A barrage of US data confirms a mixed picture for the economy: Jobless Claims are rising, Durable good data improves, while personal consumption is revised lower and trade figures disappoint. The release of 14 data points provided a limited reaction for stocks, dollar, and Treasury yields. Financial markets are quickly entering holiday mode but what appears to be clear is that outlook for the fourth quarter will continue to deteriorate.
The Fed may have just gotten the greenlight to move at the December 16th policy decision meeting since the current coronavirus wave is weighing on the labor market and trade figures, as factories and production remain strong due to depressed inventory levels. If next week’s nonfarm payroll release prints a negative number, the Fed can justify increasing their purchases and signal they will adopt yield curve control.
Lost in the shuffle of the 8:30 am data dump was China President Xi's congratulations to US President-elect on his election win, adding he hopes both sides follow the ‘no conflict’ principle. Investors are banking on Biden to mend relations with China, but he might only be able to prevent relations from continuing its deep, downward spiral.
First round of data
Large parts of the economy are being ravaged by the COVID-19 pandemic and expectations will grow for the upcoming non-farm payrolls release to be the catalyst to have Congress break the stimulus impasse. Initial jobless claims rose to a five-week high at 778,000, much higher than the consensus estimate of 730,000. The total number of people claiming benefits in all programs was 20.4 million, an increase of 135,000 from the prior week. The labor market recovery is bracing for a Biden administration that will deliver increased lockdowns as the US aims to get the virus fully under control.
The US October advance goods trade data showed a monthly improvement of 2.8% in October, but a substantial 7.5% decline from a year ago. Imports rose 2.2% on a monthly basis and 1.9% year-over-year. The export data could reduce bets that the fourth quarter will remain in expansion territory.
The second reading of third quarter GDP matched the advance reading of 33.1% and provided confirmation that the historic rebound was legit. Investors are focused on the fourth quarter now and the consensus range is wide with some analysts calling for a return to contraction and others eyeing a 5% gain.
The highly volatile durable goods readings impressed as defense orders rose sharply. Manufacturing remains unfazed as new orders stretch the increase streak to six consecutive months. Shipments of manufactured durable goods have now risen five of the last six months, with October posting a 1.3% increase.
Round two of data
The 10:00am swath of data pushed equities lower as personal income and spending posted big declines. The worse-than-expected personal income data raises the argument that Congress should act before the end of the year. The October personal income decline of 0.7% was far worse than the expected 0.1% drop, and the prior reading which was revised lower from 0.9% to 0.7%. Personal spending increased 0.5%, slightly better than the economists forecast of 0.4%, but was very much lower than the revised prior reading which was revised lower two ticks to 1.2%.
The final Michigan confidence readings for November saw limited revisions, the headline lower by a tick, while current conditions dropped 1.2 points and expectations fell 0.8 points.
New home sales always takes a backseat to existing home sales, but regardless both are providing welcome news to the best part of the economy. The housing market remains strong, but it should be near the end of this current boom. Vaccine optimism should put an end to the mass exodus of metropolitan areas.
The British pound is little changed after UK Chancellor Sunak’s spending review showed urgency in handling the current economic emergency with the announcement of billions of pounds in new spending. Sunak will reduce overseas aid to 0.5% of national income. The budget deficit forecast is set at £394 billion this fiscal year. The UK government will issue a record £485.5 pounds this fiscal year, more than the consensus estimate of £482.8 billion pounds and the prior £156.1 billion in March.
Oil prices held onto gains despite a wrath of US data that suggests the fourth quarter in the US could see a return to contraction. Commodity prices should benefit from a weaker dollar since this wave of US data supports the notion that the Fed will do more and eventually Congress too. It seems energy traders for a third consecutive week are riding coronavirus vaccine headlines that are forcing everyone to raise their crude demand outlook forecasts for 2021.
Given the current wave of lockdowns across the US and Europe, the consensus is that OPEC+ will rollover the current oil output deal next week. What makes it easier for OPEC+ to extend production cuts is that oil prices are higher and widely expected to rise next year. Now is not the time fight for market share, that will be sometime late next quarter.
WTI crude held onto most of its gains following the EIA crude oil inventory report showed a small decline in stockpiles. Crude oil inventories fell 754,000 barrels, better than the expected build of 234,000, and nowhere near last night’s API build of 3.8 million barrels. It wasn’t completely a bullish report as gasoline stockpiles rose almost 3X than expected to 2.18 million barrels and US production posted another weekly increase.
Gold got knocked down, but got up again as bullion bulls bet that you are never gonna keep me down. (Thank you Chumbawamba). Long-term investors are scaling back into gold as US labor market concerns likely increase the likelihood the Fed will deliver more stimulus at the December 16th meeting Jobless claims posted the first consecutive increase and expectations are for more lockdowns to have that go up significantly over the winter.
A Biden administration will likely deliver more lockdowns once he takes office in January and that will only raise the pressure for Congress to do more. Gold is holding the $1800 level and could continue to stabilize towards the $1850 region.
Bitcoin hovers near record territory as retail interest surges. The crypto space had a great week as Ethereum paved the wave for a massive network upgrade that should allow it to handle transactions just like Visa and Mastercard. Bitcoin with thin conditions is likely to deliver a 1000-point swing at some point before the end of the week. The Bitcoin bubble could continue to grow, but the next few days could provide some false breakouts.