Report (Premium Edition) 12-7-2020

Look for consolidation in the markets after fresh record highs on Wall Street and after sharp cheapening in Treasuries. Indications that a stimulus deal is making some progress have added to the positive developments on vaccines boosted risk appetite last week that saw the Dow rally 0.83% to 30,218, while the S&P 500 advanced 0.88% to 3699, and the NASADQ advanced 0.70% to 12,464.

The chart above shows a strong bull trend for the S&P 500 and we believe it should continue if the vaccine rollouts are successful and Congress passes another bailout. It may dip on negative news, but we think it should hold on the the 3600. A drop below 3400 and rise in the VIX could signal a bear trend.

Rising virus cases and tightening in restrictions should see investors take chips off the table, especially with year end fast approaching. Meanwhile, the cheapening in Treasuries saw the wi 10- and 30-year yields climb to With rising to 1.74% and 0.985%, respectively. That rise in rates should help underpin demand for this week’s $118 bln in 3-, 10-, and 30-year auctions.

The calendar is light today and pretty thin for the week. Today’s slate has October consumer credit, expected to expand by $18.0 bln from $16.2 bln previously. The earnings calendar is light, featuring reports from BHP, and Coupa Software. The Treasury will auction 3-, 10-, and 30-year paper beginning Tuesday with the shorter maturity. The data highlights this week are the CPI and consumer sentiment releases.

Key Drivers for the Week of Dec 7 – Dec 11

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·  Longer dated yields equities on the rise amid vaccine development, stimulus hopes

·  Treasury bond rate tests 1.75%, highest level since March

·  Wall Street at record highs with Dow at 30,218 and S&P 500 at 3699

·  ECB likely to strengthen PEPP, TLTRO programs, but hawks may limit uber-easing   

·  Brexit remains on knife edge amid amid “irresolvable” differences on fishing 

·  U.S. calendar has CPI, PPI, consumer sentiment; $118 bln in coupon auctions

·  Bank of Canada expected steady at 0.25%; Beaudry gives Economic Progress Report

·  China trade, CPI, PPI, loan data; Japan Q3 GDP, PCE, core machine orders due

·  German ZEW investor sentiment, industrial production, trade; Eurozone Q3 GDP

·  UK industrial production, trade, second release of Q3 GDP due

Key Market Trends

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S&P 500 Sectors

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Week Ahead: Reflation Trade Finds a Foothold

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A reflation trade is finding a foothold, joining vaccine inspired risk-on flows to drive sovereign yields higher. Treasuries have led the charge with the 1.75% 30-year yield the highest since March. The selloff was exacerbated Friday by the tepid increase in payrolls that boosted expectations for fiscal relief. Solid gains in average hourly earnings and the dip in the unemployment rate weighed too, especially as the FOMC will allow inflation to run hot. Meanwhile, the equity rally continues with Wall Street at new highs as promising vaccines developments overshadow rising virus cases and more stringent lockdowns. Amid that background, attention will be on the ECB. But those looking for another easing bonanza are likely to be disappointed. Brexit is also a focus. There’s also a busy data slate in Asia where Chinese reports should further confirm the recovery is broadening. The U.S. calendar will play second fiddle with just CPI and Treasury supply of much interest.

NORTH AMERICA

U.S. markets will continue to digest recent data and events that have resulted in a surging stocks and rising yields, defying the worries over record increases in infections that have renewed more stringent lockdowns. The Dow finished last week with a 0.83% gain to 30,218, while the S&P 500 climbed 0.88% to 3699, with the NASDAQ 0.70% firmer at 12,464. Concurrently, the wi 30-year rate rose 8 bps to 1.74%, with the wi 10-year up 6 bps to 0.975%. The curve bear steepened over 5 bps to 81.5 bps. There’s little on this week’s calendar that will have lasting impact. CPI and consumer sentiment feature. There’s also more Treasury supply and it will be interesting to see the demand for the 3-, 10-, and 30-year auctions.

The November CPI (Thursday) and PPI (Friday) highlight an otherwise thin calendar. Those reports may garner a bit of additional scrutiny given the advent of the reflation trade. But with the FOMC’s new average inflation strategy and the promise to let price pressures run hot, the market impacts will be minimal. We expect a 0.1% gain for the headline CPI and a 0.2% core price rise, following flat rates for both in October. As-expected November figures would result in a slight slowing to a 1.1% y/y clip for the headline versus the 1.2% y/y prior pace. Core prices should remain steady at a 1.6% y/y growth rate. As for PPI, we’re forecasting a flat print for the headline and a 0.2% climb for the core, following gains of 0.3% and 0.1% respectively in October. As expected readings would result in a y/y headline PPI metric of 0.6%, up from 0.5% in October, while the core should surge to a 1.5% y/y rate versus the prior 1.1%. Headline inflation were lifted by rising oil prices over the summer, while the core figures face divergent pressures from diminished demand but growing supply bottlenecks.

The preliminary December consumer sentiment report for December (Friday) will provide a gauge of the conflicting impacts from the virus surge and lockdowns against vaccine development. We expect an uptick to 77.0 from 76.9 in November, not far from the 7-month high of 81.8 in October. Also, initial jobless claims for the week of December 5 (Thursday) should dip -2k to 710k following the -75k dive to 712k previously.

Treasury supply hits with a $118 bln package of coupon auctions. This includes a $56 bln 3-year sale (Tuesday), a $38 bln 10-year reopening (Wednesday) and a $24 bln 30-year bond reopening (Thursday). The package is down from the $122 bln from the November refunding. As per the refunding announcement, the debt managers increased the volume of the shorter note by $2 bln, and reduced the reopenings sizes by $3 bln. Yields cheapened measurably last week with the longer dated coupons at or near their highest levels since March. The wi 30-year rose to 1.74%, with the wi 10-year at 0.975%, and the wi 3-year at 0.225%. Though recent auctions have seen tepid results, there could be decent demand this week given speculation the FOMC might extend the duration of its QE purchases at next week’s policy meeting.

The earnings docket is again thin. Monday has BHP and Coupa Software. Tuesday brings Brown Forman, Chewy, AutoZone, and Guidewire Software. Wednesday has Campbell Soup. Thursday has Adobe, Oracle, Costco, Broadcom, lululemon, and Vail Resorts. No earnings are scheduled for Friday.

In Canada, the Bank of Canada’s announcement (Wednesday) is the focus this week. However, we suspect it will be an as-expected affair, with no change in the 0.25% rate setting alongside a reiteration of their commitment to hold rates at 0.25% into 2023, which is when “economic slack is absorbed so that the 2% inflation target is sustainably achieved.” BoC Deputy Governor Beaudry delivers the “Economic Progress Report” (Thursday). As for data, Q3 capacity utilization is expected to rebound to 75.0% after plunging to 70.3% in Q2 as the economy shutdown from 79.8% in Q1. The November Ivey PMI is due Monday.

ASIA

This week will again see the markets focused on Covid developments, as cases and deaths continue to skyrocket, particularly in the U.S. and Europe. But hopes for a quick vaccine rollout are mitigating to a degree. The regional calendar will feature China trade data, along with CPI and PPI. Japan’s docket has the second look at Q3 GDP, consumption data, current account figures, the MoF business outlook survey and PPI. Elsewhere, India has industrial production, while a mix of prices, trade and production are due from some of the smaller regional economies. There are no central bank meetings scheduled.

In China, the November trade report (Monday) is expected to reveal a narrowed surplus of $54.0 bln from $58.4 bln previously with further improvement in exports and imports following respective rates of 11.4% y/y and 4.7% y/y in October. China continues to lead the global recovery. November CPI (Wednesday) should slow to a 0.2% y/y rate from 0.5% previously. PPI (Wednesday) is expected at a -1.9% y/y clip from -2.1%. November loan growth and new yuan loan figures are tentatively due Thursday. Japan Q3 GDP (Tuesday) is expected to be revised slightly lower to a 21.2% q/q growth pace from 21.4%. October PCE (Tuesday) should rebound to a 3.0% y/y rate from -10.2% previously. October current account (Tuesday) is projected at a JPY 2,000.0 bln surplus from JPY 1,660.2 bln. October core machinery orders (Wednesday) are forecast to have bounced 2.5% m/m from -4.4%. The December MoF business outlook survey (Thursday) is estimated rising to 3.0 from 2.0. November PPI (Thursday) likely remained steady at a -2.1% y/y rate of contraction.

India October industrial production (Friday) is penciled in climbing to a 1.2% y/y rate from 0.2% previously. Taiwan November exports (Monday) are expected up 10.0% y/y from 11.2% in October. November CPI (Tuesday) should tick up to -0.1% y/y from -0.2%. Malaysia has October industrial production (Friday), forecast at 1.5% y/y from 1.0%. In the Philippines, October trade figures are due Thursday, with the deficit set to widen to $2.0 bln from $1.7 bln.

Australia’s calendar is thin this week, with the Q3 housing price index (Tuesday) the lone highlight. There is nothing of significance from the RBA near term. Last week, the RBA left policy steady, 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. Lowe highlighted that the economy will need “significant gains” in employment to push wages higher and see inflation return to target. Like other central banks worldwide, the RBA stressed that “monetary and fiscal support will be required for some time.” In other words, low for longest is locked in for an extended period.

New Zealand’s calendar is a sedate affair this week, with Q3 manufacturing activity (Wednesday) of note. The next RBNZ policy meeting is February 24 of next year. 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 bank’s economic projections were less pessimistic on growth and inflation and cut back the projections for peak unemployment. The cash rate was left unchanged at a record low 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, but markets have started to price out expectations that the bank will move towards a negative rate regime next year, on the back of the less pessimistic outlook. The balance of risks remains tilted to the downside, but it seems that in the central scenario further rate action won’t materialize.

EUROPE

Eurozone: euphoria over vaccine developments has eased somewhat and Brexit talks remain at a knife edge. Still, data releases showing that the manufacturing sector at least is holding up through the current lockdowns and the prospect of a strong rebound in activity through spring and summer next year will leave the hawkish camp at the ECB trying to reign in excessive demands at Thursday’s ECB meeting. That Lagarde will deliver a strengthening of PEPP and TLTRO programs is almost certain and a move to a more symmetric inflation target also wouldn’t surprise anybody, but those hoping for another easing bonanza are likely to be disappointed. Looking ahead, political pressure on the central bank is likely to increase once the focus turns from a damage control to managing the recovery.

On Brexit, all hinges on the finer details of the agreement regarding level playing field rules and the governance of a deal. France, Italy, Spain and the Netherlands are reportedly among the countries that have insisted on seeing the full text of any agreement before Barnier signs off a deal. The aim is now to get an agreement before the European Council in Brussels, but plans in Westminster to simultaneously bring back discussions on the Internal Market Bill that would allow the government to breach the Withdrawal Agreement, could also still throw a spanner in the works.

Data releases this week are mainly backward looking, but also include German ZEW Investor Sentiment (Tuesday) for December. We expect a rise in the expectations reading to 45.0 (median 46.0) from 39.0 with vaccine developments helping to underpin investor confidence in the recovery. Stock markets already rallied on the confirmation that vaccination programs can start soon and that should also be reflected in ZEW readings, even if the real economy is likely to struggle over the winter.

The final reading of Eurozone Q3 GDP (Tuesday) meanwhile is expected to confirm the 12.6% q/q rebound over the summer. The breakdown, released for the first time, is likely to show a strengthening on consumption, but also investment, although subsequent virus developments and renewed lockdowns mean Q4 will look much worse. German production and trade data for October are also too backward looking to change the outlook, but should confirm that Germany’s manufacturing sector remains supported by external demand. Industrial production (Monday) is seen rising 1.2% m/m (median 1.6%), while the trade surplus (Wednesday) is expected to widen again in October data. France also has production numbers and there are some final inflation readings, but none of those are likely to have much of an impact.

U.K.: a EU and UK deal was reported on Friday to be “imminent”, at least according to an EU source cited by Reuters. The same source said a deal was possible by the end of the weekend and dismissed reports that the EU had, via alleged pressure from France, raised demands at the 11th hour on state aid rules, saying this was spin from a UK government source. Another EU source cited by the BBC had earlier refuted this, too. Negotiations were paused on Friday, apparently the ongoing irresolvable differences on fishing. A phone call due to take place between UK PM Johnson and EU chief von der Leyen on Saturday was touted as been a make or break threshold.

The steady performance of the pound in recent weeks and months reveals that the consensus market view for a narrow trade deal to be reached has been unwavering during the Brexit endgame thus far. If there is a no-deal outcome, which we do not expect, while acknowledging that there is a risk, this would essentially mean that a deal has been postponed to the “other side of Breixt”, that is to say after the UK has exited from its transition membership of the common market and customs union at year end. The consequence of this would be near-term logistical chaos and economic disruption come January, alongside a sharper drop in the terms of trade for the UK than would otherwise be and, to a lesser degree, the EU, and a good degree of bad faith.

In the years ahead, into the next general election the UK (due by 2024), the relationship between the two will be an evolving and complicated one. The UK under the current government wants to diverge from EU rules, while EU states are concerned that the UK will undercut their markets. The relationship will be subject to dispute arbitration with the possibility of retributive measures. The possible use of such measures as part of a governance regime is reportedly an area of hot contention.

Any concrete news of a deal would be a near-term positive for the pound, especially given that the UK economy, having underperformed G20 peers during the pandemic, is widely seen to benefit most in the vaccine-assisted route back to a post-Covid normalcy. But there are also downside risks for the pound, the biggest one being a no-deal outcome. A narrow deal would still negatively affect the UK’s trading position, too, over the near- to medium term at the least.

The UK data calendar this week is highlighted by October industrial production, October and second release Q3 GDP data, and October trade figures (all due Thursday). A 0.3% m/m rise is expected in production, and a 0.5% m/m gain is anticipated in October GDP.

Switzerland: The Swiss data calendar is quiet this week, highlighted by the release of November unemployment data (Tuesday).

Stocks & ETF Watch List

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Economic Data Calendar

We have a thin economic calendar in the first full week of December. The November inflation reports should reveal lean headline figures for both CPI and PPI, alongside 0.2% core price gains, with a flat trend for gasoline prices. We expect solid October wholesale gains of 0.9% for inventories and 1.0% for sales. The GDP and employment data imply a Q3 productivity growth trimming to 3.9% from 4.9%, after a hefty 10.6% Q2 pace.

Week of December 7

The November employment report documented a slowing in the pace of economic growth in November that likely reflects the surge in coronavirus cases and heightened restrictions, just as the last initial claims report revealed big declines in initial and continuing claims into the end of November that trimmed the significance of rising initial claims in the middle two weeks of November. We always get a high degree of seasonal volatility between the Veteran’s Day holiday in early November and the MLK weekend in January, and this noise should be heightened considerably this winter given that “seasonal behavior” is likely changing dramatically with the virus. Our read between the jobs and claims data is that the rate of economic recovery is indeed slowing into November, but only gradually, and we expect further gains for the economy in December.

The math behind GDP calculations show that a solid gain is already in the cards for Q4, even if growth slows through the turn of the year. Hours-worked are poised for 8.8% growth in Q4, with nearly all of that growth already reported through November. Even if we got a dramatic -1.0% hours-worked drop in December, the Q4 growth rate would only be knocked down to 7.0%. At this point, any growth slowing is really a driver of Q1 GDP prospects, as activity through December will drive our entry-point to Q1. The jobs data through November signal upside risk for our 6.4% Q4 GDP estimate, and our forecast is above most market estimates. Our Q4 GDP forecast is also supported by a solid November ISM-adjusted average for the producer sentiment indicators of a robust 55, despite the drop from 58 in October, a firm path for the equipment data in the factory goods report through October, the 2.2% October rise in exports, and the housing boom.

Productivity, Q3 Revised: 3.9%

The GDP data imply a Q3 productivity growth trimming to 3.9% from 4.9%, after an unrevised 10.6% Q2 gain. We expect an unrevised 43.5% Q3 growth rate for the BLS output measure, following a -36.8% Q2 contraction rate. We expect a 37.8% (was 36.8%) Q3 growth rate for hours-worked, after an unrevised -42.9% Q2 drop. We saw big upward compensation revisions in the Q2 and Q3 GDP data, and we now expect Q3 growth in compensation per hour of -2.2% (was -4.4%), after a 21.9% (was 20.0%) Q2 clip. The mix should leave Q3 unit labor cost growth of -5.7% (was -8.9%), after a revised 10.4% (was 8.5%) Q2 pace. We tentatively expect a -3.0% productivity contraction rate in Q4, with a 1.5% unit labor cost gain.

Wholesale Inventories: 0.9%

Wholesale inventories are expected to grow 0.9% in October after a 0.7% September increase, as seen in the advance indicators report. Sales are estimated to rise 1.0%, after a 0.1% September climb. The I/S ratio should hold at 1.32 from September (was 1.31), versus an all-time high of 1.68 in April, leaving a ratio back near the pre-pandemic reading of 1.31 in January and February, and well below the prior all-time high of 1.41 in January of 2009 for a data set extending back to 1992. Business inventories should rise 0.6% in October, with other component gains of 0.1% for factories and 0.8% for retailers. The inventory and sales data will be restrained by a downdraft in gasoline prices. Wholesale inventories faced big Q2 headwinds from a plunge in imports that is being reversed in Q3 and Q4. We’re now seeing solid wholesale sector gains with the recovery in imports from China, following a big pullback in imports from China between mid-2019 and March of this year. International trade is disproportionately captured at the wholesale level of production.

CPI/Core: 0.1%/0.2%

We expect a 0.1% November gain for the CPI headline and a 0.2% core price rise, following flat rates for both in October. CPI gasoline prices look poised to tick up 0.1% in November, leaving a small tailwind for the headline. As-expected November figures would result in a 1.1% headline y/y increase, following a 1.2% October rise. Core prices should show a 1.6% y/y rise, as seen in October. As with PPI, the headline inflation figures were lifted by oil prices over the summer, while the core figures face divergent pressures from diminished demand but growing supply bottlenecks that remain problematic in Q4. We expect headline y/y gains for CPI to remain around the 1.2% area into early Q1, alongside 1.6% y/y core price gains, with slightly smaller y/y gains for the PCE chain price metrics. With average inflation targeting, the Fed will face no pressure to withdraw accommodation any time soon.

Initial Jobless Claims: 710k

Initial jobless claims for the week of December 5 should remain elevated, though we assume a -2k decline in the weekly pace to 710k, after a 75k drop to 712k from 787k. Claims should average 703k in December, after averages of 740k 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 220k December payroll rise, after gains of 245k in November, 610k in October, and 711k in September.

Continuing claims fell by -539k to 5,520k in the week of November 21, following a minor upward revision in the prior week’s reading that left a 6,089k figure. We expect continuing claims to fall -250k the 5,270k area for the week ending on November 28, as workers continue to return to work and leave the jobless pool, alongside the inflow of newly unemployed, and the loss of benefits to some workers who were laid off early in the pandemic. Continuing claims fell by -1,734k between the October and November BLS survey weeks. We saw prior declines of a hefty -4,924k in October BLS, -1,745k in September, -2,459k in August, -2,280k in July, and -1,610k in June.

PPI/Core: 0.0%/0.2%

We expect a flat November PPI headline figure with a 0.2% rise or the core, following gains of 0.3% and 0.1% respectively in October. As expected readings would result in a y/y headline PPI metric of 0.6%, up from 0.5% in October. We expect a 1.5% y/y rate for the core, up from 1.1% in October. A small uptick in energy prices should boost the headline, if just barely. The y/y core reading is assumed to ease to the 1.3% area into early Q1, with a downward hit from reduced aggregate demand but a boost for prices from supply disruptions. Supply constraints for some sectors remain problematic in Q4. Oil prices have flattened, after bottoming in April and climbed sharply through August, thanks to a better supply-demand balance in the petroleum sector.

Michigan Sentiment, Preliminary: 77.0

The Michigan sentiment report for December is expected to tick up to 77.0 from 76.9 in November, versus a 7-month high of 81.8 in October, as coronavirus headwinds inhibit the climb 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. Expectations are pegged at 70.6 from 70.5 in November and a 7-month high of 79.2 in October. We saw a 7-year low of 65.9 in July that was also seen in May. Current conditions should edge up to 87.1 from 87.0 in November and a 4-month high of 87.8 in September. The 1-year inflation measure should tick down to 2.7% from 2.8% in November, while the 5-10 year inflation measure remains at 2.5% for a second month versus a 7-month low of 2.4% October. We’ve seen divergent oscillations in the various confidence metrics since June around levels that are in expansion territory, despite huge fluctuations with the pandemic, on-and-off stimulus, vaccines, and the elections. Restraint in confidence with rising coronavirus restrictions should cap gains in spending into year-end.

Week of December 14

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 indexes oscillate around 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.

Empire State/Philly Fed Index: 7.0/20.0

The Empire State index is assumed to rise to 7.0 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 20.0 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 may 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 that should sustain production increases 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. Ex-petroleum import prices are expected to grow 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 increases 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 rise to 73.1% from 72.8% in October. Industrial production expanded at a 41.4% clip in Q3, and we expect an 4.8% growth pace in Q4.

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

We expect a -0.2% November retail sales headline with a flat ex-autos measure, following respective October gains of 0.3% and 0.2%. We expect a 0.1% uptick for the CPI gasoline index that leaves a flat figure for service station sales. Unit vehicle sales fell to 15.6 mln from 16.3 mln in October, versus a 16.3 mln pace again in September, leaving a likely flat path for the auto dealer component. We expect some unwind of the October boost to non-store sales from Amazon Prime day, but a boost 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 6.4% rate in Q4 after a robust 40.6% growth clip in Q3.

Business Inventories: 0.6%

Business inventories are estimated to rise 0.6% in October after a 0.7% September increase. Our forecast incorporates a 0.2% rise for factory inventories, alongside gains of 0.8% for retailers and 0.9% for wholesalers as seen in the advance indicators report. Sales should rise 0.8% in October, after a 0.7% gain in September. As-expected readings would result in the I/S ratio remaining at August’s 6-year low of 1.32 for a third month, 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 $40 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: 1.530 mln

Housing starts are expected to hold steady from October’s 1.530 mln clip from 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, extending the increase to a 13-year high of 1.545 mln in September before an October down-tick to 1.544 mln. We saw a prior 1.536 mln 14-year high in January. All the housing measures rebounded sharply in Q3, with recent 14-year highs for new and existing home sales, a 12-year high for the MBA purchase index in September, and an all-time high for August pending home sales. 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 1.532 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.

Current Account: -$185.6 bln

The current account balance is expected to expand dramatically 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 downward revision in the 33.1% Q3 GDP growth clip to 33.0%. 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: 33.0%

We expect a slight downward revision in Q3 GDP growth to 33.0% from 33.1%, with downward bumps of -$3 bln for exports, -$2 bln for imports, -$1 bln for factory inventories, and -$2 bln for nonresidential construction, but hikes of $1bln for both residential and public 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 6.777 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 13.1% 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 6.4% growth pace for real consumption in Q4, after a 40.6% surge in Q3. We peg disposable income growth at -6.0% in Q4, after a -12.9% Q3 rate but an enormous 46.2% growth clip in Q2.

New Home Sales: 980k

We expect a -1.9% November pull-back for new home sales to a 980k 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 985k 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.

Durable Goods Orders: 1.8%

Durable goods orders are expected to rise 1.8% in November with a 4.2% 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 are assumed to rise to around 10 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 flat as well. 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.