The Market Today
Georgia on Everyone’s Minds; U.K. Goes on Full Lockdown
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: Officials with U.S. warp speed said Monday that “we agree” the rollout of the vaccine has lagged behind expectations but added they expect it to soon ramp up. Governor Cuomo of New York reported that the state had identified its first case of the U.K. virus variant, a reportedly more infections version of the coronavirus that has led to a surge of cases across England. While the U.K. cheered the start of vaccinations with the Oxford-AstraZeneca shot which began Monday, residents were also provided with more disheartening news. Prime Minister Johnson announced a third nationwide lockdown for England, enforceable by police, that will begin today and keep schools and nonessential travel shut down until at least the middle of February. Earlier in the day a top medical official from Johnson’s government said they were “not confident” the hospital system could manage the current surge. Johnson said there are “tough, tough weeks to come” but hopefully stated “we are entering the last phase of the struggle.” Scotland followed suit with a stay-at-home order that will last until at least the end of January.
Georgia on Everyone’s Minds: The fate of who controls the Senate for the next two years will be sealed today, although the results to the two runoff elections are not expected to be known so quickly. If Democrats win the two seats, the Senate will be split 50/50. If Republicans win either seat, they will retain control of the chamber. Either way, bold legislative items are less likely to pass through the resulting congressional landscape than the more convincing sweep of both chambers pollsters projected in November.
ISM Manufacturing Index Expected to Soften but Remain Positive: Today’s economic calendar will bring the December ISM Manufacturing index at 9:00 a.m. CT. The regional Fed bank reports point to a slight softening in manufacturing activity, but remaining on solid footing. Overall manufacturing output remains 3.6% below its pre-virus peak.
Auto Sales Expected to Reverse Recent Softening: December’s auto sales data are scheduled to be released throughout the day. Sales are expected to have increased from 15.55m units to 15.80m. Sales were at 16.70m units in December 2019. After being one of the hardest hit sectors of the economy in March and April, with annualized sales down 49% over the two months, sales had bounced back to within 3% of their pre-virus level. However, they have pulled back over the past two months and are now 7.6% below their pre-virus level.
Fedspeak: Chicago Fed Bank President Evans and New York Bank President Williams will speak on an AEA panel today at 2:45 p.m. CT.
Volatility Emerges as Virus Surges to Drop Major Equity Indices from Record Levels: The major U.S. equity indices sharply reversed opening gains, diverging with overnight gains across Asia and Europe and starting 2021 on a sour note. U.S. equities closed at record levels to end 2020, a trend that had pushed foreign equities up to start 2021 as investors remained hopeful that stimulus and vaccine efforts will sustain, and eventually accelerate, the economic recovery. But despite a report from Markit showing U.S. manufacturing’s resilient expansion continued in late December, a trend which had also played out in foreign PMIs released earlier in the day, equities tumbled and Treasury yields erased their overnight rise. The S&P 500 opened up 0.4% and at an all-time high before a quick correction dragged the index down as much as 2.5% by midday. The broad index ended in the middle of that range with a 1.5% loss, and every sector except for energy in the red. After climbing above 0.95% overnight, the 10-year Treasury yield ended the day unchanged at 0.91%.
Treasury Yields Tick Higher Ahead of Georgia Elections Even as U.S. Equity Futures Struggle to Recover: U.S. equity futures have struggled to recover following Monday’s steep declines as investors turned their attention to today’s two Senate run-off elections in Georgia. Futures contracts on the main equity indices flipped between gains and losses several times overnight but were little changed shortly after 7 a.m. CT. Equities in Asia avoided mirroring U.S. losses from Monday but Europe’s Stoxx 600 had traded 0.3% lower ahead of the U.S. session. As announced on Monday, England is now under its most stringent lockdown measures since the initial response to the pandemic and other countries across mainland are considering extending or tightening measures. A mutated virus strain first identified in the U.K., which is said to be more infectious, has led to a rapid rise of infections and led to concerns about a pandemic that was already spreading at a worrisome pace. After this morning’s ISM report on U.S. manufacturing activity in December is digested, focus is likely to return to the virus headlines and any reports related to today’s elections in Georgia. The two run-offs will determine whether Republicans maintain control of the Senate or cede it to Democrats with split membership and a decision-swinging, tiebreaker vote from the Vice President. Despite the continued uncertainty, Treasury yields ticked higher across the curve with the 10-year yield up 1.5 bps to 0.93%.
ICYMI – December 2020 Monthly Review
Markit Manufacturing PMI Revised Up to 7-Year High, Largely on Supply Chain Disruptions: The Markit Manufacturing PMI was revised up unexpectedly from an initial estimate of 56.5 in early December to a final reading of 57.1 once all monthly responses were collected, its highest level since September 2014. However, a large portion of the gain was tied to slower movement of goods through the supply chain. Employment did continue its gradual improvement for a fifth month, but new orders and production eased from November. Today’s ISM report, which is expected to edge lower in December, will provide another measure for manufacturing activity.
Housing Continued to Prop Up Construction Spending in November as Business Activity Remained Weak: Construction spending rose 0.9% in November, nearly matching expectations for a 1.0% gain, and there were positive revisions reported for the prior two months. Cumulatively, the net results left total construction spending across the three months 0.5% better than economists had expected and at a record for the series. The gains continued to be concentrated in private residential construction activity as private non-residential spending remained weak and federal spending weighed after a strong month in October. The 2.7% increase in private residential spending pushed activity up 16% from one year ago. The 0.8% decline in private non-residential activity continued the persistent weakness that has dragged spending levels down nearly 10% from November 2019.
Evans Said It’ll Take Years for Policy to Normalize, Signals Comfort with Inflation As High as 3%: Chicago Fed President Evans, who rotates onto the voting committee in 2021, said the economic outlook continues to face significant risks from the pandemic and that the Fed’s bond-buying program could be altered if conditions warrant. However, he also noted that Fed policy is a secondary weapon in the context of a fight against a pandemic and that recent passage of additional fiscal aid was encouraging. He did, nonetheless, provide some insight into his personal economic paradigm that will drive his voting decisions this year. Evans, historically dovish and particularly so on inflation matters, continued to show a calm and comfort with inflation climbing above 2%. “I’m not worried about inflation going up substantially beyond 2.5%,” he said, going on to proclaim, “I don’t even fear 3%. The more we get inflation up above 2% then markets are going to understand that, yes, we’re in it to win it.” He believes that “It likely will take years to get average inflation up to 2%,” adding “This translates into low-for-long policy rates, and indicates that the Fed likely will be continuing our current asset purchase program for a while as well.”
Mester Sees Better Days Ahead but Need for Policy Accommodation for “Quite Some Time”: Fed President Mester from the Cleveland District Bank cautioned that near-term economic activity could be weak because of the worsening virus pandemic, but said the start of the vaccination efforts “make me more confident” that the recovery will gain steam over the medium-term. Still, the outlook remains incredibly uncertain and faces elevated risks, a combination that will necessitate accommodative policy for “quite some time.” In a speech titled “Patience Will Be a Virtue in Fostering a Broad-Based Sustainable Recovery,” Mester said that “both fiscal policy and monetary policy will continue to be needed to limit lasting damage to the economy from the pandemic and support the achievement of a broader, sustainable recovery.”