 mln prior trough in January of 2009 that marked the start of the auto bankruptcies. Capacity utilization should rise to 73.5% from 72.8% in October. Industrial production expanded at a 41.4% clip in Q3, and we expect an 8.0% growth pace in Q4.

Retail/Ex-Auto Sales: Unchanged/Unchanged

We expect flat November retail sales readings for both the headline and ex-autos measure, following respective October gains of 0.3% and 0.2%. We expect a -0.4% drop for the CPI gasoline index that leaves a flat figure for service station sales. Unit vehicle sales should be steady from 16.2 mln in October, versus a 16.3 mln pace in September, leaving a likely flat path for the auto dealer component. We expect some unwind of the October boost to non-store sales from Amazon Prime day, but a boost from rising coronavirus restrictions alongside the emergence of the holiday shopping season. We expect a continued rebound for sales of clothing, furniture, electronics, and appliances as we continue to reverse the big Q2 hit. Real consumer spending is expected to grow at a 6.7% rate in Q4 after a robust 40.6% growth clip in Q3.

Business Inventories: 0.6%

Business inventories are estimated to rise 0.6% in October after a 0.7% September increase. Our forecast incorporates a 0.1% rise for factory inventories, alongside gains of 0.8% for retailers and 0.9% for wholesalers as seen in the advance indicators report. Sales should rise 0.8% in October, after a 0.7% gain in September. As-expected readings would result in the I/S ratio remaining at August’s 6-year low of 1.32 for a third month, versus an all-time high of 1.67 in April and a 1.47 peak from the last recession in both March of 2009 and December of 2008. Inventories in the Q3 GDP report showed a -$4.3 bln liquidation rate after a record -$287.0 bln pace in Q2, leaving a fourth consecutive quarterly decline. We expect a $36 bln accumulation rate in Q4. Inventories were already unwinding pre-COVID-19 as earlier tariff front running reversed course before the big Q2 hit, leaving room for the start of a protracted inventory rebound in Q4 of 2020.

Housing Starts: 1.520 mln

Housing starts are expected to post a November down-tick to a 1.520 mln pace, after rising to a 1.530 mln clip in October from 1.459 mln in September, versus a 13-year high of 1.617 mln in January. Permits are expected to climb to a new 14-year high of 1.560 mln in November, extending the increase to a 13-year high of 1.545 mln in September before an October down-tick to 1.544 mln. We saw a prior 1.536 mln 14-year high in January. All the housing measures rebounded sharply in Q3, with recent 14-year highs for new and existing home sales, a 12-year high for the MBA purchase index in September, and an all-time high for August pending home sales. Before the pandemic permit were following a solid growth path that began in Q2 of 2019, fueled by low mortgage rates, and this strength has resumed with the end to shutdowns, alongside an emerging migration of families to the suburbs. We expect a 1.523 mln average for starts in Q4, following a 1.440 mln pace in Q3 and a 1.079 mln pace in Q2. We expect a 1.560 mln average for permits in Q4 that outpaces the 13-year high 1.501 mln average in Q3, and a 1.490 mln prior high in Q4 of 2019.

Current Account: -$191.4 bln

The current account balance is expected to expand dramatically to -$191.4 bln in Q3 from a -$170.5 bln deficit in Q2. We saw a -$200.3 bln goods and services trade deficit in Q3. As a percentage of nominal GDP, the gap is expected to sit at -3.6% in Q3, versus -3.5% in the prior quarter. We saw Q3 rebounds for goods, services, and income of 68% for exports and 66% for imports, thanks to rebounds after disruptions from COVID-19 for trade in goods and services, as well as income receipts and payments. We expect an annual current account deficit of -$664 bln in 2020, versus a high from the last expansion of -$498 bln in 2019. The deficit remains below the -$806 bln record deficit back in 2006.

Leading Indicators: 0.6%

The leading economic index likely rose by 0.6% in November, following increases of 0.7% in October and September, as we continue to reverse the huge drops of -6.3% in April and -7.5% in March. We expect gains across the board, with boosts across most of the input measures, led by housing permits, and initial claims.

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