Report (Premium Edition) 01-11-2021

It’s been a strong start to 2021 for equities, while bonds have been hammered. Reflation trades have prospered in the wake of the Democrats taking the presidency and both houses of Congress, underpinning expectations for massive stimulus measures, and especially when combined with vaccine developments. Overall, we believe that the US equities will continue to be bullish for at least the first part of this year, but are very worried about a market drop due to all the pumping of the economy and spending.

The major indexes all closed at fresh records on Friday with the Dow at 31,097, the S&P 500 at 3824, and the NASDAQ at 13,201. However, the surge in virus cases and more restrictive lockdowns will be a headwind this quarter.

Investors should be worried about the energy sector, specifically oil because demand will dramatically decrease and it is has increased substantially more than equities in the last quarter.  Looking at the chart above we can see an increase of 11.33% for the S&P 500 compared to Oil of 26.30%.  A 10% correction in pricing for oil sector MLPs and stocks could be coming soon.

Take for example Exxon Mobil stock (NYSE: XOM). Looking at this chart of Exxon Mobil (XOM), you can clearly see how closely correlated Exxon Mobil’s stock XOM (chart bars) is to oil prices (orange line).  It also shows the S&P 500 dramatically below both oil and XOM.  The lockdowns and also a Democrat policy against oil will likely cause both a short term and long-term bearish trend.

Meanwhile, price pressures have been emerging that are weighing heavily on bonds and yields are now at their highest levels since the early last year with the wi 10-year at 1.115% and the wi bond at 1.880%.

Today’s docket is light with just the record $58 bln 3-year auction to kick off the $120 bln in coupon sales. The wi cheapened to 0.235% on Friday. Auction demand has been sketchy in recent months and it’s possible that buying will be limited, even at the cheaper rates, amid expectations of heavy supply ahead given the hefty stimulus under the Biden agenda. Atlanta Fed’s Bostic speaks on his economic outlook. There is a heavy Fedspeak calendar this week that includes Chair Powell and VC Clarida. Data picks up later in the week and will include CPI, PPI, retail sales, industrial production, and the Empire State index.

Key Drivers for the Week of Jan 11

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• Fiscal stimulus from Biden administration, vaccines, boost optimism on 2021 growth   
• Reflation trades rally to open 2021, bond yields climb on inflation prospects
• U.S. CPI expected to show rising prices, retail sales expected to decline in December
• Treasury to auction $120 bln in 3-, 10-, 30-year maturities, auctions could be weak
• Heavy Fedspeak slate, most continue to see rates near 0% for years
• Japan closed Monday, state of emergency imposed in Metropolitan Tokyo
• Asian data includes inflation, trade reports from China, Japan, India
• BoK expected to keep rates unchanged at 0.50%
• Eurozone likely to contract in Q1 under extended social distancing, Brexit
• German 2020 GDP report; Eurozone production and trade due
• UK under “tier 5” lockdown restrictions, most severe since last spring

Key Market Trends

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S&P 500 Sectors

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Week Ahead: New Agenda & More Politics

On January 11, 2021

The Democrats’ triumph in both Georgia Senate races gave them control of Congress, which elevated expectations for a new agenda from Washington that will feature even more fiscal spending. Prospects of increased stimulus, combined with the ongoing rollout of the vaccines, supported market expectations for a pop in growth, especially over the second half of the year.

Expect to see more politics as the Democrats try to impeach President Trump with 9 days left. The House will likely vote to impeach Trump for the second time, but it unlikely the Senate will because they do not return until the 19th and Trump would be a private citizen by the 20th. The objective appears to be stop Trump from running again, which is unlikely

While the reflation trade boosted risk-on conditions, it also added to rising inflation expectations that pushed bond yields higher. These factors should again be the drivers of global markets this week, while virus, lockdown, and vaccine news will be omnipresent. In the U.S., December retail sales and CPI will be of interest. Europe’s calendar has the first reading for German 2020 GDP. Brexit developments will also be monitored. Asia’s docket has China CPI and trade, while Japan is closed on Monday.

NORTH AMERICA

The U.S. data docket features CPI (Wednesday), which should capture the attention of the Treasury market as rising inflation fears have lifted rates recently. Our projection is for December increases of 0.4% for the CPI headline and a 0.2% for the core, following 0.2% gains for both in November. Note that CPI gasoline prices look poised to bounce 8.2% in December, leaving a tailwind and hence upside risk for the headline. As-expected December figures would result in a 1.3% headline y/y increase, following a 1.2% pace in November and October. Core prices should show a 1.7% y/y rise, up from 1.6% in November. Headline y/y gains for all the inflation gauges are anticipated to climb sharply into Q2 of 2021 due to hard comparisons, leaving a peak headline CPI y/y gain in the 3.4% area in May, alongside a 2.7% y/y core price rise. However, the Fed will not come under pressure to withdraw accommodation any time soon despite the expected temporary Q2 inflation spike.

Retail sales (Friday) is the other important report this week. Retail sales are seen dipping -0.2% in December with a -0.4% ex-autos decline, following respective November decreases of -1.1% and -0.9%. A 8.2% bounce for the CPI gasoline index should give a boost to service station sales. Unit vehicle sales rebounded to 16.3 mln in December, and this should support the auto dealer component, after a 15.6 mln pace in November. But typical strength is being undermined by rising coronavirus restrictions during the holiday shopping season. We expect strength in non-store sales, and some continuation of the rebound for sales of clothing, furniture, electronics, and appliances as we further reverse the big Q2 hit. But uncertainty over the impact of the restrictions on holiday shopping is a downside risk to our estimate.

There are a handful of other release to keep an eye on this week. Initial claims (Thursday) are expected to slip again, this time -17k to 770k, leaving a still elevated level. Expanding coronavirus restrictions are an upside risk. Good news from the factory sector should partly soothe any lockdown related jitters over the near term outlook — the Empire State index (Friday) is assumed to rise to 6.0 in January from 4.9 in December. The diffusion indexes should remain elevated as factory activity continues to ramp up. We have coronavirus headwinds since late-November that have restrained the indexes, but a second round of stimulus and coronavirus vaccines should provide a Q1 lift. Finally, industrial production (Friday) is projected to rise 0.6% in December following the 0.4% November headline increase, as firms continue to rebuild inventories. Rising restrictions are, of course, a downside risk to our estimate here as well.

Treasury supply will be a focal point. Demand has been slowing at most auctions in recent months and this week’s $120 bln slate of 3-, 10-, and 30-year sales could be very poor, even with yields the cheapest since early 2020. The Treasury is selling $58 bln in 3-year notes (Monday), $38 bln in reopened 10-year notes (Tuesday) and $24 bln in reopened 30s (Wednesday). The wi 3-year traded at 0.235%, with the wi 10-year at 1.120% and the wi bond at 1.880%. For the 3-year, an award rate here would be the second cheapest since June, but for the 10-year and bond, these would be the highest rates since February. With the potential for a rise in inflation, the FOMC’s tolerance of increasing price pressures, and the prospects for massive stimulus and much more bond issuance ahead, there shouldn’t be any urgency for buyers to step in.

There’s a heavy Fedspeak agenda with about half of the FOMC on tap, with many discussing the economic outlook for the new year. Highlighting will be an appearance by Fed Chair Powell (Thursday) who will take part in a Princeton Economics webinar. VC Clarida will discuss the new policy framework (Wednesday), and Governor Brainard will speak on AI. Atlanta Fed’s Bostic is the only FOMC voting president currently slated and will discuss the outlook (Monday). Other Fedspeakers include Kaplan, Kashkari, Rosengren, George, and Harker.

On the corporate earnings calendar, Monday has Synnex Corp, Tuesday brings Delta Air Lines, while Wednesday features Infosys, IHS Markit, and Wipro. On Thursday, BlackRock, Delta Air Lines, and First Republic Bank report. Friday has JP Morgan Chase, Wells Fargo, Citigroup, and PNC.

In Canada, the BoC’s Business Outlook Survey (Monday) headlines a sparse calendar this week. The survey is expected to show continued improvement in sentiment despite the increase in restrictions during the quarter, as firms increased production to rebuild depleted inventories. The release of the December existing homes sales report is expected on Friday. The BoC’s next meeting is on January 20. No change is expected to the 0.25% rate setting until 2023 — hence the Business Outlook Survey is of interest, but will not alter the outlook for steady, accommodative policy for an extended period.

ASIA

The new agenda expected out of Washington with more fiscal spending will likely continue to support a robust reflation trade, keeping risk-on conditions intact for now. This week’s Asian calendar is fairly light, but features China December CPI and trade data. In Japan, markets will be closed on Monday for Coming of Age Day. Data later in the week include November current account figures, along with November machinery orders and the tertiary index. India has December CPI and trade data, along with November production. South Korea’s BoK meets, and is expected to keep rates steady at 0.50%.

In China, December CPI (Monday) should warm to 0.2% y/y versus the prior -0.5% print. That was the first drop since October 2009 and comes after prices decelerated through 2020. The December trade report (Tuesday) is expected to see the surplus slip to $70.0 bln from $75.4 bln. The pace of exports may slow slightly given the surge in the virus and renewed restrictions around much of the world in the last couple of months of 2020. Japan is closed Monday for Coming of Age Day. Of note, a month-long state of emergency was imposed on Friday for the Tokyo Metropolitan region, the restrictions won’t be as severe as those last spring, but nevertheless should result in a nonnegligible drag on Q1 growth. November current account (Tuesday) should see the surplus narrow to JPY 1,600.0 bln from JPY 2,144.7 bln. December bank loan figures are due Wednesday. November core machinery orders (Thursday) are penciled in falling -5.0% m/m after rebounding a hefty 17.1% in October. December PPI (Thursday) is forecast slipping slightly to -2.3% from -2.2%. The November tertiary industry index should rise 0.2% versus the 1.0% increase previously. This would be a sixth straight monthly gain.

India has December CPI (Tuesday) expected to cool to 4.9% y/y from 6.9%, below the RBI’s 6% limit and could open the door to more rate cuts after the bank moved to a holding pattern last August following cuts in March and May. November industrial production (Tuesday) likely fell to a -1.0% y/y contraction rate after jumping to a 3.6% pace in October as industries recover from the pandemic declines from March through August. December WPI (Thursday) is estimated slowing to a 0.8% y/y clip from 1.6%, while the December trade report (Friday) should reveal a -$15.0 bln deficit, widening from November’s -$9.9 bln shortfall. South Korea December unemployment (Wednesday) is forecast at an unchanged 4.1%. The BoK meets (Friday), with policy seen unchanged, and rates steady at 0.50%. The Bank eased 25 bps in May to the current rate after a 50 bp cut in March. Malaysia November industrial production (Monday) is expected to rise to a 0.1% y/y clip, rebounding from the prior -0.5% contraction rate which was the first slide since June.

In Australia, retail sales (Monday) headlines the calendar this week. We expect a 7.0% gain in November after the 1.4% gain in October, which would match the preliminary November reading. November housing investment is due Friday. There is nothing from the RBA until the policy meeting on February 2. In December, RBA Governor Lowe said the RBA doesn’t expect to lift the cash rate for at least three years. New Zealand’s thin calendar has November building permits (Thursday). The RBNZ does not meet again until February 24 of 2021. No change to the 0.25% rate setting is anticipated for quite some time. Markets are closed in both nations on Monday and Friday.

EUROPE

Eurozone: it was a busy first week to the year 2021, full of data releases, political surprises in the U.S., and for much of Europe the confirmation that despite vaccination programs, it will take quite a while before normal life can resume. Social restrictions have been extended and/or tightened in many European countries. While the last quarter of 2020 may not have been quite as bad as feared, the first quarter this year is likely to bring another contraction in economic activity and that means that a technical recession for the Eurozone (but also the U.K.) seem very likely now.

Brexit developments may actually add to that, not so much because of actual disruptions, but because there are signs that in the absence of a deal companies on both sides of the channel increased stock levels. While that will have lifted demand in November/December, it will likely see a correction in early 2021. Coupled with the ongoing woes for the services sector, that will keep a lid on overall economic activity. Despite all this, markets are starting to look ahead to stimulus programs and the recovery — yields are likely to continue to move higher in coming weeks and months.

Some at the central bank may actually welcome the rise in yields as they also look ahead to the recovery and the need to reign in stimulus. Others, however, remain focused on the need to provide favourable financing conditions for cash strapped governments, which will emerge from the crisis with much higher deficit and debt levels. Against that background, the main battle this year will be if and when the central bank will start to phase out PEPP and in a first step if it actually uses the full amount of asset purchases under the PEPP program.

Data releases include the first reading for German 2020 GDP, which we expect to show a contraction of -5.0% (median -5.1%), which given virus developments would hardly be a surprise. Eurozone industrial production (Wednesday) and trade data (Friday) for November will already look somewhat outdated. For what it is worth we expect a rise in production of 0.5% m/m (median 0.3%) and a slight narrowing in the trade surplus, the latter due to a likely jump in imports. Final December HICP readings for France and Spain are unlikely to hold major surprises.

U.K.: the pound, being the principal financial market barometer of Brexit sentiment, put in an overall neutral performance against the dollar, euro and other currencies last week. The wasn’t any significant border disruptions as a consequence of the UK leaving the EU’s common market and customs union, although the hassle of custom declaration form filling has increased in trade with the EU.

The UK’s terms of trade with the EU has eroded in the Brexited world, despite the deal, with the key financial services sector left in a strategically more precarious position than before, with participation in EU markets dependent on the latter’s equivalency rules — although London’s competitive advantage in this area should protect the sector over the near- to-medium term. There is also potential for pent up business investment, with Brexit uncertainty having finally cleared, while the UK is ahead of the pack in rolling out a Covid vaccination program. Weakness in the pound may prevail for a time, but with the government aiming to have nearly 25% of the UK population vaccinated by mid February, including all of the most at-risk groups — the pound looks a much better bet in the bigger view. One thing to note is that UK scientists have expressed concern that the current vaccines may not be effective in protecting against the new ‘South Africa’ variant of Covid. Incoming data on this will throw better light on this over the coming weeks.

UK nations went into a ‘tier 5’ lockdown, the most restrictive level since the full lockdown of spring last year, although manufacturing, auto repair businesses, DIY and garden stores, remain open, along with food sellers. High street retail, aviation and other public transport, along with the hospitality sector, are bearing the brunt of the lockdown, as in other nations, although the percentage impact on GDP from these sectors being closed is slightly bigger in the UK than most peers. The UK economy underperformed its G20 peers during lockdowns last year, so there is some thinking in market narratives that the UK will be apt to underperform again (although the way the UK compiles GDP data relative to other G20 nations may have exacerbated the picture).

The UK data calendar is highlighted by the release of production, monthly GDP and trade data for November. Given the fast changing realities (new Covid lockdown, rapid vaccination program) the data is particularly backward looking, so will limited, if any, market impact.

Switzerland: The Swiss data calendar is quiet this week.

Stocks & ETF Watch List

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Solid Picks

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Income Stock & ETFs Picks

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Dogs of the Dow

This list of DOW stocks based on H. G. Schneider’s Article in the Journal of Finance in 1951 that used price-earnings ratio. The general idea is that blue-chip companies that pay a dividend are more likely to withstand an economic downturn. The dividend score of a stock, where a score of 99 is best. This algorithm compares a company to its peers and considers the consistency of key dividend metrics as well as their direction of change. The overall score, which 99 is the best) is computed from the percentile rank of valuation, growth, financial strength, efficiency, momentum, and dividends. The score also considers the past performance of a stock in each of the component areas relative to peers. (updated monthly)

Economic Data Calendar

We have a heavy slate of data in the second week of January. We expect December retail sales declines both with and without autos thanks to coronavirus restrictions through the holidays. We also expect a solid December gain in industrial production, and a firm November rise in business inventories. The December inflation reports should reveal a big energy-led gain for CPI with a moderate core price rise, and big increases for trade prices. We expect a small January rebound for the Empire State index, with support from stimulus and vaccines, alongside a modest January climb in the Michigan sentiment survey.

Week of January 11

The U.S. jobs report oddly supported forecasts of a solid U.S. growth trajectory into Q1, despite the headline -140k payroll drop and -0.4% pull-back in the hours-worked index that left a weaker set of December data than we had assumed. Weakness was heavily concentrated in the leisure and hospitality component due to bar and restaurant closures with rising COVID cases, leaving a whopping -498k employment drop and an associated -5.6% hours-worked decline for that sector. The concentrated hit to low-wage employment prompted a 0.8% pop in December average hourly earnings, and it’s noteworthy that wage income will likely rise by 0.4% in December despite the layoffs because of strength evident across the remainder of the report.

The bellwether goods sector of the economy revealed a hefty 93k payroll rise in December, which beat our estimates, with component gains of 38k for factories, 51k for construction, and a 4k for mining. We saw a solid 0.4% hours-worked rise for the goods sector, with gains of 0.3% for factories, 0.9% for construction and 0.5% for mining. Strength here explains the solid December readings we’ve received for the various producer sentiment reports, as businesses scramble to rebuild inventories. Equipment orders continue to expand, and Boeing will be ramping up shipments of 737 MAX aircraft into Q1. We assume that vaccines will translate to a loosening of restrictions, hence allowing the bar and restaurant industries to again participate in the broad-based rebound in growth after the pause through the holiday period.

CPI/Core: 0.4%/0.2%

We expect November gains of 0.4% for the CPI headline and a 0.2% for the core, following 0.2% gains for both in November. CPI gasoline prices look poised to bounce 8.2% in December, leaving a tailwind for the headline. As-expected November figures would result in a 1.3% headline y/y increase, following a 1.2% pace in November and October. Core prices should show a 1.7% y/y rise, up from 1.6% in November. As with PPI, the headline inflation figures were lifted by oil prices over the summer, and now later into December, while the core figures face divergent pressures from diminished demand but growing supply bottlenecks that remain problematic into Q1. We expect headline y/y gains for all the inflation gauges to climb sharply into Q2 of 2021 due to hard comparisons, leaving a peak headline CPI y/y gain in the 3.4% area in May, alongside a 2.7% y/y core price rise, with respective PCE y/y chain price gains of 2.5% and 2.0%. The Fed will face no pressure to withdraw accommodation any time soon despite the expected temporary Q2 inflation spike.

Import/Export Price Index: 1.0%/0.8%

Import prices are estimated to rise 1.0% in December, with a 0.8% export price rise, after November gains of 0.1% imports and 0.6% for exports. We expect a big December 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 0.8%. 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 December with further production agreements from OPEC. 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.

Initial Jobless Claims: 770k

Initial jobless claims for the week of January 9 should remain elevated, though we assume a -17k down-tick in the weekly pace to 770k, after a -3k drop to 787k from 790k. Seasonal adjustment for initial claims was switched to being additive from multiplicative in September, and the usual seasonal rise in NSA claims through the holidays may be lifting the reported SA data with the new seasonal factors given the unusually high level of claims. We are likely also seeing a lift from expanding coronavirus restrictions. Claims are expected to average 755k in January, following averages of 828k in December, 749k in November, and 786k in October. The 892k December BLS survey week reading exceeded recent survey week readings of 748k in November, 797k in October, and 866k in September. We assume a 190k January payroll rise after the -140k December drop.

Continuing claims fell by -116k to 5,072k in the week of December 26, following a downward revision in the prior week’s reading that left a 5,198k figure. We expect continuing claims to fall -132k to the 4,940k area for the week ending on January 2. Though rising coronavirus restrictions are likely prompting some stalling in the continuing claims downtrend, we expect resumed bigger declines into early-2021. Continuing claims fell by -767k between the November and December BLS survey weeks. We saw much larger prior declines of -1,734k in November, a hefty -4,924k in October BLS, -1,745k in September, -2,459k in August, -2,280k in July, and -1,610k in June.

Retail/Ex-Auto Sales: -0.2%/-0.4%

We expect a -0.2% December retail sales headline dip with a -0.4% ex-autos decline, following respective November decreases of -1.1% and -0.9%. We expect an 8.2% bounce for the CPI gasoline index that should give a boost to service station sales. Unit vehicle sales rebounded to 16.3 mln in December, and this should support the auto dealer component, after a 15.6 mln pace in November. Typical strength is being undermined by rising coronavirus restrictions during the holiday shopping season. Regardless, we expect strength in non-store sales, and some continuation of the rebound for sales of clothing, furniture, electronics, and appliances as we further reverse the big Q2 hit. Real consumer spending is expected to grow at a 2.8% rate in Q4 after a robust 41.0% growth clip in Q3.

PPI/Core: 0.2%/0.1%

We expect a 0.2% December PPI headline rise with a 0.1% core price gain, following gains of 0.1% for both in November. As expected readings would result in a y/y headline PPI metric of 0.6%, down from 0.8% in November. We expect a 1.3% y/y rate for the core, down from 1.4% in November. A rebound in energy prices should boost the headline. The y/y headline PPI reading should climb to a peak in the 3.4% area in April due to hard comparisons, while the core y/y rate rises to a peak near 2.2% around May. Oil prices are rebounding after a fall pause and a bottom in April, thanks to a better supply-demand balance in the petroleum sector, and supply constraints for some sectors should remain problematic into Q1.

Empire State/Philly Fed Index: 6.0/13.0

The Empire State index is assumed to rise to 6.0 in January from 4.9 in December, 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 rebounding to 13.0 in January from 11.1, 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. We have coronavirus headwinds since late-November that have restrained the indexes, but a second round of stimulus and coronavirus vaccines should provide a Q1 lift. Producers continue to face remarkably lean inventories and rebounding demand in many industries above pre-pandemic levels that should sustain production increases despite retail sector disruptions from virus outbreaks.

Industrial Production: 0.6%

Industrial production is projected to rise 0.6% in December following the 0.4% November headline increase. We saw November increases of 0.8% for manufacturing and 2.3% for mining, but a -4.3% decrease for utilities. In December, we expect gains of 0.4% for manufacturing, 0.5% for mining, and 1.5% for utilities. We expect the vehicle assembly rate to remain steady from 11.3 mln in November, 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 73.8% from 73.3% in November. Industrial production expanded at a 42.5% clip in Q3, and we expect a 6.6% growth pace in Q4.

Business Inventories: 0.5%

Business inventories are estimated to rise 0.5% in November after a 0.8% (was 0.7%) October increase. Our forecast incorporates a 0.7% rise for factory inventories, alongside a flat wholesale inventory figure and a 0.7% retail inventory rise as seen in the advance indicators report. Sales should be flat in November, after a 1.0% gain in October. As-expected readings would result in the I/S ratio remaining at the 6-year low of 1.32 seen since August (October was 1.31), 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 -$3.7 bln liquidation rate after a record -$287.0 bln pace in Q2, leaving a fourth consecutive quarterly decline. We expect an $88 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.

Michigan Sentiment, Preliminary: 81.0

We expect the Michigan sentiment index to climb to 81.0 from 80.7 in December and a 7-month high of 81.8 in October. We saw an 8-year low of 71.8 in April and a 14-year high of 101.4 in March of 2018. We expect current conditions to rise to a 10-month high of 90.6 in January from 90.0, versus a 6-month high of 87.8 in September. Expectations should rise to 74.9 from 74.6 in December. The 1-year inflation measure should hold steady at the 8-month low of 2.5% seen in December, versus a 3.2% high in May that was last seen in August of 2014. The 5-10 year inflation measure should maintain the 2.5% in December from a 7-month low of 2.4% in October and a 2.7% high in August and September that was also seen in May, and previously in March of 2016. We’ve seen erratic oscillations in the various confidence metrics since June around expansionary levels, despite huge fluctuations with the pandemic, on-and-off stimulus, vaccines, and the elections. The indexes remain well above readings from prior recessions, and with divergent swings for the surveys in recent months.

Complete Calendar