Report (Premium Edition) 02-22-2021

The jump in Treasury yields has become the focal point now that long-dated rates are at their highest levels since last February. The long bond tested 2.15% on Friday and the 10-year hit 1.36%, having cheapened from 1.657% and 0.914%, respectively, at the start of the year. With the improvement in vaccine distribution, the reduction in virus cases, along reopenings, a reflation trade is strengthening.

That, the potential for another massive stimulus package and the FOMC’s willingness to let the economy run hot are starting to raise inflation fears. Meanwhile, Wall Street is turning more consolidative after hitting new highs.

This will be a busy week of data and events, though today’s slate is on the light side. The January leading indicator index is expected to increase 0.7%, more than double December’s 0.3% rise, and in line with the hefty gains seen since recovering last May. The February Dallas Fed index is seen improving to 8.0 from 7.0. The January Chicago Fed national activity index is also due.

There is Fedspeak from Kaplan and Bowman. Note that Fed Chair Powell will go to Capitol Hill Tuesday and Wednesday to present his semi-annual Monetary Policy Report (aka Humphrey Hawkins) to Congress. For earnings, reports are due from Cadence Design, Agora, Palo Alto Networks, SBA Communications, Republic Services, Williams Companies, Occidental Petroleum, Discovery, Zoom, ONEOK, and Ingersoll Rand.

Key Drivers for the Week of February 22

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.

• Worries over rising prices exacerbated by improving recovery, stimulus potential
• Treasury 10-year yield climbs to 1.36%, 30-year to 2.15%, cheapest since last Feb
• U.S. data: confidence, income, consumption, durables, claims, new home sales, GDP
• Fed Chair Powell gives semi-annual Monetary Policy Report to Congress
• Treasury auctions $183 bln in new 2-, 5-, 7-year notes
• Japan on holiday Tuesday; data on Tokyo CPI, services PPI, production, sales due
• Bank of Korea seen on hold at 0.50%; RBNZ expected steady at 0.25%
• European ESI economic confidence, CPI; German Ifo business climate, Q4 GDP
• UK monthly employment data for January, February due

Key Market Trends

Tip: Use this as a quick guide on the direction of key markets. I once had a client that would call me nearly every day asking the direction of the markets. This is a quick cheat sheet to know the trend and help understand what is happening with the markets.

S&P 500 Sectors

Tip: Use this section to know the performance of various sectors, weight portfolios, or look for trades. Modern portfolio theory stresses the importance of diversification, but recently several sectors like technology have out-performed others like unities. This is also a way to narrow the sectors to find investment opportunities.

REIT Alert: Due to Covid-19, there is a large percentage of people that have not paid rent or mortgages. We are very worried about the effect it could have real estate investment trusts (REITS) value. Even though the sectors may trending bullish, we believe that REITs could have a significant drop in value.

Week Ahead: Rising Rates Rattle Stocks

On February 22, 2021

The markets will have ample data this week on which to gauge the progress of the economy amid unprecedented monetary and fiscal stimulus, along with the encouraging increase in the number of vaccine doses administered and a reduction in Covid cases. In the U.S., a busy calendar will focus on confidence and income/consumption, while claims and the second GDP report will be worth a look. Fed Chair Powell’s Congressional testimony will warrant considerable attention, but nothing new is expected. In Europe, the February confidence indicators are likely to confirm the split between current conditions in services and manufacturing. Asia has Japan’s Tokyo CPI, retail sales, and industrial production reports, while two regional central banks meet.

NORTH AMERICA

In the U.S., inflation is becoming more of a topic of conversation. With the recovery seemingly intact, the potential for the massive $1.9 tln fiscal spending spree is causing the markets some consternation as it feeds into growing fears of inflation, especially given the FOMC’s willingness to let the economy run hot under the new policy framework. There’s also some creeping doubt over the FOMC’s inflation tolerance and whether policymakers will be able to remain sidelined for the long time span that’s been professed once price pressures pick up in earnest. Treasury yields have popped higher this year — the 10-year climbed to 1.36% on Friday. It was just over 0.900% at the turn of the year and hit an historic low (close basis) of 0.507% in early August. The 30-year bond topped 2.100%, the highest on a closing basis since February 6, 2020. The 2s-10s curve steepened to 121 bps, the widest March 2017, and the 5s-30s gapped out to 154 bps the steepest since October 2015. And the 2s-30s gap hit 200 bps for the first time since December 2016. Meanwhile, Wall Street squandered its early gains on Friday, to close little changed, an apt end to a sideways week. With equity valuations lofty, the rise in rates is opening the door for a less risky alternative, especially if yields continue to cheapen.

There is a very busy calendar this week that includes data, the Fed’s Monetary Policy Report, and supply. The income/consumption reports, along with confidence numbers, will be of considerable interest and should support outlooks for accelerating growth. Income should surge due to stimulus payments and the resumption of extraordinary unemployment benefits in late December. Those should provide a big boost to consumption as well. And a widening distribution of vaccines and easing in infections should start to unleash pent up demand to sustain spending into 2H. Those factors should also help underpin an improvement in confidence.

Consumer confidence (Tuesday) is expected to rise to 90.0 in February from 89.3 in January. We assume the final February Michigan sentiment (Friday) report will repeat the 76.2 preliminary reading. However, both indexes face upside risk due to stimulus deposits and expanding vaccine availability. The confidence measures have shown divergent swings since mid-2020 that have a downward tilt into Q1, likely due to the surge in virus cases, more stringent lockdowns, and the bizarre political backdrop. We should be seeing some lift from stimulus payments and vaccine distributions into February and March. A 11.4% headline surge is projected for personal income (Friday) in January thanks mostly to a projected 55% rise in “current transfer receipts” attributable to winter stimulus payments. A 2.5% rise in consumption is also seen after a -0.2% December decline. Of course, while ample pent up demand combined with a flood of available money to spend (courtesy of DC), ongoing closures to many retail firms may restrain total consumption, leaving two way risk around our estimate.

Initial claims (Thursday) disappointed last week, revealing a rise in claims when another drop was anticipated. The flow of claims data had been consistent with a reduction in the pace of job losses of late, and the claims report suggest that the trend had paused. Hence, this week’s claims report will be in focus. Initial claims for the week of February 20 should bounce to 900k as disruptions from weather in the south central region impact the data. The impact of weather disruptions should temper any sustained market reaction to the report, but we can’t rule out knee jerk moves. Also of importance to the outlook is the durable goods release (Thursday), expected to show a 0.8% rise in January orders with a 1.0% climb in transportation orders. Finally, a 3.3% January bounce is seen for new home sales (Wednesday) to an 870k pace. The housing sector is continuing to boom into 2021. Solid fundamentals even before the pandemic are now being exacerbated by migrations to suburban areas that are boosting new home construction. However, rising building costs and home prices, along with low inventories could cap sales near term. The rather dated, second look at Q4 GDP (Thursday) will be monitored. We’re forecasting an upward revision to a a 4.4% growth rate versus 4.0% in the preliminary reading. We expect GDP growth rates of 3.2% in Q1 and 5.6% in Q2 and Q3, as stimulus payments and vaccines allow a bounce in consumer activity alongside continued strength in investment spending, and a rapid rebound in international trade.

Fed Chair Powell goes to Capitol Hill Tuesday, Wednesday, to present his semi-annual testimony. The Monetary Policy Report was released Friday and reiterated the stance that the Committee is “firmly committed to fulfilling its statutory mandate.” And it added that policymakers seeks “to explain its monetary policy decisions to the public as clearly as possible.” This will be the basis for Chair Powell’s testimony. This report did not break any new ground, nor do we expect Powell will. He will explain the new policy framework to lawmakers. This is the new cornerstone of the FOMC’s stance where it will allow inflation to run hot before even thinking about removing accommodation. Powell will also explain how the pandemic has caused the Fed to track non-traditional, high-frequency data for insights on the labor market, consumer spending and the economy. Wages and inflation will also be important topics too, with wages seen little changed in general despite the disruptions in the labor market, while inflation remains low despite a rebound since last spring. What is likely to be a major topic of discussion in the testimony will be the Fed’s increased emphasis into social justice. There’s also Fedspeak on the week from Kaplan, Bowman, Brainard, VC Clarida, Bostic, Bullard, Quarles, and Williams.

Treasury supply is on tap too with the usual 2-, 5-, and 7-year auctions slated. The debt managers left the size unchanged from January at $183 bln, with $60 bln in 2s, $61 bln in 5s, and $62 bln in 7s. Rates cheapened last week, leaving the wi 2-year at 0.115%, the wi 5s at 0.595%, and the win 7s at 0.990%. Stops here would be an historic low on the 2-year tranche, but the highest levels on the 5s and 7s since last February. Demand has been lackluster of late, one more reason why the bond market has been cheapening.

The earnings docket thins a bit, but still features a number of key reports. Monday has Cadence Design, Agora, Palo Alto Networks, SBA Communications, Republic Services, Williams Companies, Occidental Petroleum, Discovery, Zoom, ONEOK, and Ingersoll Rand. Tuesday has Home Depot, Medtronic, Square, Intuit, Bank of Nova Scotia, Bank of Montreal, Thomson Reuters, CoStar Group, Alcon, Verisk, Pioneer Natural Resources, Royal Caribbean, and Heico. Wednesday brings NVIDIA, Lowe’s, RBC, Booking Holdings, TJX, Teladoc, Exelon, CIBC, ViacomCBS, American Water Works, Cheniere Energy, Entergy, NetApp, and Weibo. Thursday has Salesforce, Anheuser-Busch Inbev, Airbnb, TD Bank, American Tower, NetEase, Moderna, Autodesk, DoorDash, Dell, Vmware, Monster Beverage, Ambev, Keurig Dr Pepper, Rocket Companies, Sempra Energy, Best Buy, Wayfair, Etsy, PG&E, Domino’s Pizza, J.M. Smucker, and Cable One. Berkshire Hathaway, Liberty Broadband, and Icahn Enterprises report on Friday.

In Canada, the flow of data is back to a trickle after the tap was cranked open last week. The industrial product price index (Friday) is due, but it typically flies under the market’s radar. CPI, released last week, showed a pickup to 1.0% y/y growth in January from 0.7% in December, leaving a still tame CPI growth rate that is at the bottom of the BoC’s 1-3% target band. While energy prices could leave a large gain for the January IPPI, the report will not alter expectations that accommodative policy is here to stay through at least 2022. BoC Governor Macklem delivers a speech (Tuesday) on “Labour market impacts of COVID and sectoral implications,” which could be of some interest.

ASIA

A heavier regional calendar will update the outlook on growth. Japan is off for the Emperor’s Birthday on Tuesday, but later in the week will feature Tokyo CPI, retail sales, and industrial production. India will release Q4 GDP. In the smaller economies, the usual mix of prices, trade, production and growth are slated. China’s slate is empty. For central banks, New Zealand’s RBNZ meets, with no change to its 0.25% OCR seen. South Korea’s BoK is expected on hold with rates at a lean 0.50%.

In Japan, January services PPI is due Monday. The pace of deflation slowed fractionally to -0.4% y/y in December from -0.5% in October and November. This would be a fourth straight month in deflation. Price pressures ticked up in mid 2013 and had been in positive territory through September. Japan will be off Tuesday for the Emperor’s Birthday holiday. The remainder of the docket is due Friday and features February Tokyo CPI, seen increasing slightly to a -0.3% y/y pace from -0.5% overall, and -0.3% y/y from -0.5% on a core basis. The declines in prices have eased from the -1.2% y/y clip in December for the headline and -0.9% for the core. The closures in the economy and state of emergency called in early January are likely to crimp demand and limit price pressures. January industrial production is expected to rebound 3.0% on the month, after falling from -1.0% in December. Production has generally been in contraction for the last two years, but the y/y pace weakened substantially on the pandemic (-26.3 % y/y in May). January retail sales are penciled in falling to a -7.0% y/y contraction rate, double the prior -3.4% for large retailers, and -3.0% y/y from -0.2%. January housing starts are forecast to have posted a -3.0% y/y rate from -9.0%. They have been in contraction for 18 straight months. January construction orders are also due.

Elsewhere, India Q4 GDP (Friday) is expected to bounce to a 1.0% y/y rate of growth after Q3’s -7.5% contraction rate and the -23.9% from Q2. The economy has recovered quickly from the pandemic-recession. Hong Kong January CPI (Monday) should warm to 1.0% y/y from 0.7% in December. Q4 GDP (Thursday) is estimated at -3.0% y/y from -3.6%. The January trade deficit (Thursday) is expected to widen to HKD 48.0 bln from 47.5 bln. South Korea’s BoK (Thursday) is expected on hold with rates at 0.50% when it meets. It’s been at that record low level since the 25 bp cut in April. The rate was at 1.25% a year ago. Taiwan January export orders (Wednesday) are estimated to have climbed to a 40.0% y/y rate from the 30.3% surge in December. January industrial output (Thursday) should rise 20.0% y/y from 9.9%, while January unemployment (Thursday) is expected at an unchanged 3.8%.

Thailand January exports (Thursday) are penciled in slowing to a 3.0% y/y pace, down from 4.9%. The January trade and current account reports are due Thursday. January manufacturing production (Friday) and is expected to fall 4.0% y/y from -2.4%. Malaysia January CPI (Wednesday) is forecast to warm to -0.7% y/y from -1.4%. The January trade surplus (Friday) is seen narrowing to MYR 18.0 bln from -20.7 bln. Singapore’s January CPI (Tuesday) is seen rising to 0.2% y/y from unchanged previously. January manufacturing production (Friday) is forecast at up 5.0% y/y from 14.3% in December.

In Australia, a thin docket is on offer this week. New private capital expenditures (Thursday) are of some interest, with a 1.0% bounce seen in Q4 (q/q, sa) after the -3.0% drop in Q3. The Q4 wage price index (Wednesday) is expected to rise 0.2% (q/q, sa) after the 0.1% gain in Q3. There is nothing from the RBA this week. The RBA has been consistent that the cash rate will be maintained at 10 bps for as long as necessary– as such, the market has fully priced in low for as long as needed. Global central banks have all adopted this policy, led by the Fed and ECB, as a cure for the pandemic drag on the economy and a way to maintain stability of the financial system. Of course, inflation concerns are beginning to filter into the market, altough central bankers remain sanguine on the issue.

New Zealand’s calendar is highlighted by the RBNZ (Wednesday) — no change to the 0.25% record low rate setting is anticipated. The Bank slashed rates 75 bps in March from the 1.00% rate a year ago, and has kept policy steady since. We also expect policymakers to reiterate assurances that rates will remain low for as long as it takes (the economy to fully recovery). Retail sales volumes (Tuesday) are expected to fall -2.0% (q/q, sa) after the 28.0% surge in Q3. The trade report is expected to show a -NZD 0.7 bln deficit in January after the NZD 17 mln surplus in December.

EUROPE

Eurozone: confidence is strengthening and the manufacturing sector is experiencing very strong demand and supply chain shortages, which together with the uptick in energy price inflation will likely fuel underlying price pressures going forward. So far headline rates remain below the ECB’s definition of price stability and ECB officials are eager to stress that they will see through short term increases in headline inflation rates, also to prevent reflation trades from running too far ahead. Meanwhile the fact that in Italy PM Draghi managed to get broad backing for his reform programs has helped to keep spreads in, which will make the ECB’s work much easier going forward.

This week’s economic calendar brings the rest of the confidence indicators for February, which are likely to confirm the split between current conditions in services and manufacturing, with the latter strengthening to an extend that reveals supply chain constraints and rising price pressures. The former, however, remains depressed, although despite the slow progress of vaccine programs in the EU active infection numbers are falling and confidence in a gradual re-opening of economies later in the year strengthening.

Against that background we expect an improvement in German Ifo Business Climate (Monday) to 91.0 (median 91.8) from 90.4 in the previous month, driven entirely by a strengthening expectations index. The European Commission ESI Economic Confidence index (Thursday) meanwhile is expected to lift to 92.0 (median same) from 91.5, although see some risk of a downside surprise as current conditions remain depressed. Meanwhile Eurozone M3 money supply growth is likely to show a further acceleration in the headline rate as the central bank continues to maintain very favourable financing conditions and to support easy access to credit for companies and consumers.

The rest of the calendar is backward looking and should not change the overall outlook. The final reading of Eurozone CPI inflation for January (Tuesday) is widely expected to confirm the jump to 1.4% y/y that was largely due to base effects. The ECB has already stressed that it doesn’t expect inflation to reach target lastingly any time soon and indeed even at 1.4% y/y, the headline rate remains clearly below the ECB’s 2% goal. Furthermore, the ECB seems to be shifting towards a more symmetric inflation target and that would require a lengthy overshoot following the current period of underinflation.

French and German Q4 GDP numbers are likely to confirm preliminary readings of 0.1% q/q and -1.3% q/q respectively. French confidence data as well as preliminary inflation data for France and Spain are also due. Events include ECB speakers Lagarde (Monday) and Schnabel (Friday).

U.K.: the UK’s rapid vaccine rollout and sharp drop in the rate of new cases, which are down some 80% from the peak in January, raises the prospect of economic and societal reopening over the coming months, at least towards what could be normalcy if not a full return to pre-pandemic freedoms. With the UK nations still enduring lockdown measures, Prime Minister Johnson will on Monday outline a roadmap to lifting Covid restrictions, which are expected to by a cautious step-by-step approach. Vaccinations, and evidence that the program is proving effective, alongside a build up in natural herd immunity (from those having recovered from a Covid infection) and seasonal factors bode well for reopening prospects. A sharp focus will remain on the various new, highly transmissible variants, though so far these evidently haven’t prevented a sharp worldwide drop in new cases, including in areas and countries will loose restrictions. The UK economy and the pound underperformed peers during the height of the first lockdowns last year, and the vista of reopening has already been buoying the pound against other currencies.

The pound last week forayed above 1.4000 against the dollar for the first time since April 2018, extending the recovery from the nadir seen last March at 1.1409. While recent gains have been fuelled in part by broader dollar softness, the pound itself has been outperforming. Sterling hit respective 11- and 14-month highs against the euro and yen. The UK currency was as of last week’s close showing an average 3.5% gain versus the dollar, euro and yen on the year to day, that is to say since the UK left its Brexit transition membership of the EU’s common market and customs union. UK stock markets are also up over this period, including indexes that track smaller cap companies whose incomes are generated domestically, and not just the global names that dominate the larger cap indices, such as the FTSE 100.

The UK’s preliminary February composite PMI, released last Friday, came in above expectations, rising to a two-month high of 49.8 headline from the 41.2 reading that was seen in January. The median forecast had been for just 42.2. The improvement was driven by a marked rebound in the services PMI, to a four-month high of 49.7 in the headline reading, up from 39.5 in the prior month and well above the median expectation for a much more modest rise to 41.0. This was despite the ongoing UK-wide Covid lockdown, which has hit the hospitality and high street retail sectors, among others, hard. The PMI surveys also highlighted post-Brexit problems and hassles, but the point is the UK hasn’t fallen off a cliff and activity has in fact increased, overall. The final PMI data will be released next week.

UK data calendar this week is on the quiet side, highlighted by monthly employment data covering January and February (Tuesday). Unemployment is expected to tick up slightly to 5.1%, which of course is being held down by the government’s furlough program. Some encouragement was gleaned from the February PMI report, which showed job declines in the lockdown-afflicted service sector have been less this month than in January, with survey respondents noting hopes for a rebound in consumer demand on the other side of the lockdown, encouraged by the pace of the Covid vaccination roll out. Business expectations for the 12 months ahead were accordingly the most upbeat since last April. The UK economy should expand markedly over the coming months.

Switzerland: The Swiss data calendar this week brings Q4 GDP data and the February KOF leading indicator (both due Friday). GDP is expected at +0.1% q/q and -2.1% y/y. The KOF headline is anticipated to rise to 97.0 after January’s 96.0 reading.

Stocks & ETF Watch List

Tip: Use this section to find stocks and ETFs to add value to your portfolio by increasing the alpha (return) and decreasing beta (beta). Our list is updated weekly to help provide our readers with timely insights. Readers should do their own research before making any investment.

Solid Picks

This group of stock/ETF picks is likely to experience growth and perform well into the near future. The “Fair Value” is a calculation using a discount cash flow analysis to determine the Intrinsic Value. 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.

ETFs

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 heavy release schedule in the last week of February. We expect a Q4 GDP growth boost to 4.4% from 4.0%. Personal income should surge by 11%-12% in January due to stimulus payments, alongside a big consumption gain. We expect a January rise for durable goods orders with broad-based strength. The advance indicators report should reveal a slight January narrowing in the goods trade balance and a further inventory climb. New home sales should rise again in January, as should leading indicators, while consumer confidence increases in February.

Week of February 22

The releases over the last week provided clarity on the profile of the Q1 economy, and the mix prompted an outsized boost in our GDP growth assumptions for the first half of the year. The biggest surprise was a 5.3% surge in retail sales in January, which more than reversed declines through the three months of Q4 to leave new record-highs for most measures. The seasonal factors for this year’s odd holiday season obviously faced a big mis-match to the actual sales pattern, though sales also faced a big January boost from vaccines and stimulus deposits, after heightened coronavirus restrictions in November and December. It’s now clear that consumer spending will post solid growth in Q1 despite the weak close to Q4, and we now peg GDP growth at 4.8% in Q1 and 6.0% in Q2.

We also saw a big 0.6% January rise for industrial production after huge 0.9%-1.1% over the prior four months that confirmed the solid uptrend for GDP, alongside robust early producer sentiment readings for February that show little sign that the solid readings from the second half of 2020 will abate anytime soon. Inventories are rebuilding, but it will take a while to recoup the the losses from inventory liquidations over the four quarters ending in Q3 of 2020. The sector is also benefiting from the ongoing housing boom, and though t

This last week’s massive weather-related disruptions in the south central region will take a chunk out of some of the February macro measures, though utility output and consumption will soar, and disruptions to the massive petrol-chemical complex centered around Houston will provide a further updraft for commodity prices. The housing metrics in particular may face big February disruptions, though the reported 10.4% January surge in building permits makes clear that the housing boom will extend well past any February setbacks.

Leading Indicators: 0.7%

The leading economic index likely rose by 0.7% in January, following increases of 0.3% in December and 0.7% in November, as we continue to reverse the huge drops of -6.3% in April and -7.5% in March. We expect continued broad improvement across most components, though at a slower pace given disruptions from renewed pandemic shutdowns.

Consumer Confidence: 90.0

Consumer confidence is expected to rise to 90.0 from 89.3 in January, 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 87.0 from 84.4 in January 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 92.0 in February from 92.5, 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 January’s 5.8%. The confidence measures have shown divergent swings since mid-2020 that have a downward tilt into Q1, likely due to the surge in virus cases, more stringent lockdowns, and the bizarre political events of January. We should see a lift from stimulus payments and vaccine distributions into February and March, however.

New Home Sales: 870k

We expect a 3.3% January bounce for new home sales to an 870k pace, following a rise to a 842k clip in December that left a 7-month stretch of sales rates that are the highest since a 1,016k reading in September of 2006. We expect a median sales price drop to $350,000 from $355,900 in December, leaving a y/y increase of 6.4%. We expect an 867k Q1 pace for new home sales, after a 873k pace in Q4. The housing sector is continuing to boom into 2021, as solid fundamentals even before the pandemic are now being exacerbated by migrations to suburban areas that are boosting 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 climb in starts, construction, and completions in 2021 given likely ongoing strength in new home sales, though with likely weather headwinds in February.

Durable Goods Orders: 0.8%

Durable goods orders are expected to rise 0.8% in January with a 1.0% climb in transportation orders, after a 0.5% headline orders rise in December that included a 1.1% transportation orders gain. The durable orders rise ex-transportation is pegged at 0.7%, after a 1.1% December rise. A defense orders gain is pegged at 4.9%, following a -5.1% December drop. Boeing orders fell to 4 planes in January, after a bounce to 90 in December with the lifting of the 737 MAX grounding. The vehicle assembly rate slowed to 10.8 mln in January from 11.0 mln in December, versus a 0.1 mln trough in April last year. Durable shipments should rise 1.0%, and inventories should rise 0.2%. The I/S ratio is expected to tick down to a new 18-month low of 1.66 from 1.67 in December, versus 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.

Preliminary Q4 GDP: 4.4%

We expect a Q4 GDP growth boost to 4.4% from 4.0%, with hikes of $6 bln for both factory inventories and residential construction, $5 bln for wholesale inventories, and $4 bln for public construction, but trimmings of -$2 bln for both nonresidential construction and consumption, and -$1 bln for exports. The Q4 GDP data document a sharply diminished rebound in consumer activity, but a still-robust climb for business fixed investment, as companies struggle to replenish inventories. The inventory aggregate returned to accumulation in Q4 after a massive four-quarter liquidation through Q3, and residential investment extended its powerful double-digit growth pace, just as government purchases continued to contract. We expect GDP growth rates of 3.2% in Q1 and 5.6% in Q2 and Q3, as stimulus payments and vaccines allow a bounce in consumer activity alongside continued strength in investment spending, and a continued rapid rebound in international trade.

Initial Jobless Claims: 900k

Initial jobless claims for the week of February 20, should bounce to 900k as disruptions from weather in the south central region impact the data. Last week we saw a smaller, 13k, rise to 861k from 848k. The usual seasonal rise in NSA claims to a peak in January before a drop into the spring should support a similar SA pattern, given the unusually high claims level and the switch since September to additive seasonal factors. We’ve likely also seen a lift from expanded winter coronavirus restrictions. Claims are expected to average 852k in February, after averages of 852k in January, 825k in December and 749k in November. The 861k BLS survey week reading follows prior survey week figures of 914k in January, 892k in December, and 748k in November. We assume a 350k February payroll rise after the 49k January gain.

Continuing claims fell by -64k to 4,494k in the week of February 6, following an upwardly revised 4,558k figure. We expect continuing claims to fall -146k to the 4,350k area for the week ending on February 13. Though rising coronavirus restrictions are likely prompting some stalling in the continuing claims downtrend, we expect resumed bigger declines later in Q1. Continuing claims likely fell about -435k between the January and February BLS survey weeks. We saw prior drops of -537k in January, -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.

Advance Indicators Goods Deficit: -$81.7 bln

We expect the advance indicators report to reveal a January narrowing in the goods trade balance to -$81.7 bln from -$83.2 bln in December and an all-time high -$86.1 bln in November. We expect exports to grow 2.8% to $137.0 bln, while imports grow 1.0% to $218.7 bln. A steep January petroleum price climb will boost both exports and imports of petroleum. The rapid rise in vehicle trade may stall in January due to parts shortages. We expect a $24 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 January gains of 0.5% for wholesale inventories and 0.9% for retail inventories.

Personal Income/Consumption: 11.4%/2.5%

We expect an 11.4% headline surge for personal income in January thanks mostly to a projected 55% rise in “current transfer receipts” attributable to winter stimulus payments. Daily Treasury data show $131 bln in January payments to individuals, which is annualized in the income report. We expect a 1.1% January rise for wage income and compensation due to a 0.9% January rise for hours-worked and a 0.2% increase for hourly earnings. We also expect a 2.5% rise in consumption after a -0.2% December decline. We expect a savings rate spike to 21.6% in January, versus a 12.9% recent-low in November. We saw a 33.7% prior peak last April with previous direct deposits. We peg disposable income growth at 25.4% in Q1, after contraction rates of -8.1% in Q4 and -13.2% in Q3, but a 46.2% growth pace in Q2. We expect a contraction rate for real consumption of -1.2% in Q1, after growth rates of 2.5% in Q4 and 41.0% in Q3.

Michigan Sentiment, Revised: 76.2

We assume the final February Michigan sentiment report will repeat the 76.2 preliminary reading, though the risk is for an upward revision as stimulus deposits and expanding vaccine availability kick in. The 6-month low in February followed a 79.0 January figure, versus a 7-month high of 81.8 in October, an 8-year low of 71.8 in April, and a 14-year high of 101.4 in March of 2018. Expectations fell to a 6-month low of 69.8 from 74.0, versus a 7-month high of 79.2 in October. Current conditions fell to a 4-month low of 86.2 from 86.7, versus a 9-month high of 90.0 in December. The 1-year inflation gauge rose to a 3.3% figure last seen in July of 2014, while the 5-10 year inflation gauge sustained the 2.7% January high also seen last August, September and May, and previously in March of 2016. The confidence measures have shown divergent swings since mid-2020 that have a downward tilt into Q1, likely due to the surge in virus cases, more stringent lockdowns, and the bizarre political backdrop. We should be seeing some lift from stimulus payments and vaccine distributions into February and March.