The Market Today
Blue Wave Comes to Fruition; Electoral College Results Certified
by Craig Dismuke, Dudley Carter
2021 ECONOMIC OUTLOOK WEBINAR
Vining Sparks will host our 2021 Economic Outlook Webinar next Tuesday, January 12. During the presentation, we will discuss the forecast tension between the continued headwinds of the virus and the upside risk from the growing pent-up consumer demand.
CORONAVIRUS UPDATE (VS Coronavirus Chartbook – PDF)
Monitoring the Virus Headlines: The virus headlines took a backseat Wednesday to the Democrats’ victories in two key Senate races that strip Republicans of their majority and an afternoon of chaos in the nation’s capital. In the U.S., Illinois extended its statewide mask mandate by 150 days and North Carolina’s governor extended the state’s modified stay-at-home order for an additional three weeks. Just a bit north of those two locations, Quebec imposed a month-long curfew that will take effect Saturday. In Europe, Ireland reported a record for new infections and said health officials are seeing an “increasing presence” of the variant U.K. strain. As a result, the country’s prime minister announced schools will remain closed and construction must stop for at least a month, measures that may need to be extended for up to three months. The U.K. reported a record for new cases and daily deaths and reports indicated that London’s hospitals could run out of ICU capacity within two weeks. Back on the mainland, Switzerland announced that it will decide next week on whether it will keep bars and leisure businesses closed until the end of February.
Noise Make Jobless Claims Data Less Insightful: It is difficult to make much of the jobless claims data around the 2020 holidays because of how distorted it is from historical norms, the exaggerations caused by the seasonal adjustments, and the inconsistency in reporting from each state. Initial jobless claims for the week ending January 2 inched down from 790k to 787k, aided by a favorable seasonal adjustment. On a non-seasonally adjusted basis, claims rose from 845k to 922k (+77k), rising in 39 states.
Initial PUA claims plunged from 310k to 161k on a lack of reporting. It appears that eight states representing over 100k initial PUA claims in the previous week did not report for the reference week.
Continuing jobless claims dropped 126k from 5.198mm to 5.072mm for the week ending December 26. On a non-seasonally adjusted basis, the raw number of continuing claims actually rose 145k to 5.382mm as 42 states reported increases. Those increases were offset by inordinately large declines in California (-163k) and Puerto Rico (-31k).
The pandemic-related continuing claims programs for the week ending December 19 both showed improvement with continuing PUA claims falling 71k to 8.38mm and the PEUC extension program declining 293k to 4.52mm. A lack of reporting appears to be less of an issue with these programs for this specific reference week, although the consistency has always been suspect.
In all programs combined, the number of people filing for some form of unemployment insurance for the week ending December 19 fell 419k to 19.176mm. This marks the lowest level in five weeks despite the steady increase in the spread of the virus.
ISM Services: The December ISM Services index, released at 9:00 a.m. CT, is expected to drop from 55.9 to 54.5 as the overall pace of activity slowed in response to the virus.
Fedspeak: Speaking today are Harker (8:00 a.m. CT), Barkin (8.30 a.m.), Bullard (11:00 a.m.), Evans (12:00 noon), and Daly (2:50 p.m.)
Capital Chaos Shrinks Equity Gains but Treasury Yields Cling to Climb as Democrats Take Senate Control: After equity markets closed Wednesday, news stations called the second Senate run-off race in Georgia in favor of Democrats, an expected development that was the primary driver of an underlying sector shift in equities and significant jump in Treasury yields. Investors sold growth-focused sectors in overnight futures trading and began to snap up value-oriented shares that would benefit more in a cyclical upturn. Treasury yields shot higher in response to the growing possibility that additional stimulus could be added to the more than $3.7 trillion already passed when the Biden administration takes over with Democrats in control of both chambers of Congress. And while that was the primary market driver and the overnight trends held through to the close, equities pulled back from their highs amid the unrest in Washington D.C. As lawmakers were evacuated from the Capitol Building and protestors entered the Senate chamber, the S&P 500 drifted down from a daily gain of 1.5% to close up just 0.5%. The Dow rose 1.4% and the move out of the tech sector dragged the Nasdaq down 0.6%. Treasury yields were less impacted by the afternoon chaos in the capital, with the 10-year yield ending up 8.2 bps at 1.04%, its highest mark since March 19.
U.S. Stocks and Treasury Yields Rise as Congress Certifies Biden Electoral Victory after Tumultuous Day on Capitol Hill: As was the case yesterday in the U.S., global markets appear more focused on the medium-term impacts of a Democratic-controlled government than on the near-term disruptions in the U.S. capital that delayed President-elect Biden from being confirmed as the next president of the United States. After hours of delay, Congress was able to reconvene and certified the electoral college results just after 2:30 a.m. CT. A consolidated government with Democrats in control is expected to seek additional stimulus to help the economy recover from the pandemic, a key factor in yesterday’s record close for the Dow and the 10-year yield marching up to its highest level since March. Ahead of this morning’s weekly jobless claims report, the 10-year yield had added another 2.0 bps to trade at 1.06% and a recovery in tech shares was leading equity futures on each of the three major indices higher. Earlier, stocks rose 0.6% across Asia and Europe’s Stoxx 600 was trading 0.3% higher at 7:25 a.m. CT. Data released Thursday showed economic confidence in the Eurozone improved more than expected in December but preliminary estimates showed core inflation held at 0.2% YoY, far short of the ECB’s target of inflation “below, but close to, 2%.” The steady increase in initial jobless claims had little impact on U.S. markets, with the 10-year yields holding around 2.0 bps higher on the day.
Fed Sees Vaccines Helping Medium-Term Recovery After Near-Term Slowdown: There were no surprises in the Fed’s December Minutes as it relates to the economic assessment. Looking back, officials have generally been surprised at the pace of recovery from the pandemic but acknowledged that it has been felt unevenly by different groups of consumers and businesses and has slowed amid the latest virus surge. Looking ahead, expectations were for a near-term economic slump but signaled some optimism for a medium-term bump, primarily tied to the rollout of vaccines. More interesting for investors, however, was discussion related to asset purchases.
Fed Pledges to Provide Notice “Well in Advance” that “Substantial Further Progress” Has Been Met that Could Slow Asset Purchases: While some had expected the Fed would alter the duration or composition of asset purchases at the December meeting, the Committee opted instead to strengthen forward guidance to say the current purchase plan would continue until “substantial further progress” towards the dual mandate was achieved. The Minutes showed support for adopting the new guidance was unanimous, that nearly all officials favored the current composition, and that only a couple currently had any interest in shifting purchases to longer maturities. More intriguing for markets has been the question of what “substantial further progress” means pragmatically. The new guidance was left intentionally vague and judgmental but officials pledged to “clearly communicate…well in advance” of a when the threshold is expected to be met, which could be a trigger for the possible slowing of asset purchases. Once that time comes, officials divulged that they expect the “appropriate evolution” of asset purchases could be similar to that of asset purchases from 2013 and 2014, where purchase levels were gradually tapered over several quarters to a pace that held the balance sheet steady for several years.
Markit Signals Services Slowed in the Second Half of December, Resilience of Business Orders for Equipment Holds Up: In the second wave of economic reports Wednesday, the Census Bureau reported that factory orders rose 1.0% in November, better than the 0.7% expected, and October’s 1.0% gain was revised up to 1.3%. The details of the report showed business investment in equipment was a bit stronger than expected during the month, with capital goods orders and shipments both revised up from 0.4% to 0.5%. Just before the factory orders report was released, the Markit Services PMI for December was revised down from 55.3 to 54.8, slightly more than expected, representing a 3.6-point decline to a three-month low. As a result, the composite index edged 0.2 points lower to 55.3.