Report (Premium Edition) 10-25-2021

Key Market Trends

Tip: Use this as a quick guide on the short-term direction (1-2 weeks) of key markets. It is not a signal to buy or sell, just to show the trend. This is a quick cheat sheet to know the trend and help understand what is happening with the markets in the short term. I started making this section years ago because once had a client that would call me nearly every day asking the direction of the markets.

S&P 500 Sector Trends

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 outperformed others like utilities. 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. Following the Supreme Court ruling stopping the eviction moratorium, we are very worried about the effect it could have on real estate investment trusts (REITS) value. Even though the sectors may trending bullish, we believe that REITs could have a significant drop in value.

Key Drivers for the Week of Oct. 25, 2021

TIP – This is a 1-minute brief bullet-point summary. It is a tool that gives investors and financial a fast and simple list of what to watch for and talking points for the week.

• Focus on monetary policy meetings from ECB, BoJ, BoC this week, FOMC, BoE next
• Inflation, Hyperinflation & Stagflation fears
• Supply chain issues continue getting worse
• U.S. GDP to highlight Q3 slowdown, home sales, durables, income, spending on tap
• Facebook, Microsoft, Amazon, Apple, McDonald’s, Coke lead big earnings slate     
• Treasury’s $183 bln in 2-, 5-, 7-year auctions could see tough sailing
• BoC to keep rate unchanged but likely to announce end of QE; MPR and GDP due
• BoJ seen on hold, but likely to trim 2021 GDP outlook; heavy month-end data slate
• ECB on hold, may send dovish signal even as PEPP seen ending in March 
• Eurozone Q3 GDPs, ESI economic confidence, CPI reports highlight
• German Ifo business climate, GfK consumer confidence, HICP, jobless numbers   
• UK CBI distributive trade data, consumer credit; BoE meeting in November is “live” 

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 monthly to help provide our readers with timely insights. Readers should do their own research before making any investment. In order to make our report easier to read, we are now including the stocks as lists for readers in separate posts.

• Inflation Stock Picks: List of stocks that we think should perform better in a rising inflation environment. Click here
• Auto Parts Stock Picks: Auto parts companies are likely to see their stocks rise as the average age of cars and light trucks increased from 11.9 years in January 2017 to 12.2 years in January 2021, according to new data from IHS Markit. Below are the top auto parts companies that investors should buy now before the profits roll in. Click here.
• Solid Picks: This group of stock/ETF picks is likely to experience growth and perform well into the near future. Click here.
• Dividend Stocks: List of stocks that have excellent dividends and business performance. Click here.
• Dividend Growth Stocks: List of stocks that have a history of growing dividends. Click here.
• Dividend ETFs Picks: This list of ETFs is selected for their ability to pay dividends. Click here.
• 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 the price-earnings ratio. The general idea is that blue-chip companies that pay a dividend are more likely to withstand an economic downturn. Click here.

Week Ahead: Earnings & FOMC

On October 25, 2021

Core central bankers have a difficult task ahead, trying to chart a course to start to unwind pandemic stimulus while addressing rising inflation pressures amid widening and varying impacts from supply chain disruptions. Policy decisions from the ECB, BoJ, and BoC are front and center this week, with the FOMC and BoE next. None are expected to hike rates yet, but the BoC, BoE, and FOMC are looking to start or continue slowing QE purchases in the near future.

On the other hand, there is a risk the ECB sends dovish signals and pushes back against market expectations for rate hikes later in 2022. The BoJ is expected to revise down its 2022 growth projection and hence is unlikely to give any indication of slowing its corporate funding program yet. There’s plenty of data this week that will help provide some guidance for the policy decisions.

It has been tough sailing for bond markets over the past several months. Inflation worries, growth concerns, supply constraints, and more hawkish central banks have had conflicting impacts on yields, but ultimately the bears have won. And the rise in rates has generally picked up again over the past month as QE tapering nears, energy prices take off, and the “transitory” nature of price pressures is questioned with central bankers acknowledging prices could be elevated for longer than expected.

Mohamed El-Erian, an economist, warns market participants and the public that things will get worse before getting better. He believes inflation will remain at four to five percent. El-Erian is one of many economists who have expressed concerns that the current level of inflation will continue.

Federal Reserve officials have stated this week that they are still waiting for signs of inflation. Chris Waller, a member of the Federal Reserve Board of Governors, stated that the Fed will be able to better determine if inflation has been transitory in the coming months. Waller stated that if inflation continues to rise through the rest of the year, then a more aggressive policy response other than tapering might be necessary in 2022. This likely means raising interest rates. It could reduce inflation, but also slow down economic growth. This is just one reason why I believe the Fed doesn’t have any other options.

The San Francisco Fed anticipates that core inflation will be slightly higher next year. Consumer Price Index (CPI), which is currently at a 14-year peak of 5.4%, has been overwhelming consumer concern that prices will rise beyond what the Fed can manage. On average, the price of all energy sub-categories has increased by 24.8%. On an unadjusted 12-month basis, gasoline alone has increased 42.1% by September 2021. Food is on the other side, however, up 4.6% overall, with certain meats and beans growing more strongly.

The Federal Reserve’s Beige Book compiles data from every Fed bank and branch director across the country to provide commentary on economic conditions. The October issue’s national aggregates show that the growth rate has slowed over the past 45 days because of COVID-19 concerns and supply-chain disruptions. Real estate activity has slowed slightly and loan demand has remained flat. Price increases were experienced in all regions of the country, including energy. Although some people expect prices to decrease over the next 12 months, most believe that a rate increase will occur sooner than expected if inflation doesn’t ease.

The Federal Reserve Bank of Atlanta has again downgraded its real GDP estimate for 2021’s third quarter to 0.5%. This is a continuation of a troubling trend over recent months. It was 1.2% on October 15, 6% in August and 14% in May. Blue-chip banks still forecast a 4% increase in GDP. Atlanta Fed economists say that growth indicators have declined across the board. This indicates that consumers are reducing their spending in response to inflation.

Analysts at Goldman Sachs stated that they disagreed with Atlanta Fed’s GDP growth estimates. They said, “In our opinion, [the Atlanta Fed projection] seems too pessimistic about net trade and investment.” This could be because Atlanta Fed’s current GDP is volatile historically due to consistently inaccurate forecasts. For example, going into the COVID locks, the Atlanta Fed repeatedly overestimated economic resilience. This led to weekly downward revisions in quarterly growth and, again, an overestimation of economic recovery.

Moody’s Analytics recently stated that supply chain problems will only get worse before they improve. One analyst believes that the supply chain supporting global economic growth may not be able to recover fast enough to meet consumer demand. Gina Raimondo, U.S. Secretary for Commerce, recently said that she is optimistic that the holiday season will alleviate supply chain problems in the U.S. Moody’s analysts disagree with Raimondo’s and the Biden administration. They claim that there are a number of issues that “have combined for an ideal storm where global production will suffer because deliveries aren’t made in time, prices and costs will rise, and that GDP growth will not be as strong as it should.”

We should remind you that economists continue to warn of recession as we head into winter. Given the Atlanta Fed’s August forecast of 14% GDP growth in Q3 2021 (which was 0.5% in October), future cuts to Q4 could well be seen as economic contraction.

U.S. preliminary Q3 GDP (Thursday) will be the focus of the economic data amid expectations for a steep slowing in growth. That could make for a difficult dilemma for the FOMC at its November 2-3 policy meeting and could see the Fed hold off on announcing QE tapering later in the month. Other reports this week include home sales, durable orders, income, consumption, the ECI and confidence numbers. The earnings calendar is also very heavy, while the Treasury auctions $183 bln in 2-, 5-, and 7-year notes.

We expect Q3 GDP growth to slow to 2.8% from Q2’s 6.7% pace, and after the 6.6% clip from Q1. Supply chain bottlenecks sharply curtailed activity last quarter despite the massive stimulus spending. Vehicle shortages capped consumption growth and net exports subtracted a hefty -$72 bln as an estimated 9.0% gain in imports greatly outpaced an estimated 0.9% rise in exports. Inventories likely added sharply to growth as a -$168.5 bln liquidation rate in Q2 was likely followed by a smaller -$20.2 bln pace in Q3. As for prices, the index should post a 5.0% increase, also due to supply constraints, after a 4.3%Q2 pace.

New home sales for September (Tuesday) are projected increasing 4.1% to a 770k pace, following an August rise to 740k from 729k in July. We’re seeing rapid growth in demand for new homes in 2021 due to the pandemic and supported by record low mortgage rates. September durable goods orders (Wednesday) are projected falling -1.1% with weakness in transportation orders. September personal income (Friday) should edge up 0.3% after the 0.2% August increase based on the earnings jump in the jobs report. Consumption is expected to rise 0.5% following the 0.8% prior pop. The spending index has been choppy due to various pandemic issues.

The employment cost index, ECI (Friday), is estimated to increase 0.8% Q/Q in Q3, after a 0.7% gain in Q2. An as expected result would push up the 12-month figure to 3.2% y/y from 2.9% y/y in Q2, and would be a 13-year high, another sign of the inflation problem. October consumer confidence should dip slightly further to 109.0 after a drop to a 7-month low of 109.3 in September amid weakness in the expectations component. Other confidence measures have softened this month. The October IBD/TIPP index fell to a 13-month low of 46.8. The preliminary reading from the University of Michigan survey slipped to 71.4 from 72.8 in September. And the Langer consumer comfort index dropped to a 51.4 average in October, from the prior month’s 56.1 average.

Treasury supply is back on tap this week with the $183 bln in 2-, 5-, and 7-year note auctions on Tuesday, Wednesday, and Thursday, respectively. These could be tough maturities to sell given they are closely tied to the FOMC’s policy stance. While rates have risen significantly, it is not clear if they have cheapened sufficiently to bring in anything better than mediocre demand. One potential saving grace could be expectations the Treasury will announce reductions in nominal coupon volumes in November.

The wi 2-year tested 0.53% on Friday before closing at 0.495%. A stop in this range would be the highest since February 2020, but the January 2020 award rate was nearly 66 bps higher. The wi 5-year popped to 1.270% on Friday and closed at 1.215%. Award rates here would be the highest since the January 2020 rate of 1.448%. And the wi 7-year cheapened to 1.550% and closed at 1.485% last week and also would be the highest since January 2020’s 1.570%.

The earnings slate is loaded with a number of heavy hitters, starting out Monday with Facebook, along with Southern Copper, Kimberly-Clark, Cadence Design, Otis, Canon, Restaurant Brands, Logitech, Crown Holdings, Lennox, and Universal Health. Tuesday includes Microsoft, Alphabet, Visa, Eli Lilly, Novartis, Texas Instruments, UPS, Advanced Micro, Raytheon, HSBC, GE, S&P Global, 3M, Lockheed Martin, Chubb, Sherwin-Williams, Capital One, Waste Management, UBS, Twitter, MSCI, Centene, ADM, Suncor Energy, Ameriprise Financial, Corning, PACCAR, TransUnion, Principal Financial, Markel Corp., Entegris, IDEX Corp., Fortune Brands, Hasbro, and F5 Networks. On Wednesday there are Thermo Fisher, Coca-Cola, McDonald’s, Sony, ServiceNow, Bristol-Myers Squibb, Boeing, GlaxoSmithKline, ADP, GM, Old Dominion, CME, Edwards Lifesciences, Norfolk Southern, Twilio, Ford, General Dynamics, KLA Corp., eBay, Align Technology, Spotify, Raymond James, Amphenol, Kraft Heinz, O’Reilly Automotive, Xilinx, Pinterest, Hilton, Aflac, Garmin, Hess, Yandex, United Rentals, Yum China, International Paper, Teledyne Technologies, Cincinnati Financial, Avery Denison, Arch Capital, Nomura, and BioMarin Pharmaceuticals. Thursday has Apple, Amazon, Mastercard, Comcast, Merck, Shell, Shopify, Starbucks, American Tower, Sanofi, Caterpillar, Stryker, Altria, ICE, Illinois Tools Works, Northrop Grumman, Keurig Dr Pepper, Carrier Global, Newmont, American Electric Power, Republic Services, Baxter International, ResMed, Yum! Brands, Hershey, Excel Energy, CBRE, Seagen, West Pharmaceuticals, Hartford Financial, Sirius XM, VeriSign, Bio-Rad Labs, Carlyle Group, SS&C, CMS Energy, Textron, Check Point Software, Zendesk, Eastman Chemical, Mohawk Industries, Molson Coors, and DaVita. The on Friday we get Exxon Mobil, Novo Nordisk, Chevron, AbbVie, Charter Communications, Aon, ICICI Bank, Colgate-Palmolive, L3Harris, Weyerhaeuser, Imperial Oil, Cerner, Church & Dwight, Shaw Communications, Cboe.

In Canada, it is the Bank of Canada’s policy decision that is the centerpiece this week. The BoC (Wednesday) is expected to hold its policy rate steady at 0.25%, which would match widespread expectations. However, the call on QE is a bit less certain — we now expect them to announce the effective end of QE as the emergency conditions that existed when QE was implemented no longer exist. Notably, inflation is elevated and here to stay, the labour market has recovered and the housing market is, to use a technical term, bonkers.

An end to QE will of course exacerbate already pronounced worries in the market that aggressive rate hikes are on the way in 2022 — we would not be surprised if the BoC provides some assurance that such a scenario is (still) not their base case. Recall that the bank has been clear, up to now, that they don’t see the possibility of a rate hike until late next year. Also, the Bank releases its Monetary Policy Report, which will provide updated growth and inflation projections. As for data, August GDP (Friday) is projected to bounce 0.7%, matching Statistics Canada’s estimates, after the -0.1% July dip.

ASIA

The pandemic driven supply constraints remain front and center in Asia and indeed, globally. Growth forecasts in the region have been downgraded, while price pressures and ongoing shortages of key manufacturing goods do not bode well for local economies in Q4. This week’s data slate has the usual month-end deluge from Japan, including unemployment, industrial production, retail sales and Tokyo CPI. The BoJ meets and is widely expected to keep policy unchanged. China’s docket is empty, while elsewhere, production, trade, prices and growth data are on tap.

In Japan, the BoJ meets (Wednesday, Thursday) and there are no expectations for a change to the -0.1% rate target. But, weak exports, along with supply chain issues throughout the region and indeed the world, should see the Bank downgrade its growth forecast for the remainder of this fiscal year (ending March 31, 2022). The inflation outlook is a little more uncertain. There is risk for a modest upgrade given CPI measures inched up in September with the national headline CPI y/y rate at 0.2%, in positive territory for the first time since August 2020, with the core rate at 0.1%, above 0% for the first time since March 2020.

For data, the September services PPI (Tuesday) is slated. It rose 1.0% in August. The index has not posted a decline since January. The contraction rate in retail sales (Thursday) is expected to slow to -4.0% y/y in September, from -4.7% for large retailers, and -2.5% y/y from -3.2% overall. The remainder of the reports are out Friday. October Tokyo CPI is expected unchanged at a 0.3% y/y clip overall, having rebounded from -0.4% in July and August. Prior to the September bounce, headline prices had posted 11 straight monthly declines.

We also expect a steady 0.1% y/y on a core basis. Core prices had been in deflation from August 2020 through July 2021. September unemployment should remain unchanged at 2.8% for a third month, having fallen from 3.0% in May. The job offers/seekers ration at 1.14 as it was previously. Preliminary September industrial production is penciled in dropping -3.0% m/m from -3.6% in August. This would be a fourth negative monthly print this year. We expect October consumer confidence to continue to improve and project an increase to 38.5 from 37.8 in September. Confidence has been on the rise, albeit modestly, since the decline to 34.1 in May as Covid cases in Japan have plummeted since their peak in late August. September housing starts and construction orders are also due.

Taiwan September industrial output (Monday) is expected to slow to a 12.0% y/y rate from 13.7% previously. It has slowed from 18.0% in June. September leading indicators are due Wednesday. Preliminary Q3 GDP (Friday) is penciled in dipping to a 6.5% y/y rate from 7.4% in Q2 and 9.3% in Q1. South Korea October consumer sentiment (Wednesday) is forecast inching up to 104.5 after rising to 103.8 previously. This would be an 8th straight print above 100. Advance Q3 GDP (Wednesday) likely eased to a 4.5% y/y pace after jumping to 6.0% previously, which was the fastest since December 2010. September industrial production (Friday) should ease to 3.0% y/y from 9.6% in August.

Malaysia September trade (Thursday) is forecast to see the surplus to widen to MYR 25.0 bln from 21.4 bln previously. Thailand September exports (Monday) should rise 9.0% y/ from 8.9% in August. September manufacturing production (Tuesday) is forecast falling to a -6.0% y/y from -4.2% previously. The September trade deficit (Friday) is expected to narrow to -$1.0 bln from -$1.2 bln. The September current account deficit (Friday) is predicted to have narrowed to -$2.0 bln from -$2.5 bln. Hong Kong’s September trade deficit (Tuesday) is projected widening to HKD -27.0 bln from -26.3B. Singapore September CPI (Monday) is estimated firming slightly to 2.5% y/y from 2.4%. September manufacturing production (Tuesday) is expected to slow to 9.0% y/y from 11.2% previously. September unemployment (Thursday) is seen easing to 2.6% from 2.7%.

Australia’s calendar has Q3 CPI on Wednesday, expected at an unchanged 0.8% q/q. Q3 trade prices (Thursday) should see import prices at up 2.0% from 1.9%, and export prices up 9.0% from 13.2% previously. Q3 PPI (Friday) should remain steady at 0.7%. There are no events from the RBA this week. New Zealand has the September trade report on Wednesday, where the previous NZ$2.1B deficit should narrow to NZ$200 mln.

EUROPE

Eurozone: the ECB meeting (Thursday) will be the center of attention. And while officials have signaled that the important decisions on the future of PEPP and possible changes to the older APP programs won’t be taken until December, the markets will be hoping for some signals on the flavour of the discussion. The departure (by year end) of Bundesbank President Weidmann – the most hawkish and traditional central banker at the council – fueled speculation of a further strengthening of asset purchases, although the ECB’s mandate will still have to be respected. Keeping some flexibility for emergency situations and the increased room provided by the strengthened joint issuance EU countries will help the ECB to send a dovish signal, even if it confirms that PEPP will end on time in March next year – as is widely expected.

The data calendar is very busy and will give both hawks and doves arguing points as preliminary Q3 GDP readings are likely to be strong, while confidence numbers should signal slowing growth momentum thanks to supply chain disruptions. Concurrently, inflation is being pushed up by base effects and sharply higher energy prices which have led to a huge spike in input prices. And with labour markets continuing to improve, the risk of second round effects is getting stronger.

Flash reports for Q3 GDP will be interesting but the most backward looking of the releases. Supply chain disruptions were increasingly felt over the summer, while virus developments weighed on the services sector. Against that background we expect Eurozone GDP growth (Friday) to show a deceleration in the quarterly growth rate to a still strong 2.1% q/q – from 2.7% q/q in the previous quarter. Germany’s manufacturing sector felt the problems earlier, which means the national GDP number underperformed in Q2, which could lead to a slight outperformance in Q3. But on the whole, the national numbers should all pretty much confirm this pattern.

Looking ahead, there are still speed bumps crimping output growth in the manufacturing sector not just in Europe, while the services sector is struggling with Covid rules and still not fully back to “normal”. German ZEW and Eurozone PMI reports already signaled a further deceleration in growth and the remaining round of confidence data this week is unlikely to show a different picture. The German Ifo business climate reading (Tuesday) is expected to drop back to 98.0 (median same) from 98.8 in September. The Eurozone ESI economic confidence index (Thursday) is seen falling to 117.0 (median 116.6) from 117.8 in the previous month.

Surveys already highlighted the ongoing build up of price pressures and Eurozone CPI (Friday) is likely to hit 3.7% (median same) in the preliminary reading for October, while the German HICP rate (Thursday) could lift to 4.4% (median 4.5%). So far base effects from sharply higher energy prices are mostly to blame, but supply chain disruptions, energy shortages and the general mismatch of supply and demand as the global economy recovers from the pandemic are unlikely to go away any time soon, which will keep upward pressure on prices going forward.

The key question is whether this will lead to second round effects. With labour markets bouncing back from the pandemic somewhat quicker than anticipated and the number of vacancies rising against what looks like a pick up in structural unemployment, the risk of higher wage growth is also picking up. German jobless numbers (Thursday) are seen falling a further -25K, which should bring the sa rate to just 5.4%, from 5.5% in the previous month. Also on the calendar are French consumer spending and Eurozone M3 money supply growth.

U.K.: the BoE’s new chief economist Pill effectively confirmed that the November BoE meeting will be a ‘live’ one, which means officials will discuss whether to hike the Bank Rate, which currently stands at 0.10%. With the economy running into supply and labour shortages, while facing an energy crisis over the winter, it may indeed be time to take the foot off the accelerator and trim some of the stimulus that continues to fuel demand. Energy is in short supply across Europe, but the U.K. has the additional problem that it has very low storage capacity, which means a cold winter would likely hit the U.K. earlier and harder than EU countries. The sharp rise in gas prices already has knock on effects and the U.K. is also struggling with a renewed rise in Covid-19 cases. With Pill seeing inflation topping 5%, the BoE’s best contribution to the recovery may indeed be trying to keep inflation under control, as boosting demand would hardly help.

Data releases this week will numbers on consumer credit and mortgage lending (Friday) as well as the CBI distributive trade survey. Services are increasingly driving the recovery, but are also facing delivery problems and it will be interesting to see whether the surveys reflect that.

Switzerland: The calendar has the KOF leading indicator (Friday) for October, which is likely to mirror developments in the Eurozone and drop back markedly at the start of the fourth quarter of the year.

Data Week of Oct. 25, 2021

The final full week of October is packed with reports. We expect Q3 GDP growth of 2.8%. We expect moderate September personal income and consumption gains, with a rise for durable goods orders ex-transportation, but a drop overall. We expect a September narrowing in the advance goods trade balance and further gains in wholesale and retail inventories. We expect a September new home sales climb with prices near the July and August all-time high. Consumer confidence should slip in October, while the employment cost index (ECI) should post solid Q3 gains that leave a 13-year high of 3.2% for the headline y/y gain.

Week of October 25

Monday’s reported -1.3% September industrial production drop, with its -0.7% manufacturing decline and an -11.8% vehicle assembly rate plunge to a 7.8 mln clip, made clear that supply chain bottlenecks are proving highly disruptive into late-Q3, with potentially big impacts for Q3 and Q4 GDP. We lowered our GDP estimates only modest for now, to 2.8% in Q3 and 5.2% in Q4, but there is considerable downside risk for Q3 if the advance inventory and trade data released just before the next GDP report prove weak, and we have yet to see what happens with shortages through the rest of Q4.

The -1.6% September housing starts decline, after the 1.2% August gain, likely also reflected supply chain issues, given the big declines for completions of -5.8% in August and -4.6% in September, and reports from the industry of widespread shortages of buildable lots, labor, and construction materials. Each monthly housing starts report since May of 2020 has revealed a big gain for starts under construction, even as headline starts and permits gyrate with supply disruptions. Starts under construction will grow about 13% in 2021, with a hefty 19.5% rate in Q3, and a Q4 clip that we peg at 14%. This metric is setting new all-time highs each month and is gaining steam, even as starts, permits and completions struggle to get back to the peaks from the last housing boom through 2006. Activity in the housing market is clearly expanding at the maximum possible pace, as prices soar.

The 7.0% September pop for existing home sales to a 6.29 mln clip likely also reflects a supply-constrained pace of transactions, as households are unwilling to relinquish property, leaving remarkably low inventories of homes for sale despite some 2021 up-tilt from the deep 1.9 all-time low for the months’ supply last winter. The current 2.4 months’ supply figure is still well below the all-time low from before the pandemic of 3.0 in December of 2019. We expect all the housing data to post a counter-seasonal climb into the winter as constraints prove less binding as seasonal factors anticipate the usual winter holiday slowdown.

Consumer Confidence: 109.0

Consumer confidence is expected to dip to 109.0 after a drop to a 7-month low of 109.3 in September. We expect the present situation index to be steady from a 5-month low of 143.4 in September. The expectations index is expected to edge down to 86.0 from a 10-month low of 86.6 in September. We expect the 1-year inflation measure to tick up to 6.6% from 6.5% in September, versus a 13-year high of 6.7% in August. The confidence updraft with stimulus and vaccines has dissipated since April, and nearly all the major confidence measures have fallen since June. Michigan sentiment fell to 71.4 from 72.8 in September, leaving the index just above the 10-year low of 70.3 in August. The IBD/TIPP index fell to a 13-month low of 46.8 from 48.5 in September, versus a 1-year high of 56.4 in June. The Langer consumer comfort index has fallen to a 51.4 average in October, from a 56.1 average in September and a cycle-high average of 56.6 in August, versus a weekly high of 58.2 at the end of August.

New Home Sales: 770k

We expect a 4.1% September climb for new home sales to a 770k pace, following an August rise to 740k from 729k in July. The sales rate since May has sat below the high from the last cycle of 756k in January of 2020, after an 11-month stretch of overshoots that marked the highest rates since a 778k figure in July of 2007. We expect a seasonal median sales price down-tick to $390,000 in September from the $390,900 all-time high in both August and July, leaving a y/y increase of 13.2%. We expect a 746k Q3 pace for new home sales, after a 738k rate in Q2. We’re seeing rapid growth in demand for new homes in 2021. Construction has lagged sales, and the market is heavily inventory-constrained. We expect a steady climb in starts and completions into 2022 in the face of unprecedented home demand, though the sector is pressing against capacity constraints, and growth in sales beyond lofty late-2020 levels has proven hard to sustain.

Durable Goods Orders: -1.1%

Durable goods orders are expected to fall -1.1% in September with a -4.5% drop for transportation orders, after a 1.8% headline bounce in August that included a 5.4% transportation orders increase. Durable orders ex-transportation is pegged to rise 0.4%, after a 0.3% August increase. Defense orders are pegged to rise 0.2%, following a -8.4% August drop. Boeing orders fell to 27 planes from 53 in August, down from a 3-year high of 219 in June. The vehicle assembly rate should fall to 7.8 mln in September from 8.8 mln in August. Durable shipments should remain unchanged, and inventories should rise 0.6%. The I/S ratio is expected to tick up to 1.80 from 1.79 in August, versus a 2-year low of 1.74 in January and an all-time high of 2.39 in April of 2020 for a series extending back to 1992.

Advance Indicators Goods Deficit: -$86.0 bln

We expect the advance indicators report to reveal a September narrowing in the goods trade balance to -$86.0 bln from -$88.2 bln in August and an all-time wide -$92.0 bln in June. We expect exports to grow 1.5% to $151.3 bln, while imports remain unchanged to $238.0 bln. Oil prices climbed again in September after an August dip, while trade in vehicles likely remained depressed due to ongoing semiconductor shortages. We expect a seasonal widening in the bilateral goods balance between the U.S. and China to the $34 bln area, though trade is being crimped by the closure of Chinese ports and big backlogs at U.S. ports. We saw a -$43.1 bln all-time wide bilateral gap in October of 2018. The advance report should also reveal a September gain of 1.0% for wholesale inventories and 0.2% for retail inventories.

Initial Jobless Claims: 292k

Initial jobless claims are expected to edge up to 292k, after a -6k drop to a 290k new cycle-low in the BLS survey week. The end of extended federal benefits on September 6 may have lifted initial claims in September before a resumed downtrend in October. Claims are poised to average 302k in October from 341k in September, 352k in August, and 394k in July. The 290k figure in the October BLS survey week undershot recent survey week readings of 351k in September, 349k in August and 424k in July. We assume a 380k October payroll rise, following gains of 194k in September and 366k August gain.

Continuing claims fell by -122k to a 2,481k new cycle-low in the week of October 9, following a downwardly-revised 2,603k figure. We expect continuing claims to fall further to 2,470k in the October BLS survey week. Continuing claims have fallen sharply since late-July, though we saw a flattening in this steep downtrend in September before big declines into October. Continuing claims look poised to fall by about -340k between the September and October BLS survey weeks, after drops of -97k in September, -388k in August, and -116k in July.

Advance Q3 GDP: 2.8%

We expect Q3 GDP growth of 2.8%, as supply chain bottlenecks sharply curtailed activity in Q3 despite the massive stimulus spending that fueled solid gains of 6.3% in Q1 and 6.7% in Q2. A vehicle shortage capped consumption growth, which we peg at just 2.1% in Q3, while residential investment likely posted another drop in Q3 due to shortages of building materials, this time of an estimated -1.0%. Business fixed investment likely slowed to the 4.0% area in Q3, and government spending likely fell by an estimated -1.5%. Inventories added sharply to GDP growth in Q3, as a -$168.5 bln liquidation rate in Q2 was likely followed by a smaller -$20.2 bln liquidation in Q3. We assume that net exports subtracted a hefty -$72 bln in Q3, thanks to an estimated 9.0% gain in imports that sharply outpaced an estimated 0.9% rise in exports. The impact of capacity constraints will also be evident in the chain price data, where we expect a 5.0% Q3 rise in the GDP chain price index, alongside a 4.5% PCE core price gain.

Personal Income/Consumption: 0.3%/0.5%

We expect a 0.3% September personal income rise after the 0.2% August increase, with a big 1.4% September rise in compensation after a 0.4% August gain. We expect a -2.6% drop in “current transfer receipts” as extended jobless benefits expire, after a 0.3% August gain and a 3.0% July surge due to child tax credit payments. We expect a 0.5% rise in consumption after a 0.8% August gain. We expect a savings rate drop to 9.2% from 9.4%, as we further unwind prior stimulus-induced peaks of 26.6% in March, 19.9% in January, and 33.8% in April of 2020. We peg disposable income growth at 1.7% in Q3, after a -25.7% plunge in Q2 and a 60.6% surge in Q1. We expect a growth rate for real consumption of 2.1% in Q3, after growth rates of 12.0% in Q2 and 11.4% in Q1.

Employment Cost Index: 0.8%

The employment cost index (ECI) is estimated to rise 0.8% Q/Q in Q3, after a 0.7% gain in Q2. We expect a 0.8% increase for wages and salaries and a 0.6% rise for benefit costs. As-expected gains would leave a rise in the ECI y/y increase to a 13-year high of 3.2%, following the 2.9% Q2 rise that tied the last expansions’ 2.9% cycle-high in Q4 of 2018. Wages and salaries would rise to a 3.6% y/y rate last seen in February of 2007, leaving a gain that sharply exceeds the last expansion’s 3.1% cycle-high in Q4 of 2018, versus a 3.2% pace in Q2. Benefits would be up 2.2% y/y, the same as Q2, and below the last expansion’s 3.6% cycle-high in Q2 of 2011. Overall, compensation growth has been remarkably strong through 2020 and 2021, following a modest cyclical uptrend into the start of the pandemic, likely due to widespread labor shortages despite pockets of labor market weakness in some areas.

Michigan Sentiment, Revised: 71.4

The final Michigan sentiment report is assumed to reveal a repeat of the 71.4 preliminary reading, following 72.8 in September, a 10-year low in August of 70.3, and a cycle-high of 88.3 in April. Current conditions fell to an 18-month low of 77.9 from 80.1 in September, versus a 16-month low of 78.5 in August and a 97.2 cycle-high in April. Expectations fell to 67.2 from 68.1 in September, versus an 8-year low of 65.1 in August, and an 83.5 cycle-high in June. The 1-year inflation gauge popped to a 13-year high of 4.8% from 4.6%, while the 5-10 year inflation measure fell to 2.8% from a 10-year high of 3.0% in September that was last seen in May, and previously in 2013. Confidence has posted a pull-back since Q2 with headwinds from the delta variant, resumed mask requirements, vaccine mandates, events in Afghanistan, and domestic political dysfunction, just as the confidence updraft with stimulus and vaccines is dissipating.