This will be a busy week of data and events after which trading is likely to thin into the holidays. The tug of war between the virus/lockdowns and vaccines will keep trading choppy, along with uncertainties over more fiscal relief. The Fed, meanwhile, will confirm it’s going to keep policy accommodative for some time to come. Wall Street has been buoyed to more new highs this month, including Dow 30k, on the improved outlooks for 2021, and that should be the general tone, albeit with bouts of profit-taking.
We are overall very Bullish with the markets but slightly worried that energy has risen higher than markets and could drop significantly if the economy turns. The chart above shows crude oil and the S&P 500. Investors need to be cautious about all energy sector stocks and EFTs specifically those tied to oil.
Concurrently a reflation trade has gripped Treasuries since the summer. But bonds has rallied in recent sessions to unwind some of the selloffs that pushed rates up to multi-month highs. The front end has seen the 2-year yield drop to 0.115% on Friday from 0.183% in mid-November that was the highest since late June. The 10-year fell to 0.872% after testing 0.968% on December 4, the highest going back to March.
The focus today will be on the vaccine rollout that began over the weekend. Wall Street has been pricing in the positive effects so there may be little further upside for stocks at this point. In the meantime, the spike in the virus and lockdowns will provide profit-taking incentives. Treasury market worries over inflation have been dimmed by recent data and the slowing momentum in many parts of the economy should keep a lid on rates too.
We also expect the FOMC to stress a lower-for-longer policy stance at this week’s meeting (Tuesday, Wednesday), which could include a duration extension on QE purchases. Today’s agenda is very light with nothing on the economic calendar, though the week’s slate includes key numbers on retail sales, industrial production, and housing start The Electoral College meets today to cast votes for the president, expected to be ex VP Biden, but they won’t be unsealed until early January. We’ll also wait to see if there’s a last-ditch effort out of Congress to pass additional Covid relief before the CARES Act expires on December 26.
Key Drivers for the Week of Dec 14
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.
· Vaccines begin rollout in the UK and US amid ongoing woes over virus and lockdowns
· Brexit endgame remains unresolved, no-deal risks heighten
· FOMC, BoE, BoJ may all act to help mitigate negative virus effects
· Other central banks including SNB, Bank Indonesia, Philippines, Taiwan seen on hold
· U.S. includes retail sales, industrial production, PMIs, housing starts, jobless claims
· Canada looks to CPI report, retail sales, housing starts, manufacturing shipments
· China reports production, retail sales, fixed investment
· Japan releases Tankan, tertiary index, trade, national CPI, production
· Europe awaits confidence data, preliminary PMI reports, consumer prices
· UK slate has labour data, retail sales, inflation numbers, preliminary PMIs
Key Market Trends
Tip: Use this 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.
|US Dollar Index||90.495||−0.53%||−0.481||90.98||90.433||bear|
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 in.
|Sector Name||5-Day Return||1Month||6 Months||YTD Return||1YR vs S&P 500||3YR Return||Trend|
Week Ahead: Vaccines Arrive
Tip: This is our global overview of the markets by region. Use this area to gain insight globally into what is driving the markets to help you position assets.
The vaccine rollout began last week in the UK, paving the way for vaccinations to begin in the U.S. as early as this week. While vaccines will eventually end the pandemic, it will take time and activity in the here and now remains under increasing pressure from surging infections and increasingly restrictive lockdowns. Concurrently, the expiration of the U.S. CARES relief measures and the lack of additional fiscal stimulus are eroding the outlook, as are heightened risks of a no-deal Brexit. Hence, the markets will be buffeted by worsening Q4 and Q1 outlooks that contrast with rapidly improving recovery prospects for 2021. Many central banks meet, including the FOMC, BoE and BoJ with the potential for each to extend measures to support their economies. Speculation is riding high that the Fed will extend the duration of its QE program. In Europe, a no-deal situation would put the BoE into the crisis-response mode and increase the chances of the BoE implementing a negative interest rate policy. And the BoJ could extend its emergency funding programs to help ease corporate funding strains from virus outbreaks in Japan. Overall, the markets will continue to evaluate the escalating downside risks to the near term versus the increasingly solid outlook for the new year.
The U.S. will focus on the vaccine rollout, though attention will shift temporarily to the FOMC amid the potential for a duration extension in QE purchases. Additionally, the Electoral College meets Monday to officially cast their ballots for the president, widely expected to be Biden. And, there will be last-ditch stimulus negotiations to try to craft a package before Congress recesses and the CARES measures expire on December 26. The data calendar is heavy as well with several key reports due.
The markets have been in rally mode this month. Treasury yields have dropped after longer-dated maturities hit their highest levels since March, amid a return to haven buying and front running a potential move by the FOMC to extend QE duration. The 30- and 10-year rates richened to 1.59% and 0.871% on Friday, while the 2-year dropped to 0.115%. Wall Street managed more new highs this month too thanks to vaccine developments and stimulus hopes.
The FOMC’s asset purchase plan is the focal point of this week’s meeting (Tuesday, Wednesday). There’s widespread speculation the Fed could extend the duration of its QE program where it’s purchasing $120 bln assets, including $80 bln in Treasuries and $40 bln in MBS. That Chair Powell and other Committee members have stressed downside risks to the economy, especially given the lack of fiscal support suggest they are ready to act. And that potential has increased given the record surge in virus cases and more stringent lockdowns that threaten further moderation in the labor market that’s already been losing momentum.
However, we suspect the Fed will take a wait and see stance at this point with vaccines now a reality. The FOMC minutes from the November 2-3 meeting also did not suggest much urgency to act. The minutes also indicated there would be an update on forwarding guidance, and that could be seen this week with the Fed again committing to supporting the economy for as long as necessary.
The expansion of coronavirus restrictions since the middle of November has created a new headwind for the economy. At the same time, substantial changes in seasonal behavior into the holiday period will make seasonal factors for many reports highly suspect. But the emphasis will be on judging the extent to which new restrictions are impacting growth — hence, the retail sales and initial claims reports stand out in a crowded docket. Our projection is for November retail sales (Wednesday) to drop -0.2% with a flat ex-autos figure, following respective October gains of 0.3% and 0.2%. A variety of factors are at play for retail sales in November, including weakness in gas prices and a drop in unit vehicle sales, along with a likely unwind of the Amazon Prime day boost to non-store retailers in October.
Also of note, non-store sales could be lifted as virus restrictions drive sales (back) online amid the emergence of the holiday shopping season. The data surprise of last week was the 137k initial claims (Thursday) surge to 853k in the first week of December, which may mean that heightened restrictions are having a big labor market impact. We’re expecting a -13k decline in initial claims for the December 12 week. But another upside surprise here could exacerbate worries about the near term growth outlook.
Insights into the manufacturing and housing sectors are also on offer this week. While activity in manufacturing is likely to have softened a bit in November and December, housing should remain robust. Industrial production (Tuesday) is projected to fall -0.1% in November, following the 1.1% October headline increase. The Empire State index (Tuesday) is assumed to slip to 5.0 in December from 6.3 in November. The Philly Fed index (Thursday) is seen falling to 18.0 in December from 26.3. November housing starts (Thursday) with a rise to 1.540 mln from October’s 1.530 mln clip anticipated. Low mortgage rates and an emerging migration of families to the suburbs has driven housing market activity since the spring shutdown ended.
Corporate earnings are in short supply this week: Both Monday and Tuesday are devoid of releases. Wednesday has Micron Technology and Lennar. Thursday brings Accenture, FedEx, and General Mills. Friday has Nike, Carnival, and Darden Restaurants.
Canada’s calendar has several interesting reports this week, highlighted by the CPI. We expect the CPI (Wednesday) to accelerate to a 0.9% pace in November (y/y nsa) from the 0.7% rate in October. CPI is seen flat (m/m, nsa) after the 0.4% gain in October. In the policy announcement last week, the BoC said that the outlook for inflation remains in-line with the projection in the October MPR even though the pick-up to a 0.7% y/y pace in October suggested a slightly firmer track for inflation in Q4. Notably “Measures of core inflation are all below 2 percent, and considerable economic slack is expected to continue to weigh on inflation for some time.”
In other words, the CPI backdrop and outlook allow ample scope for the BoC’s no change in rates until 2023 forward guidance. Retail sales (Friday) are projected to hold steady (0.0%) in October after the 1.1% climb in September. The ex-autos sales aggregate is anticipated to edge 0.1% higher in October after the 1.0% rise in September. Manufacturing shipment values (Tuesday) are seen rising by 0.5% in October after the 1.5% gain in September. Housing starts (Tuesday) are seen little change at 215.0k in November from 214.9k in October. October wholesale shipments are due Wednesday. The release of November’s existing-home sales is expected on Wednesday. BoC Governor Macklem delivers a speech (Tuesday).
Asian markets also will be on edge from the impacts of surging Covid cases and renewed lockdowns in the U.S. and Europe while awaiting the positive effects from the vaccines, though months away. This week’s regional calendar will feature central bank meetings from the BoJ, Bank Indonesia, Taiwan, and the Philippines. All are expected to maintain a steady rate stance, though the BoJ may extend its special financing policies to help ease corporate funding strains, due to increasing Covid outbreaks in Japan. There are also key data reports from China, including November industrial production, retail sales, and fixed investment. Japan has November trade and national CPI. Around the rest of the region, there are trade, unemployment, and growth figures.
China’s November industrial output (Tuesday) is expected to improve to a 7.1% y/y pace from 6.9%. And November retail sales (Tuesday) are penciled in climbing to 5.2% y/y from 4.3% previously. However, November fixed investment (Tuesday) should slow to 2.7% y/y from 12.8%. Japan’s BoJ ends its two-day policy meeting on Friday. Interest rates are likely to remain steady.
However, there is considerable speculation that the Bank may extend policies to help ease corporate funding strains arising from increasing Covid outbreaks in Japan. For data, the December Tankan index (Monday) is forecast to see a -15 reading versus -27 for the prior large manufacturers report amid some easing of pessimism. But it would be a fifth straight quarterly negative print.
Also, the reading for large non-manufacturers is seen at -6 from -12. The October tertiary industry index (Monday) is estimated to rise by 1.1% on the month versus the prior 1.8% increase. Revised October industrial production is due Monday as well. The November trade report (Wednesday) should see the surplus narrow to JPY 500.0 bln from 871.7 bln with further improvement in exports and imports. National November CPI (Friday) is expected to see ongoing disinflation pressures as the headline index is projected to fall to a -0.8% y/y clip from -0.4%, with the core reading likely to slide to -0.9% y/y from -0.7%.
India November WPI (Monday) is penciled in edging up to a 1.6% y/y rate from 1.5%, while November CPI (Monday) should cool to 7.0% y/y from 7.6%. The November trade balance (Tuesday) should see the deficit widen to $10.0 bln from $8.7 bln. South Korea November unemployment (Wednesday) should increase a tick to 4.3% from 4.2%. Taiwan’s central bank meets (Thursday) and is expected to keep its discount rate steady at 1.125%. Hong Kong unemployment (Thursday) is forecast to hit another record high of 6.5% from 6.4%.
Indonesia’s Bank Indonesia meets (Thursday) with its 7-day reverse repo rate seen steady at 3.75%. November trade (Tuesday) has the surplus narrowing to $2.0 bln from $3.6 bln. Singapore November non-oil exports (Thursday) are expected to bounce to a 1.5% y/y pace from -3.1% previously. The Philippines central bank meets (Thursday) and is expected to remain on hold, with the overnight borrowing rate unchanged at 2.00%.
Australia’s slate features the employment report (Thursday), expected to reveal a 50.0k gain in November after the 178.8k jump in October. The unemployment rate is projected at 7.0%, unchanged from October’s 7.0%. The minutes to the RBA’s December meeting are due Tuesday. To recap, the RBA left policy steady at the December meeting, matching widespread expectations, which left the three-year yield target at 0.10% and the cash rate target at 0.10%. Governor Lowe said the RBA doesn’t expect to lift the cash rate for at least three years. He also stressed that the bond purchase program will be kept under review and that the bank is prepared to do more if needed.
Hence, low for longest is locked in for an extended period.
New Zealand releases GDP Thursday, with the economy expected to rebound 13.2% in Q3 (q/q, sa) after the -12.2% drop in Q2. The current account (Wednesday) is projected at a -NZ$4.0 bln deficit in Q3 from the NZ$1.8 bln surplus in Q2. The trade report (Friday) is expected to show a shift an NZ$0.3 bln surplus in November from the -NZ$0.5 bln deficit in October. The next RBNZ policy meeting is February 24 of 2021. In November, the RBNZ topped up stimulus with a new Funding for Lending Program to start in December, aimed at reducing banks’ funding costs and lowering interest rates. The cash rate was left unchanged at a record low of 0.25% and the Large Scale Asset Purchase program remained at NZD 100 bln. The statement reiterated the commitment to use additional tools if necessary.
Eurozone: Covid-19 restrictions continue to hamper economic activity and while vaccinations are offering hope of a strong recovery next year, overall economic activity is clearly contracting in the last quarter of the year and the outlook for the first quarter is darkened also by the impact of Brexit, with the end of the transition period set to change a sizeable part of European trade. The ECB has already ensured that the very generous monetary support continues, and while the latest policy measures have disappointed markets somewhat, it is likely that central bankers also wanted to keep something in hand in case there is no agreement with the U.K. and the outlook deteriorates again.
Indeed, EU leaders as well as U.K. PM Johnson have warned that a no-deal scenario is now more likely than a deal and have set Sunday as the latest deadline to decide whether there is sufficient common ground for a deal. The final details could still be hammered out over the next week and parliaments on both sides of the channel may have to disrupt their holidays for a last-minute clearance ahead of the end of the transition period. Even with a deal non-tariff trade barriers will go up and likely cause some problems for the manufacturing sector early next year.
Data releases this week focus on confidence data for November. Germany’s ZEW investor confidence reading jumped higher, but that was largely on the improved sentiment in markets, which are already looking ahead to the recovery next year thanks to the prospect of vaccine programs. Even if these are starting now, it will take a while for programs to be rolled out to an extent that allows day-to-day life to return to normal and the services sector, in particular, is still facing a difficult virus winter. Manufacturing meanwhile may still be benefiting from the ongoing improvement in major export markets, but uncertainty on the Brexit front and the prospect of a no-deal scenario will still be weighing in some sectors and countries.
Against that background we expect Eurozone preliminary PMI readings (Wednesday) to signal a further contraction in overall economic activity in November when most Eurozone countries were back in some form of lockdown. The manufacturing PMI is expected to drop back to 53.0 (median same) from 53.8 and the services reading to just 40.8 (median 40.9), which should leave the composite at 44.7 – down from 45.3 in the previous month. The German Ifo Business Climate index (Friday) is also expected to decline, although the German manufacturing sector, in particular, is holding up better than others and with vaccination hopes lifting the outlook we see an improvement in the expectations reading, which should partly counterbalance the likely decline in the current conditions indicator. The overall business confidence number is still seen falling to 90.0 from 90.7.
France also has national confidence data and for the Eurozone, there are also production numbers for October (Monday), which are expected to show a robust monthly rise but are too backward looking to change the outlook. The same holds for final Eurozone November consumer prices (Thursday). The headline HICP likely to be confirmed at -0.3% y/y, firmly in negative territory, but that is something the ECB already addressed by strengthening PEPP and TLTROs at the last meeting. Eurozone trade and current account data are also due as is German PPI inflation.
U.K.: the sharp end of Brexit has finally arrived. As things stood late on Friday, the endgame remained unresolved, but the risk of a no-deal finality had sharply increased. In reality, a no-deal scenario would in effect simply delay a deal being reached, to be negotiated on the “other side” of the UK exiting its transitory membership of the EU’s common market and customs union.
The UK government hadn’t folded to EU demands, and on Friday strongly signaled to both Brussels and the domestic population that it will if necessary proceed with the no-deal option. The EU had been demanding that in return for any tariff-free and quota-free access to its market that the UK must sign up to what it calls Dynamic Alignment and Regulatory Cooperation. The UK pointed out that this would automatically bind it to EU rules and would give the EU unilateral powers to be judge and jury, and retaliate against any break-in rules with tariff penalties — which is unprecedented in any other trade deals and would greatly limit the UK’s sovereignty.
Oliver Dowden, a senior minister in Prime Minister Johnson’s cabinet, appeared on Times Radio and on the UK’s most popular breakfast TV show on Friday, and prepared the country for no-deal, arguing that the country would pay a higher price for a poor deal “in the longer run” than in a no-deal scenario. He also ruled out the possibility of there being an extension in the transition period to allow time for further negotiation.
Overall, it sounded like the UK government was serious about a no-deal. As the Spectator magazine’s head political correspondent argued, the risks of a rebellion against Johnson’s leadership in his own party are greater for Johnson in a “bad deal” scenario than under a no-deal scenario. The ball, as of Friday, seemed to be very much in the EU’s court. Leaders set a deadline of Sunday, though discussions could extend through the week if a deal has been outlined by the end of the weekend.
We still expect a deal given the win-win versus lose-lose considerations. Germany’s car industry would be significantly affected in a no-deal reality, for instance, while French fishermen, a group which casts an outsized influence on the political scene in France, would have zero access to the rich UK waters come January 1, to which many depend on. We acknowledge the no-deal risk, with the EU evidently seeing the untethered UK as an existential threat. Bookmakers Willian Hill were late last week giving odds with an implied probability of 61.9% for a no-deal outcome, with a 45.5% chance given for a deal being struck, which is down from the 62% that was given ahead of Johnson’s meeting with EU’s von der Leyen on Wednesday.
The BoE’s Monetary Policy Committee convenes for its two-day December policy meeting this week (announcing Thursday). No changes is the universal expectation, which would leave the repo rate at 0.10% and the QE total unchanged at GBP 875 bln, though this hinges on the EU and UK reaching a trade deal. A no-deal situation would put the BoE into the crisis-response mode and would increase the chance of the central bank implementing a negative interest rate policy. The BoE’s Financial Policy Committee affirmed on Friday that UK banks are able to withstand the stock of no-deal on top of the impact of the Covid pandemic.
The UK data calendar this week is relatively busy ahead of the Christmas week. The highlights include: weekly labour data are due (Tuesday), along with November inflation figures and the preliminary December PMI surveys (Wednesday), and December consumer confidence and November retail sales (Friday). Unemployment is expected to tick high, to a rate of 5.1%, headline CPI is seen ebbing to 0.6% y/y from 0.7% y/y, while both the manufacturing and more especially the services PMI readings are expected to improve, with most of the UK has come out of a month-long lockdown at the start of December. The composite PMI headline is expected to rise to 51.3 from 49.0, which would signal that the private sector of the economy is back in expansion. Retail sales are anticipated to contract 3.3% m/m as a consequence of the Covid lockdown which lasted most of November.
Switzerland: The SNB is expected to leave overall policy settings unchanged at the quarterly policy review on Thursday. Rates are already firmly in negative territory and at -0.75% the key rate is actually the lowest in the world. Like other central banks, the SNB is reluctant to cut rates further, preferring to focus on direct exchange rate intervention to keep a lid on the franc and the economy afloat. The SNB’s currency holdings moved sharply higher in November, reflecting stepped-up activity and it seems pretty likely now that the U.S. will officially class Switzerland as a “currency manipulator”. Not that the SNB has many choices as a small open economy and with the nominal interest rate deeply negative.
The Swiss data calendar is quiet, highlighted by November PPI and trade data.
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.
This group of stocks is picks that are 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.
|Ticker||Rank||Company||Dividend||Beta 1 YR||1YR vs S&P 500||3YR vs S&P 500||3R vs Sector||Overall Score|
|BAH||12||Booz Allen Hamilton||1.40%||0.68||8.70%||93.90%||112.30%||76|
|TMO||15||Thermo Fisher Scientific||0.20%||0.73||29.70%||105.00%||101.70%||86|
|BR||24||Broadridge Financial Soln||1.60%||0.8||7.10%||27.10%||-38.80%||93|
|WPM||25||Wheaton Precious Metals||1.20%||0.37||29.50%||56.10%||80.50%||57|
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.
|Ticker||Company||Dividend||Beta 1YR||1YR vs S&P||3YR vs S&P||3YR vs Sector||Dividends Score||Overall Score|
|BIP||Brookfield Infr Partners||3.80%||1.24||-1.60%||5.40%||31.30%||15||11|
|DD||DuPont de Nemours||1.80%||1.17||-13.00%||-73.70%||-48.60%||17||18|
|FRT||Federal Realty Investment||4.60%||1.19||-44.10%||-69.50%||-36.20%||73||31|
|JNJ||Johnson & Johnson||2.60%||0.67||-7.50%||-30.60%||-33.10%||50||70|
|NFG||National Fuel Gas||4.10%||0.76||-19.70%||-60.80%||20.50%||66||47|
|PG||Procter & Gamble||2.30%||0.71||-6.10%||17.60%||35.00%||66||85|
|SWK||Stanley Black & Decker||1.60%||1.46||-11.10%||-33.80%||-14.70%||83||85|
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.
|Ticker||Company||Dividend||Beta 1YR||1YR vs S&P||3YR vs S&P||3YR vs Sector||Dividends Score||Overall Score|
|WBA||Walgreens Boots Alliance||4.50%||0.82||-44.00%||-82.20%||-84.70%||74||67|
Economic Data Calendar
We have a heavy release slate in the middle week of December. We expect weak November retail sales readings alongside a further steep climb in business inventories. Industrial production is expected to fall slightly in November, alongside an elevated housing starts level and a rise in permits to a new 14-year high. Trade prices are expected to post solid November gains, while the Empire State and Philly Fed index moderate to still-firm levels. The current account balance is expected to widen sharply in Q3 as imports fueled the start of the inventory reversal, while the leading economic index extends its climb with gains across most components.
Week of December 14
We’ve seen divergent signals in the early December economic reports that suggest a heightened level of uncertainty for the data to be released over the coming weeks. Expanded coronavirus restrictions since mid-November have created a new headwind, while big changes in seasonal behavior into the holiday period will make the seasonal factors for many reports highly suspect.
The biggest recent surprise was the 137k initial claims surge to 853k in the first week of December that more than reversed the -71k drop to 716k in the week of Thanksgiving, which may mean that heightened restrictions are having a big labor market impact. In that report, NSA claims surged 229k to an elevated 948k, so the seasonal factors may have been less of a problem in that week. In contrast, the preliminary Michigan sentiment survey revealed a December headline pop to 81.4 from 76.9, with a rise in the current conditions index to a 9-month high of 91.8 from 87.0. The weekly Bloomberg consumer comfort index entered December at 49.0, which is right near the 49.1 November average, and above the 47.2 average for October, suggesting that consumers are perhaps more focused on the benefits of new vaccines and prospects for new stimulus spending than disruptions from COVID.
The housing sector is perhaps most at risk for atypical behavior, as activity usually plummets through the holidays, as anticipated by the seasonal factors, though the scramble for new housing may continue at an elevated level this year given the inability of most households to adhere to their usual holiday customs. The MBA purchase index on an SA basis spiked 9.0% in the Thanksgiving week before an ensuing -5.0% drop, even though the NSA purchase index actually plunged -27.8% in the week of Thanksgiving before a 28.9% surge.
The SA data from MBA will likely be particularly elevated through the weeks of Christmas and New Year’s. This seasonal adjustment impact may also be evident in the new and existing home sales data and other construction measures for both November and December. A warm stretch for the weather in November and early-December will exacerbate this pattern, though “La Nina” conditions suggest that the weather should turn cold into early-Q1.
Empire State/Philly Fed Index: 5.0/18.0
The Empire State index is assumed to slip to 5.0 in December from 6.3 in November, after plunging to an all-time low of -78.2 in April, versus a bottom from the last recession of -33.7 in March of 2009. The Philly Fed index is seen falling to 18.0 in December from 26.3, versus a 40-year low of -56.6 in April. The Philly Fed index posted a bottom in the last recession of -40.9 in November of 2008. These diffusion indexes should remain elevated as factory activity continues to ramp up, though we have emerging coronavirus headwinds since late-November that should restrain the indexes into year-end. Conditions have improved rapidly since Q2 however as producers face remarkably lean inventories. And, rebounding demand in many industries above pre-pandemic levels should sustain production increases into Q1 despite new retail coronavirus restrictions.
Import/Export Price Index: 0.3%/0.4%
Import prices are estimated to rise 0.3% in November, with a 0.4% export price rise, after October figures of -0.1% imports and 0.2% for exports. We expect a small November boost from petroleum prices, alongside support from a decline in the value of the dollar since Q2. We’ll see a bigger lift in December from both a big petroleum price rise and a mounting impact from the continuing dollar decline. Ex-petroleum import prices are expected to grow by 0.2%, while ex-agriculture export prices grow 0.4%. Oil prices rose between April and August, as major OPEC+ production cuts and reduced drilling activity brought balance back to the petroleum sector, though prices moderated between August and October before a bounce into early-December with further production agreements from OPEC. The rebound in global production has been associated with bottlenecks and shortages in some industries that have raised some prices, though weakness in aggregate demand has limited upside inflation pressure.
Industrial Production: -0.1%
Industrial production is projected to fall -0.1% in November, following the 1.1% October headline increase. We saw a October increase of 1.0% for manufacturing and 3.9% for utilities, but a -0.6% decrease for mining. In November, we expect a flat manufacturing figure, a 1.0% rise for mining, and a -2.0% drop in utilities. We expect a vehicle assembly rate uptick to a 10.7 mln clip in November from 10.6 mln in October, versus a 0.1 mln trough pace in April. We saw a 3.7 mln prior trough in January of 2009 that marked the start of the auto bankruptcies. Capacity utilization should fall to 72.7% from 72.8% in October. Industrial production expanded at a 41.4% clip in Q3, and we expect a 4.5% growth pace in Q4.
Retail/Ex-Auto Sales: -0.2%/Unchanged
We expect a -0.2% November retail sales headline drop with a flat ex-autos figure, following respective October gains of 0.3% and 0.2%. We saw a -0.4% dip for the CPI gasoline index that suggests a flat figure for service station sales. Unit vehicle sales fell to 15.6 mln from 16.3 mln in both September and October, leaving a likely -1% drop for the auto dealer component. We expect some unwind of the October boost to non-store sales from Amazon Prime day, but a boost for this component from rising coronavirus restrictions alongside the emergence of the holiday shopping season. We expect a continued rebound for sales of clothing, furniture, electronics, and appliances as we continue to reverse the big Q2 hit. Real consumer spending is expected to grow at a 5.8% rate in Q4 after a robust 40.6% growth clip in Q3.
Business Inventories: 0.7%
Business inventories are estimated to rise 0.7% in October after a 0.8% (was 0.7%) September increase. Our forecast incorporates a 0.2% rise for factory inventories, alongside gains of 0.8% for retailers and 1.1% for wholesalers. Sales should rise 1.0% in October, after a 0.8% gain in September. As-expected readings would result in the I/S ratio ticking down to a 6-year low of 1.31 from August’s 1.32, versus an all-time high of 1.67 in April and a 1.47 peak from the last recession in both March of 2009 and December of 2008. Inventories in the Q3 GDP report showed a -$4.3 bln liquidation rate after a record -$287.0 bln pace in Q2, leaving a fourth consecutive quarterly decline. We expect a $55 bln accumulation rate in Q4. Inventories were already unwinding pre-COVID-19 as earlier tariff front running reversed course before the big Q2 hit, leaving room for the start of a protracted inventory rebound in Q4 of 2020.
Housing Starts: 1.540 mln
Housing starts are expected to rise to 1.540 mln from October’s 1.530 mln clip and 1.459 mln in September, versus a 13-year high of 1.617 mln in January. Permits are expected to climb to a new 14-year high of 1.560 mln in November, from 1.544 mln in October and a prior 13-year high of 1.545 mln in September. We saw a previously saw a 1.536 mln 14-year high in January. All the housing measures rebounded sharply since Q2, with recent 14-year highs for new and existing home sales, a 12-year high for the MBA purchase index in late-November, and an all-time high for pending home sales in August. Before the pandemic permits were following a solid growth path that began in Q2 of 2019, fueled by low mortgage rates, and this strength has resumed with the end to shutdowns, alongside an emerging migration of families to the suburbs. We expect a 1.543 mln average for starts in Q4, following a 1.440 mln pace in Q3 and a 1.079 mln pace in Q2. We expect a 1.560 mln average for permits in Q4 that outpaces the 13-year high 1.501 mln average in Q3, and a 1.490 mln prior high in Q4 of 2019.
Initial Jobless Claims: 840k
Initial jobless claims for the week of December 12 should remain elevated, though we assume a -13k decline in the weekly pace to 840k, after a 137k jump to 853k from 716k. Claims are expected to average 843k in December, with a lift from expanding coronavirus restrictions, following averages of 748k in November, 786k in October, and 855k in September. The 748k November BLS survey week reading undershot recent BLS survey week readings of 797k in October, 866k in September, and 1,104k in August. We assume a 100k December payroll rise, after gains of 245k in November, 610k in October, and 711k in September.
Continuing claims rose by 230k to 5,757k in the week of November 28, following a minor upward revision in the prior week’s reading that left a 5,527k figure. We expect continuing claims to rise 23k the 5,780k area for the week ending on December 5. Though rising coronavirus restrictions are likely prompting some back-tracking in continuing claims, we expect a resumed downtrend into early-2021. We expect continuing claims to fall by -289k between the November and December BLS survey weeks. We saw much larger prior declines of -1,734k in November, a hefty -4,924k in October BLS, -1,745k in September, -2,459k in August, -2,280k in July, and -1,610k in June.
Current Account: -$185.6 bln
The current account balance is expected to expand sharply to -$185.6 bln in Q3 from a -$170.5 bln deficit in Q2. We saw a -$188.4 bln goods and services trade deficit in Q3. As a percentage of nominal GDP, the gap is expected to sit at -3.5% in Q3, versus -3.5% in the prior quarter. We saw Q3 rebounds for goods, services, and income of 73% for exports and 66% for imports, thanks to rebounds after disruptions from COVID-19 for trade in goods and services, as well as income receipts and payments. We expect an annual current account deficit of -$651 bln in 2020, versus a high from the last expansion of -$480 bln in 2019. The deficit remains below the -$806 bln record deficit back in 2006.
Leading Indicators: 0.6%
The leading economic index likely rose by 0.6% in November, following increases of 0.7% in October and September, as we continue to reverse the huge drops of -6.3% in April and -7.5% in March. We expect gains across the board, with boosts across most of the input measures, led by housing permits, and initial claims.
Week of December 21
We have plenty of releases in the week of the Christmas holiday. We expect a slight upward revision in the 33.1% Q3 GDP growth clip to 33.2%. We expect a modest November personal income drop alongside a rise in consumption, while durable goods orders rise significantly in November with gains both with and without transportation. We expect both new and existing home sales to post modest November pull-backs from lofty 14-year highs in October.
Preliminary Q3 GDP: 33.2%
We expect a slight boost in Q3 GDP growth to 33.2% from 33.1%, with revisions of $4 bln for inventories, $2 bln for consumption, $1 bln each for intellectual property investment, residential investment, and public construction, -$1 bln for net exports, and -$2 bln for nonresidential construction. We expect Q4 GDP growth of 6.4%. The revised Q3 GDP figures should still show a quarter with dramatic rebounds for residential investment and equipment spending to notably robust levels, and out-sized Q2-Q3 gyration in both exports and imports that left big Q3 gains, and hefty recoveries in consumer spending. Government spending received an initial lift in Q2 from spending with the CARES Act, though most of this spending was transfer payments that don’t enter government purchases, and we saw a Q3 pull-back in government spending that should extend through Q4 and into 2021.
Existing Home Sales: 6.750 mln
We expect existing home sales to fall by -1.5% in November to 6.750 mln from a 14-year high of 6.850 mln in October. Pending home sales fell -1.1% in October, as this measure continues to unwind the all-time high in August. The MBA purchase index grew 2.7% in November, with a new 12-year high on a weekly basis at the end of the month. The two measures are consistent with a still-elevated sales pace through November, and existing home sales are tracked at closings, which leaves a lag for this series of one or two months. The median sales price is expected to edge higher to $314,000 in November from a $313,000 all-time high in October, leaving a climb in the y/y metric to 15.7% from 15.5%. In Q3, we saw an average sales pace of 6.137 mln, after a depressed 4.313 mln in Q2, and we expect an even stronger 6.800 mln pace in Q4.
Personal Income/Consumption: -0.2%/0.3%
We expect a -0.2% headline decline for personal income in November after a -0.7% drop in October, alongside a 0.3% rise in consumption after a 0.5% October gain. The projected November income decline reflects a 0.6% rise in compensation, but an ongoing unwind of jobless benefits and weakness in rental and proprietor’s income, as the April income boost from the CARES Act continues to unwind. We expect a savings rate pull-back to 13.0% from 13.6% in October, as we unwind the 33.7% peak in April. The expected 0.6% November rise for wage income and compensation reflects a 0.3% November rise for hours-worked and a 0.3% gain for hourly earnings. We expect a 5.8% growth pace for real consumption in Q4, after a 40.6% surge in Q3. We peg disposable income growth at -6.1% in Q4, after a -12.9% Q3 rate but an enormous 46.2% growth clip in Q2.
New Home Sales: 985k
We expect a -1.4% November pull-back for new home sales to a 985k pace from a 14-year high of 999k in October. We expect an increase in the median sales prices to $335,000 from $330,600 in October, leaving a y/y increase of 2.1%. We expect a 991k Q4 pace for new home sales, after a 994k pace in Q3. With the economy’s reopening, the recovery for new home construction and sales is proving much faster than for the rest of the economy, partly due to solid fundamentals going into the crisis, and even lower mortgage rates now. We’re also seeing migrations since Q2 that are boosting suburban demand and new home construction, given remote learning that is de-linking the housing cycle from the school year, extended work-from-home arrangements, and deteriorating conditions in urban areas. We may also see atypical strength for housing through the turn of the year, as the 2020 holiday’s may be less disruptive than the seasonal factors anticipate. 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.
Michigan Sentiment, Final: 81.4
We expect the final Michigan sentiment report to reveal the same 4.5 points December rise seen in the preliminary report to 81.4 from 76.9 in November and a 7-month high of 81.8 in October, as the index wanders back toward the 89.1 March reading. We saw an 8-year low of 71.8 in April and a 14-year high of 101.4 in March of 2018. We saw current conditions rise to a 9-month high of 91.8 in December from 87.0, versus a 6-month high of 87.8 in September. We saw expectations increase to 74.7 from 70.5, versus a 7-month high of 79.2 in October. The 1-year inflation measure plunged to an 8-month low of 2.3% from 2.8%, versus a 3.2% high in May that was last seen in August of 2014. The 5-10 year inflation measure sustained the November rise to 2.5% from a 7-month low of 2.4% in October and a 2.7% high in August and September that was also seen in May, and previously in March of 2016. We’ve seen erratic oscillations in the various confidence metrics since June around expansionary levels, despite huge fluctuations with the pandemic, on-and-off stimulus, vaccines, and the elections. The indexes remain well above readings from prior recessions, and with divergent swings for the surveys in recent months.
Durable Goods Orders: 1.4%
Durable goods orders are expected to rise 1.4% in November with a 2.9% climb in transportation orders, after a 1.4% headline orders rise in October that included a 1.4% transportation orders gain. The durable orders rise ex-transportation is pegged at 0.7%, after a 1.3% September rise. A defense orders gain is pegged at 4.2%, following a 24.0% October bounce. Boeing orders rose to 27 planes in November after two months at zero. The vehicle assembly rate is seen ticking up to 10.7 mln in November from 10.6 mln in October, versus a 0.1 mln trough in April. Durable shipments should be flat, and inventories should be 0.3%. The I/S ratio is expected to remain at the 1-year low of 1.70 in October, versus an all-time high of 2.24 in April for a series extending back to 1992. We saw a 1.88 I/S peak with the last recession in April and May of 2009.
Week of December 28
We have a light economic calendar for the final holiday-shortened week of the year. The most important release of the week will be the advance indicators report, where we expect a November widening in the goods trade balance, following an October pull-back from an all-time high in August. We also expect solid gains for both wholesale and retail inventories, as businesses continue to restock following a big four-quarter inventory liquidation. We also expect a modest December rise in consumer confidence, following a drop in November.
Consumer Confidence: 98.0
Consumer confidence is expected to rise to 98.0 from 96.1 in November, 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 106.6 from 105.9 in September 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 rise to 92.2 in October from 89.5, 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 moderate to 5.5% from 5.7% in November. All of the available confidence measures were oscillating near historic highs before being crushed by COVID-19, and throughout the Q2 drop-backs and ensuing bounce, it’s remarkable how firm the consumer measures have stayed relative to prior recessions.
Advance Indicators Goods Deficit: -$81.2 bln
We expect the advance indicators report to reveal a November widening in the goods trade balance to -$81.2 bln from -$80.4 bln in October and an -$83.1 bln all-time high in August. We expect exports to grow 2.6% to $129.5 bln, while imports grow 2.0% to $210.7 bln. A likely November petroleum price rebound will boost both exports and imports of petroleum. We expect further gains for trade in vehicles after huge increases over the summer, but large declines in each prior month since February. We expect a sustained high November bilateral goods deficit between the U.S. and China of about -$30 bln as businesses rebuilt inventories. The bilateral gap previously posted a pull-back between mid-2019 and March to an -$11.8 bln March deficit that marked the smallest gap since 2004. We saw a -$43.1 bln all-time wide bilateral gap in October of 2018. The advance report should also reveal November gains of 0.9% for wholesale inventories and 0.6% for retail inventories.