Report (Premium Edition) 01-25-2020

Bullish momentum on stimulus hopes and positive earnings expectations continued to drive Wall Street higher with the S&P 500 and NASDAQ setting more fresh records. The NASDAQ led the way with a 0.55% rally to 13,530. The S&P 500 posted only a fractional gain on IT, consumer discretionaries, and communication services, but it was sufficient for another new high at 3858.

The Dow ended marginally lower. There are headwinds from the virus and uncertainties over the amount of stimulus that will make it through Congress, but they are being overshadowed for now. Treasuries posted small losses amid the gains in risk appetite and some worries over inflation. Longer maturities underperformed with the bond cheapening over 3 bps to 1.865%. The 10-year rose to 1.102%. The wi 2-year was little changed at 0.135%, little impacted by next week’s supply announcement.

We have been watching oil prices for two reasons. The first one is that it directly affects the prices of many energy stocks like Exxon Mobil (XOM).  The second is that we see a correlation between the health of the economy as whole and oil prices. Obviously, there are many factors that affect the price when it comes to supply/demand, but it has proven to give us a great indication of the health of the economy.

Looking at the chart above, you can see that oil prices have recently been very correlated with the S&P 500.  Investors should be watching for a dip in oil as an indicator of a potential slowing of the economy.

Why this matters is that we are overall very bullish on the stock market. However, the new strand of coronavirus and rising inflation fears could cause the market to drop. Oil prices will likely be one of the first indicators.

The markets are likely to be in flux amid the various influencers. Data is light with December existing home sales are due, expected at a 6.720 mln pace from 6.69 mln previously. Flash Markit January manufacturing and services PMIs are on tap, along with weekly EIA oil inventory figures. Earnings include Schlumberger, Kansas City Southern, Regions Financial, and Ally Financial.

Key Drivers for the Week of January 25th

TIP – This is a 1 minute brief bullet-point summary as a tool that gives them a fast and simple list of what to watch for and talking points.

• Virus second wave, more stringent restrictions seen weighing on growth, sentiment
• U.S. Q4 GDP, consumer confidence, sentiment, initial claims, ECI awaited
• FOMC expected to leave policy unchanged, economic and job outlooks likely trimmed
• Very heavy earnings slate ahead, guidance will be key  
• Treasury to auction $183 bln in shorter-dated coupons
• Japan’s heavy slate: services PPI, retail sales, employment, production, confidence
• German Ifo Business Climate, GfK Consumer Confidence, HICP, employment data due
• UK data slate includes employment numbers

Key Market Trends

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S&P 500 Sectors

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Week Ahead: Resurgent Virus Crashes the Party

On January 25, 2021

Wall Street and global stocks cheered as Joe Biden was sworn in as president — the markets anticipate a hefty increase in stimulus. That view was backed up by Treasury Secretary nominee Janet Yellen’s Senate testimony, where she stressed the need to go “big.” But, the resurging virus and more stringent lockdowns crashed the party on Friday, and threaten to be significant headwinds to the recovery. This week’s heavy dose of global data releases, including GDP and sentiment, are likely to reveal the many negative impacts from the second wave. Meanwhile, there is a slew of earnings and guidance will be key. The FOMC meets will again confirm its uber-accommodative settings because of Covid.

NORTH AMERICA

The U.S. data calendar has plenty to offer for a market that divides its focus between the short term and the medium term outlooks. The first reading for Q4 GDP (Thursday) will highlight, with the report expected to show growth slowing to a 4.1% pace in Q4 (q/q, saar) from 33.4% in Q3. GDP is seen running at a 3.2% clip in Q1. Consumption spending is expected to slow to a 2.2% from 41.0% in Q3 as heightened coronavirus restrictions impacted spending, but there are ample risks to the upside and downside on this estimate. Timely data is prized in order to evaluate the impact of the increased lockdowns through year end on activity — consumer confidence (Tuesday) is seen slipping to 88.0 in January from 88.6 in December. The final reading on the University of Michigan’s consumer sentiment survey (Friday) should show no change from the preliminary reading of 79.2, leaving a dip versus 80.7 in December. Initial claims remain of considerable interest, as the level remains elevated even after the unexpectedly large drop seen in the previous survey week. Initial claims are seen falling -70k to to 830k in the January 23 week after the -26k dip to 900k from 926k. Seasonals and lockdowns leave the now typical uncertainty over this sometimes volatile weakly indicator.

The ECI (Friday) is worth a gander, as the market has grown sensitive to inflation data, which shows increasing pressures in the pipeline. ECI is seen rising 0.4% Q/Q in Q4 after a 0.5% gain in Q3, so this report should not stoke inflation concerns. New home sales for December (Thursday) are expected to surge 10.6% in December to 930k, as the housing sector remained hot through year end amid lean inventories, low rates and a shift in household preference to single family units.

The FOMC meets (Tuesday, Wednesday) and no changes are expected to its uber-accommodative posture. But while the policy outcome and the statement will be uneventful, inside the ropes it’s likely to be an interesting debate on the outlook given the new administration in Washington and the probability for hefty fiscal action, the resurgence in virus infections and renewed lockdowns, as well as vaccine developments. As seen in Fedspeak this month, there has been an open public debate from Committee members regarding QE tapering, especially the regional presidents. The typically dovish Bostic (11-Jan), a 2021 voter, said he is open to tapering later this year, while the other dove Bullard (13-Jan) suggested it is good to plan ahead. However, Chair Powell (14-Jan) put the kybosh on those notions the time of rate hikes is “no time soon.” He also said there will be plenty of advance warning before any policy action is taken. We expect the FOMC to retain its qualitative, vague stance on guidance with little, if any change, to the December FOMC statement that “The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved…In addition, the Federal Reserve will continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage-backed securities by at least $40 billion per month until substantial further progress has been made toward the Committee’s maximum employment and price stability goals.” We do look for the Fed to downgrade slightly its medium term outlook on the economy and the labor market due to the surge in the virus, the shutdowns and slowing in the economy, and the drop in employment (in December it said the economy and employment “continued to recover”). Note that there is a new voting contingent this year that leans dovishly and includes Evans, Daly, Bostic, and Barkin.

A busy week of corporate earnings is on tap. According to Facset, 89% of earnings released through last week came in better than expected. Hence, the focus will remain on the Q4 results released this week, with more good news likely providing a further lift to already elevated index levels on Wall Street. Monday has Kimberly-Clark, Otis, Brown & Brown, and Graco. Tuesday reveals Microsoft, J&J, Verizon, Novartis, NextEra Energy, Texas Instruments, Starbucks, AMD, Raytheon, American Express, GE, 3M, Lockheed Martin, Canadian National Railway, Prologis, Capital One, UBS, Freeport-McMoran, eBay, PACCAR, Rockwell Automation, ADM, and D.R. Horton. Wednesday brings Apple, Tesla, Facebook, AT&T, Abbott Labs, Boeing, ServiceNow, Stryker, Lam Research, Anthem, ADP, Crown Castle, Norfolk Southern, Progressive, Canadian Pacific Railway, Blackstone, General Dynamics, Corning, Ameriprise, Nasdaq, Teradyne, Hess, Raymond James, Whirlpool, and Textron. Thursday has Visa, Mastercard, Comcast, Danaher, McDonald’s, Mondelez, Altria, Sherwin-Williams, Marsh & McLennan, Northrup Grumman, Dow, T. Rowe Price, Xcel Energy, MSCI, Southwest Airlines, Stanley Black & Decker, Valero Energy, McCormick, Rogers Communication, Dover, Tractor Supply, Nucor, Celanese, Principal Financial, Eastman Chemical, and Pulte. Friday has Eli Lilly, Chevron, SAP, Honeywell, Charter Communications, Caterpillar, Colgate-Palmolive, Roper Technologies, L3Harris, Johnson Controls, Weyerhaeuser, Synchrony Financial, Church & Dwight, and Booz Allen Hamilton.

The bond market will be challenged by a record $183 bln in shorter dated coupon supply. The Treasury is selling $60 bln in 2-year notes (Monday), $63 bln in 5-year notes (Tuesday) and $62 bln in 7-year notes (Thursday). The shorter tranches were each increased by $2 bln, with the longer note upped by $3 bln, and all are at historic highs. The wi 2-year closed unchanged at 0.130%, with the wi 5-year 1 bp richer at 0.455%, and the wi 7-year down 1.5 bps at 0.780%.

Canada’s back loaded calendar is highlighted by November GDP (Friday), while December building permits (Thursday) and the December industrial product price index round out the docket. GDP is expected to run at a 0.4% pace (m/m, sa) in November following the matching 0.4% gain in October. The renewed restrictions ramped up in December, suggesting the negative impact on the economy should be modest in November. The separate quarterly GDP measure, due out on March 2, is expected to slow to a 3.0% pace (q/q, saar) in Q4 2020 from the 40.5% surge in Q3 that came after the -38.1% jump in Q2. Building permit values are projected to fall -6.0% in December after the 12.9% surge in November. The housing sector has been an outperformer of the pandemic economy, supported by low mortgage rates and an increase in demand for detached housing. BoC Governor Macklem said he is not worried about a housing bubble, speaking in a Bloomberg interview last week.

ASIA

This week’s calendar features Japan’s usual month-end data deluge, which will include retail sales, unemployment industrial production and consumer confidence. China’s docket is empty. Elsewhere in the region, the usual mix of production, employment, prices, and growth are slated. There are no central bank meetings scheduled this week.

In Japan, December services PPI (Tuesday) is likely to remain in deflation for a third straight month after dropping to -0.6% y/y in November from -0.5% in October. December retail sales (Thursday) should see large retailer sales fall to -4.0% y/y from -3.4%, and total sales slide to -0.5% y/y from 0.6% previously. The remainder of the docket comes on Friday, with January Tokyo CPI expected to post a -1.0% y/y pace overall from -1.3%, and decline -0.8% y/y from -0.9% on a core basis. December unemployment is expected to edge higher to 3.0% from 2.9%, while the job offers/seekers ration should decline to 1.04 from 1.06. Preliminary December industrial production is forecast to fall -2.0% from the -0.5% decline previously. January consumer confidence is expected to fall further to 31.0 from 31.8. December housing starts and construction orders are also due.

South Korea advance Q4 GDP (Tuesday) is seen falling to a -1.5% y/y pace of contraction versus the previous -1.1% rate. December industrial production (Friday) is penciled in falling to -1.0% y/y from up 0.5%. Taiwan December industrial output (Monday) likely slowed to a 6.0% y/y clip from 7.8% in November. December GDP (Friday) is estimated to have climbed to 4.1% y/y from 3.9% in Q3. Hong Kong December trade (Tuesday) should see the deficit narrow slightly to HKD 25.5 bln from 25.6 bln. Thailand December manufacturing production (Wednesday) is forecast to have fallen -0.5% y/y after rising 0.4% in November. December trade and current account figures are due Friday. Singapore December CPI (Monday) is seen at an unchanged -0.1 y/y, while December manufacturing production (Tuesday) should slip to a 12.0% y/y rate from up 17.9% previously. December unemployment (Thursday) should remain steady at 3.6%. Malaysia December trade (Friday) has the surplus widening to MYR 25.0 bln from 16.8 bln. Philippines December trade deficit (Wednesday) should narrow slightly to $1.6 bln from $1.7 bln. Q4 GDP (Thursday) likely posted a -10.0% y/y rate of contraction versus -11.5 in Q3.

In Australia, the Q4 CPI (Wednesday) highlights the calendar, with the report expected to reveal a 0.6% gain (q/q, sa) after the 1.6% climb in Q3. 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 calendar has the trade report (Thursday), projected to show a NZ$600 mln surplus from the NZ$252 mln surplus in November. We do not hear from the RBNZ again until February 24. No change to the 0.25% rate setting is anticipated for quite some time.

EUROPE

Eurozone: virus restrictions are still being tightened and/or extended. The first round of confidence data for January backed warnings that the Eurozone is likely to see a technical recession over the Q4/Q1 period, but the ECB still seems cautiously optimistic that the already very expansionary policy settings will be sufficient to lift inflation in the medium to long term. Market reaction to the clarification of the new PEPP regime, which sets a ceiling for asset purchases rather than a target, highlighted that the central bank will face an uphill battle trying to keep spreads contained if and when it tries to scale back asset purchases.

However, while German and Eurozone HICP is likely to jump higher in January readings as Germany’s VAT cut comes to an end, we expect the central bank to turn the 2% limit for price stability into a more symmetric target with the ongoing policy review. That, coupled with the fact that headline rates will remain far below that target for a while to come, should help to calm concerns over an early change in direction, with monetary policy expected to remain very accommodative through next year.

The data calendar this week brings the final round of confidence indicators for January starting with the German Ifo Business Climate indicator on Monday. ZEW investor confidence improved on stimulus hopes, vaccine developments and the Brexit deal. But while there is light at the end of the tunnel now, the current situation is still dire with restrictions extended once again. The services sector is suffering and German PMIs declined in the January reading, developments that the Ifo is likely to mirror. We expect the overall business climate reading to fall back to 91.4 (median 91.3) from 92.1, with a deterioration in current sentiment outweighing the expected pick up in the expectations reading. Similarly, the ESI Economic Confidence reading (Thursday) is seen falling to 89.7 (median 89.4) from 90.4 in the previous month.

Preliminary GDP readings for the last quarter of 2020 are also starting to roll in, although they are too backward looking to change the overall outlook, especially after Germany already released overall 2020 numbers. We are looking for a decline in French GDP (Friday) of -4.0% q/q (median 4.1%) and see German GDP (Friday) down -0.1% q/q (median 0.0%). Official labour market data have not caught up yet with the overall decline in activity and demand, thanks to labour market programs that provide an incentive for companies to hang on to staff through the crisis. Still, against the background of the renewed shut down of much of the services sector we expect German sa jobless numbers (Friday) to show a rise of 7K (median 8.5k) over the month in January readings, which should leave the official jobless rate unchanged at 6.1% (median same). The real impact of the pandemic will become apparent over time, not just in Germany.

German inflation data for January (Thursday), meanwhile, will mainly reflect the fact that the temporary cut to the VAT rate came to an end in December, which should lead to a sharp rise in the headline rates at the start of this year. We are looking for a pick up in the HICP reading (Thursday) to 0.5% y/y (median 0.6%) from -0.7% by/y in December. The national CPI reading is seen at 0.6% y/y, up from -0.3% y/y in December. Other data releases include Eurozone M3 money supply, French consumer spending and German import price inflation.

U.K.: the UK economy is firmly back in the grip of Covid-restriction caused contraction, driven by a sharp downturn in services, particularly hospitality (which is sector that accounts for a biggest percentage of GDP than many peers), High Street retail and aviation, along with other public transport services, which are bearing the brunt of lockdown. The multiplier effect is greatly impacting other sub sectors, too. There is even talk of the government going yet tighter with lockdown rules due to the new, more transmittable SARS-Cov2 variants. The fact that the UK is testing at one of the world’s highest rates, and 10x more than the pace in some other large countries, and that scientists in the lockdown-sceptic camp have been warning about the reliability of PCR (the dominant form of testing and diagnosis) under prevailing protocols in the circumstance of a virus that has gone endemic, is neither here nor there.

But there are reasons for optimism. The evidence suggests that new highly transmittable variant of the coronavirus in the UK has not rendered the current vaccinations obsolete. The UK also remains, despite the supply jams being experience with the Pfizer vaccine, among the leaders of the pack in the rollout out of Covid vaccinations, and continues to be track to have nearly 25% of the population vaccinated including nearly all of the at-risk groups as soon as mid February.

UK data calendar this week is quiet, highlighted by monthly labour data (Tuesday), which has been a metric of limited use in the pandemic era, with the government furlough scheme maintaining employment levels despite the lockdowns. The headline unemployment figure is still expected to tick higher, to a rate of 5.1% in November, from 4.9%. The BoE projected in its latest forecasting round, last November, that it expects joblessness to peak at 7.5% this year before dropping back thereafter, on the proviso that the domestic and global economies start to reopen.

Switzerland: The Swiss data calendar is highlighted by the release of the January KOF leading indicator (Friday). The median forecast is for a drop in the headline reading to 101.5 after the 104.3 print that was seen in December. The risk is for a weaker reading given the tightening degree of lockdown measures being implemented in Switzerland and across Europe.

Stocks & ETF Watch List

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Solid Picks

This group of stock/ETF picks is likely to experience growth and perform well into the near future. The rank score of a stock, where a score of 1 is best. This algorithm compares a company to its peers and considers the consistency of key return metrics. 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.

Income Stock & ETFs Picks

This list of stocks and ETFs are selected for their ability to pay dividends. 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.

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.

Economic Data Calendar

We have a hefty slate of releases in the final week of January, alongside the January FOMC meeting. We expect a 4.1% growth rate for Q4 GDP, with a fairly flat December personal income figure given delays in stimulus distributions into January, alongside a big consumption drop. We expect another solid durable goods report in December, a big December bounce for new home sales, and a December narrowing in the goods trade balance. The employment cost index (ECI) should post moderate Q4 gains that are consistent with a cyclical moderation, while consumer confidence posts a January down-tick that mimics the January decline in Michigan sentiment.

Week of January 25

The U.S. housing data over this past week have made clear that the housing market isn’t just stabilizing at an elevated level, but is continuing to climb to new highs into 2021. The MBA purchase index set a new 12-year high in the middle week of January, leaving an estimated 5% climb for January overall, after gains of 2.6% in December and 2.7% in November. Thursday’s housing starts report set an array of new 13-14 year highs for starts, permits, starts under construction, and completions, leaving as spike in activity into year-end, with a robust uptrend for the relatively stable and forward-looking “starts under construction” series. We expect the residential component of fixed investment in the GDP reports to climb by 32% in Q4, and a further 18% in Q1.

Though the NAHB housing market index slipped to 83 in January from 86 in December and a peak of 90 in November, the November reading capped a 7-month surge through four consecutive all-time highs. Despite the 2-month pullback into January, we have a 6-month stretch of the highest readings ever. Before this boom, the all-time high was a reading of “just” 76 in December of 2019, which we thought was remarkably strong at the time.

Most importantly, today’s existing home sales report documented a further sales climb into December despite a massive -16.4% plunge in home inventories that marked a seventh consecutive decline to what is now a deep new all-time low. The months’ supply, at 1.9, reflects a fifth consecutive all-time low since a 3.0 reading in August. Amidst this apparent widespread refusal of homeowners to place their homes on the market, the median price has risen 12.9% over the past year. We have y/y gains in the most recent home price “repeat-sales” measures of 7.9% for the S&P Case Shiller index and 10.2% for the FHFA index. Despite soaring sales, the transactions market is heavily supply constrained, and we’d be seeing an even bigger boom if supply was more elastic. The illiquid housing market likely has quite a ways to climb until we can bring demand and supply back into balance.

Consumer Confidence: 88.0

Consumer confidence is expected to slip to 88.0 from 88.6 in December, versus a 6-year low of 85.7 in April. This compares to an 18-year high of 137.9 in October of 2018 and a recession-low of 25.3 in February of 2009. We expect the present situation index to improve to 91.8 from 90.3 in December and a 7-year low of 68.4 in May, versus a 19-year high of 176.0 in August of 2019 and a recession-low of 20.2 in December of 2009. The expectations index should fall to 85.5 in January from 87.3, versus an 18-year high of 115.1 in October of 2018 and a recession-low of 27.3 in February of 2009. We expect the 1-year inflation measure to remain at December’s 5.9%. The confidence measures have shown divergent swings since mid-2020 that have a downward tilt into January, likely due to the surge in virus cases, more stringent lockdowns, and the bizarre political events of recent weeks. We should be seeing some lift from stimulus passage and vaccine distributions however, which may be more evident in February.

Durable Goods Orders: 3.0%

Durable goods orders are expected to rise 3.0% in December with an 8.3% climb in transportation orders, after a 1.0% headline orders rise in November that included a 2.1% transportation orders gain. The durable orders rise ex-transportation is pegged at 0.5%, after a 0.4% November rise. A defense orders gain is pegged at 3.0%, following a 3.7% November bounce. Boeing orders jumped to 90 in December with the lifting of the 737 MAX grounding, from 27 in November and zero in the two months before that. The vehicle assembly rate fell to 10.7 mln in December from 11.1 mln, versus a 0.1 mln trough in April. Durable shipments should rise 1.0%, and inventories should rise 0.5%. The I/S ratio is expected to be steady from 1.70, versus a 1-year low of 1.69 in October and an all-time high of 2.24 in April for a series extending back to 1992. We saw a prior 1.88 I/S peak in April and May of 2009.

Advance Indicators Goods Deficit: -$83.8 bln

We expect the advance indicators report to reveal a December narrowing in the goods trade balance to -$83.8 bln from an all-time high -$85.5 bln in November. We expect exports to grow 3.1% to $131.5 bln, while imports grow 1.1% to $215.3 bln. A December petroleum price rebound will boost both exports and imports of petroleum. We expect a bounce in trade for vehicles after a November pull-back that marked the first declines since May. We expect a $30 bln bilateral goods deficit between the U.S. and China with elevated import and export figures as businesses rebuild inventories. The bilateral gap previously fell between mid-2019 and March 2020 to an -$11.8 bln deficit that marked the smallest gap since 2004, versus a -$43.1 bln all-time wide bilateral gap in October of 2018. The advance report should also reveal December gains of 1.0% for wholesale inventories and 1.2% for retail inventories.

Advance Q4 GDP: 4.1%

Our GDP estimates sit at 4.1% in Q4 and 3.2% in Q1, after 33.4% growth in Q3. We expect a Q4 moderation in consumption growth to 2.2% from 41.0% in Q3 as heightened coronavirus restrictions impacted spending, while government purchases contract at an estimated -5% rate, and nonresidential investment in structures fall at a -9% pace. We saw a continued boom in housing activity and equipment spending, and we expect Q4 growth rates of 32% for residential investment and 25% in equipment spending. The trade components should post hefty Q4 growth rates of 17% for exports and 21% for imports. We’re also seeing a big turn in the inventory cycle after four quarters of inventory liquidation through Q3, with an expected $92 bln inventory addition in Q4 before another $84 bln addition in Q1. The hefty Q4 import gain can be seen as feeding the big Q4 inventory increase.

Initial Jobless Claims: 830k

Initial jobless claims for the week of January 23 should remain elevated, though we assume a -70k drop in the weekly pace to 830k, after a -26k dip to 900k from 926k. Seasonal adjustment for initial claims was switched to being additive from multiplicative in September, and the usual seasonal rise in NSA claims to a peak in early January may be lifting the reported SA data with the new seasonal factors given the unusually high claims level. We are likely also seeing a lift from expanding coronavirus restrictions. Claims are expected to average 844k in January, following averages of 825k in December, 749k in November, and 786k in October. The 900k January BLS survey week reading exceeded recent survey week readings of 892k in December, 748k in November, and 797k in October. We assume a 100k January payroll rise after the -140k December drop.

Continuing claims fell by -127k to 5,054k in the week of January 9, following a downwardly revised 5,181k figure. We expect continuing claims to fall -154k to the 4,900k area for the week ending on January 16. Though rising coronavirus restrictions are likely prompting some stalling in the continuing claims downtrend, we expect resumed bigger declines through Q1. Continuing claims is expected to fall -422k between the December and January BLS survey weeks. We saw prior drops of -767k in December, -1,734k in November, -4,924k in October, -1,745k in September, -2,459k in August, -2,280k in July, and -1,610k in June.

New Home Sales: 930k

We expect a 10.6% December bounce for new home sales after a dip to 841k in November. We expect an increase in the median sales prices to $337,000 from $335,000 in November, leaving a y/y increase of 2.3%. We expect a 905k Q4 pace for new home sales, after a 974k pace in Q3. The housing sector is continuing to boom into 2021, as solid fundamentals even before the pandemic are now being exacerbated by further mortgage rate declines and migrations from urban to suburban areas that is boosting the need for new home construction. We’ve also seen a de-linking of the housing cycle from the school year, and a likely boost in activity through the holiday’s due to reduced seasonal disruptions with virus restrictions. The new construction data have notably lagged sales, but we expect a steady climb in starts, construction, and completions given likely ongoing strength in new home sales.

Leading Indicators: 0.4%

The leading economic index likely rose by 0.4% in December, following increases of 0.6% in November and 0.8% in October, as we continue to reverse the huge drops of -6.3% in April and -7.5% in March. We expect broad improvements for most components however, the jump in initial claims will restrain the headline.

Employment Cost Index: 0.4%

The employment cost index (ECI) is estimated to rise 0.4% Q/Q in Q4, after a 0.5% gain in Q3. We expect a 0.4% increase for wages and salaries and a 0.5% rise for benefit costs. As-expected gains would leave an ECI y/y increase of 2.2% for total compensation, versus 2.4% last quarter and a cycle-high 2.9% pace in 4Q18. Wages and salaries would rise 2.1% y/y, versus 2.5% last quarter and a cycle-high 3.1% in 4Q18. Benefits would be up 2.2% y/y, compared to 2.3% in Q3 and a 3.6% cycle-high in Q2 of 2011. Overall, compensation growth was adhering to a modest cyclical uptrend into the headwind from COVID-19, before a moderation through 2020 and into 2021.

Personal Income/Consumption: 0.1%/-0.7%

We expect a 0.1% headline rise for personal income in December after a -1.1% drop in November, alongside a -0.7% drop in consumption after a -0.4% November decline. An expected 0.4% December rise for wage income and compensation reflects a -0.4% December drop for hours-worked but a 0.8% surge for hourly earnings. We had expected some December boost from early direct deposits with the winter stimulus package, but daily Treasury data suggest that these payments didn’t start until January, and we’ll otherwise see diminishing income support from last year’s CARES Act. We expect a savings rate rise to 13.5% in December, and a surge to a 23.3% peak in January from a 12.9% recent-low in November. We saw a 33.7% prior peak in April of 2020 with previous direct deposits. We peg disposable income growth at -8.0% in Q4 and 23.7% in Q1, after a -13.2% contraction rate in Q3. We expect growth for real consumption of 2.2% in Q4 and -1.1% in Q1, after a 41.0% surge in Q3.

Michigan Sentiment, Revised: 79.2

We assume no revision in the January Michigan sentiment reading of 79.2, versus 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. Current conditions fell to 87.7 in January from a 9-month high of 90.0. Expectations slid to 73.8 from 74.6, versus a 7-month high of 79.2 in October. The 1-year inflation measure popped to a 5-month high of 3.0% in January from an 8-month low of 2.5%. The 5-10 year inflation measure rose to 2.7% from 2.5% in November and December, versus a 7-month low of 2.4% in October. The confidence measures have shown divergent swings since mid-2020 that have a downward tilt into January, likely due to the surge in virus cases, more stringent lockdowns, and the bizarre political events of recent weeks. We should be seeing some lift from stimulus passage and vaccine distributions, however, which may be more evident in February.