The Market Today

Economy Contracts 2.8% for Full-Year 2020, Much Better 2H Recovery Than Expected


by Craig Dismuke, Dudley Carter

NOTEWORTHY NEWS

Fed Sees a Path for Strong 2021 Growth But Hones in On Risks and Signals Easy Policy Won’t Be Short-Lived: As expected, the Fed left rates, asset purchases, and forward guidance unchanged. In his press conference, Chair Powell reiterated that the Fed would “clearly communicate … well in advance” of when the balance sheet plans might change because of “substantial further progress” towards their goals. The Statement pointed out, “The pace of the recovery in economic activity and employment has moderated in recent months, with weakness concentrated in the sectors most adversely affected by the pandemic.” Powell stressed that vaccinations will determine how strong and sustained growth in 2021 will be, also a new inclusion in the Statement. He remained dovish, saying the pieces were in place for strong second half of 2021 but cautioned that considerable risks remain with the economy still far from fully recovered. Inflation could pick-up amid a burst of activity later in the year, but he expects it would be transient and said the Fed will be patient considering the strong disinflationary forces that pre-existed the pandemic. He punted on questions about recent market volatility and its correlation with easy monetary policy.

EU Struggles Continue: The EU continued to fight with AstraZeneca over vaccine supplies, blaming the company for “continued lack of clarity” on the forward-looking delivery schedule for doses. The continent’s rampant outbreak, largely tied to new virus strains, has led to new restrictions amid a slow vaccine rollout. Norway is closing its borders, the U.K. is requiring foreign visitors to quarantine for 10 days, and France said is curfew isn’t slowing the virus enough. Germany cut its growth forecast for 2021 from 4.4% to 3%.

Democrats Continue Stimulus Discussions: President Biden will meet with his economic team, including Treasury Secretary Yellen, on Friday to discuss the virus response. House Speaker Pelosi said Democrats plan to use all available tools to pass more relief and noted committee chairs were assessing using reconciliation to pass additional virus stimulus.


TRADING ACTIVITY

Wall Street’s Wednesday Slide Rippled around the World Thursday as Investors Await Jobless Claims and GDP: The weakness that walloped U.S. investors on Wednesday has rippled around the globe Thursday, dragging Asian equities down 2% and knocking 0.6% off Europe’s Stoxx 600. Despite solid business orders data for December, generally upbeat corporate earnings, and an uneventful Fed meeting, U.S. stocks sold off sharply Wednesday and Treasury yields declined. While the day’s calendar was clearly busy, wild swings in heavily-shorted stocks remained in focus. The stratospheric rise in shares of GameStop has been the buzz this week and was the topic of the first question asked of Fed Chair Powell in his afternoon press conference. Amid the S&P 500’s 2.6% decline Wednesday, its largest daily drop since October 28 which erased its 2021 gain, Powell said he wouldn’t comment on a single stock but said overall financial stability risks appeared moderate. He said the current economic environment necessitates easy policy and signaled that any valuation risks should be addressed with macroprudential tools. The Nasdaq matched the S&P 500’s drop while the Dow fell just over 2%. Treasury yields, which were already lower amid a global risk-off shift that had started in Europe, showed little response to the Fed announcement. The 2-year Treasury yield inched 0.2 bps lower to 0.12% while the 10-year yield shed 1.9 bps to 1.02%.

Notwithstanding strong earnings reports from Facebook and Apple after markets closed yesterday, both companies’ shares and futures for the major U.S. indices were weaker Thursday morning in front of an influx of morning economic data. Treasury yields were biased lower but little changed at 7:20 a.m. CT, with the 10-year yield down 0.8 bps to 1.01%.


TODAY’S CALENDAR

Initial Jobless Claims Reflect Some Improvement While Emergency Programs Remain Hard to Discern Amid Reporting Volatility: Initial jobless claims declined more than expected (January 23), down from 914k (previously estimated 900k) to 847k, a three-week low. New claims in the emergency PUA program were also slightly improved, down 20k to 426k, but still notably higher than better levels from November, prior to the winter case surge that weighed on the recovery. Continuing claims for regular state programs also continued their declining trend, dropping 203k to 4.77 million, a new pandemic low. Some of that improvement likely reflected a transition into emergency extension programs, however, and discerning those shifts remains difficult as a result of reporting volatility (potentially related to uncertainty about program availability prior to the passage of the latest stimulus package). After plunging 2.7 million in the prior two weeks, continuing PUA claims spiked 1.6 million. After tumbling 1.1 million in the week before, continuing PEUC claims jumped 837k. With unusually large swings for these programs in several states, total claims in all programs surged 2.3 million to 18.3 million after sliding 2.4 million to 16.0 million the week before.

Economy Contracts 2.8% for Full-Year 2020, Much Better 2H Recovery Than Expected: The economy contracted 2.8% in 2020 after recovering another 4.0% in 4Q.  While the 4Q result was slightly weaker than expected; a cumulatively strong 2H20 kept the full-year loss from being as large as initially expected.  In the details, personal consumption disappointing, increasing just 2.5% as a continued recovery in services spending took some activity away from the goods sector.  Investment was stellar at all levels, contributing 4.1% to the final GDP tally. Business investment in structures, the hardest-hit category, actually gained 3.0% QoQ SAAR, still down 14% from pre-virus but its first positive quarter. Business investment in equipment is now back above its pre-virus level.  Residential investment (housing) continued its exceptional run, up 33.5% QoQ SAAR in 4Q, and now up 13.7% from its pre-virus level. Government consumption dragged 0.2% from growth as state and local spending contracted 1.7%, the third quarterly decline.  Federal non-defense spending also dropped 8.4% as the initial wave of stimulus spending continued to phase out.  External trade dragged 1.5% from the result as a 30% jump in imports outpaced a 22% gain in exports. Inventories continued to recover, up $44.6 billion, adding 1.0% to the GDP total.  Going forward, the consumer has even more powder available, inventories are likely to continue recovering, and the external trade deficit should become a tailwind as other economies begin the advance in the recovery process.


New Home Sales and Regional Manufacturing: New home sales are expected to side 3.5% in the December report released at 9:00 a.m. CT. The Kansas City Fed will release its regional manufacturing report at 10:00 a.m.


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