The Market Today
Fed Closes Tumultuous Year Quietly; Fiscal Stimulus Negotiations Continue
by Craig Dismuke, Dudley Carter
CORONAVIRUS UPDATE (VS Coronavirus Chartbook – PDF)
Monitoring the Headlines – Stimulus Talks Continue: Discussions will continue today on a COVID-19 stimulus plan with efforts now focused on a $900 billion plan which includes $600 payments to individuals, $300 federal supplement to weekly unemployment insurance payments, aid for small businesses, and $17 billion in aid for airlines. The plan reportedly omits funding for state and local government and business liability provisions. Government funding will expire tomorrow giving Congress a narrowing window to agree to additional funding if they aim to include the stimulus plan with the package. Although, another continuing resolution could be used to extend the deadline further.
Initial Jobless Claims Rise for Fourth Week of Last Five: Initial jobless claims for the week ending December 12 rose for a second consecutive week, up from 862k to 885k. While this is discouraging, the non-seasonally adjusted data actually declined from 957k to 935k new claims. However, the holiday shopping season is not seeing the seasonal hiring it traditionally has, making the results look more negative when applying the seasonal adjustments. New PUA claims rose 40k to 455k. Combined, overall new claims increased 63k to 1.34 million, the fourth weekly increase over the last five weeks.
Continuing Claims Improve to Lowest Level of Pandemic, but Pandemic Programs Increase Further: Continuing jobless claims significantly more than expected for the week ending December 5, down 273k to 5.51mm. The non-seasonally adjusted data showed the same, strong results. The largest decline came from Florida where continuing claims dropped 51k (-27%) to 136k. However, the PUA-related programs saw discouraging increases for the week ending November 28. PEUC claims rose 269k to 4.80mm while PUA continuing claims rose 689k to 9.25mm. The state-by-state details continue to show evidence that the weekly tallies are suspect. Bottom line, the more timely continuing claims figures show more improvement than expected, but the most timely initial claims data raise concerns about the slowing of the labor recovery.
Starts and Permits Show Housing Unaffected by Recent Slowdown: Housing starts rose 1.2% in November, beating expectations for a smaller 0.3% gain. The previous months’ reports saw large, mixed revisions but the overall trend remained the same. Building permits also beat expectations, rising 6.2% in November versus expectations for a 1.0% gain. New permits are now up 12.5% for the year and are at their highest level since 2007.
Philadelphia Fed Index Shows Sharper Slowdown Than New York Index: The Philadelphia Fed’s regional report on manufacturing activity dipped more than expected, down from 26.3 to 11.1. The new orders index plunged from a very-high 37.9 to 2.3, remaining only fractionally in positive territory. The number of employees index also dropped sharply, down from 27.2 to 8.5. The average employee workweek index fell from 25.7 to 18.0. The Philadelphia Fed index shows an even more concerning slowing in activity than its sister report from the New York Fed. Combined, the reports point to the ISM Manufacturing index dropping 2 or 3 points for the month.
Stocks and Yields Swung About as Investors Digested the Fed’s Last Decision of 2020: The Dow declined 0.2% Wednesday while the S&P 500 and Nasdaq notched modest gains and Treasury yields edged higher after fluctuating around the Fed’s last decision of the year. Data earlier in the morning showed retail sales in November were notably disappointing, and negative revisions for October signaled that the spending slowdown began even earlier than expected. An hour later, preliminary PMIs projected the broader economy continued to slow in early December, primarily because the services sector saw a weaker pace of improvement amid the current virus surge and new restrictions. However, with investors hopeful recent signs of progress mean a stimulus compromise in Congress could be near, stocks and yields were both higher heading into the Fed’s afternoon decision. Markets initially responded with disappointment to the Fed’s decision not to increase or extend the duration of its asset purchases, sending yields higher and stocks lower. However, the S&P 500 recovered to close 0.2% higher and the 10-year yield finished up just 0.8 bps at 0.916% after having approached 0.95% in the minutes after the Fed’s announcement. While the Fed didn’t alter their asset purchases as some had expected, they did explicitly state the current monthly level of $120 billion in net purchases will continue for some time and Powell said in his press conference changes could still be made in the future if the situation warrants (more below on the Fed’s decision).
Fed Links Asset Purchases to “Substantial Further Progress” on Economic Goals: As expected, the focus of yesterday’s Fed announcement was on the plan for asset purchases and the refreshed set of economic projections. The only change to the Statement was the inclusion of “qualitative outcome-based guidance” that said the Fed would continue buying at least $80 billion in Treasurys and at least $40 billion in MBS each month, more explicit than the “current pace” language from September’s statement. Some had expected the Fed could increase these purchases or alter their composition, but those decisions were tabled for consideration until at least 2021. More impactful, these purchases will occur “until substantial further progress has been made toward the Committee’s maximum employment and price stability goals,” a more definitive commitment than September’s “over the coming months” pledge. In his press conference, Powell several times stressed the absolute size of the asset purchases and the new explicit linkage of them to “substantial” progress towards the dual mandate in response to questions as to why, considering he also said the recovery was slowing, the Fed didn’t alter their size or composition. He did, however, say such changes could be made if the situation deteriorates and conditions warrant.
New Projections Highlight Faster Recovery with Almost No Inflationary Impact: In the Updated Summary of Economic Projections, the story was essentially that Fed officials expect the recovery to occur more quickly than expected but still result in below-target inflation readings through 2022. The 2020 contraction was forecasted to be -2.4%, better than the 3.7% penciled in back in September, and the unemployment rate is expected to average 6.7% in the fourth quarter, better than the 7.6% previously estimated. But while the expected inflation trend was nudged up a tenth in 2021 and 2022, the median forecast for 2023 was unchanged at 2.0%. In the context of the new inflation-focused policy framework, the lack of significant pricing pressures, despite the forecast for a stronger recovery, helps explain the lack of changes in the dot plot. The lone non-zero dot for 2022 was lowered to project just a single hike that year while one of the no-hike dots from September projected a single increase. Collectively, however, the consensus that rates should remain low was evidenced by the median forecast (12 dots) showing no rate increase through at least 2023. Powell admitted the faster projected face of recovery but continued to stress uncertainty and power disinflationary forces that would help keep inflation muted for the next several years.
Second Round of Reports Confirm Slowing of Activity: In the second round of economic reports later Wednesday morning, home builder confidence pulled back from a record level in December and preliminary Markit PMIs indicated the broader recovery also slowed. The NAHB’s Housing Market index dropped 4 points from an all-time high of 90, with same-sized declines registered by each of the three underlying metrics on current and future sales and foot traffic from potential buyers. The housing sector has been the clear outperformer during the economic recovery and record-low rates are expected to continue supporting activity, but several indicators signal activity has come off the boil in recent months. Just before that report’s release, preliminary Markit PMIs showed the services sector leading a broader slowing of the economy while manufacturing remained relatively consistent. The composite PMI fell from 58.6 to 55.7, a still solid level, as the services index dropped from 58.4 to 55.3 while manufacturing inched lower from 56.7 to 56.5.