The Market Today
Georgia Vote Tallies in Focus as Yields Rise; ADP Projects December Job Loss
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: Two run-off elections were the major focus in Georgia on Tuesday. However, also newsworthy was the announcement that state health officials had identified the first local case of the mutated virus strain from the U.K. Reflecting the severity of the current U.S. outbreak, Arizona and New Jersey both reported record daily deaths. However, most of the virus headlines remained centered on Europe’s accelerating outbreak that has led most countries to enhance restrictions. On the first day of its third nationwide lockdown, the U.K. government announced a fiscal aid package worth $6.2 billion aimed at supporting small businesses with grants for those most heavily impacted by the current measures. The U.K. government also reported daily record for new infections of more than 60,000. On the mainland, Germany extended existing restrictions, as expected, through at least the end of the month as well as fiscal aid to affected businesses. The decision, which will be revisited on January 25, keeps non-essential businesses and schools closed, limit private gathering sizes, and forbids non-essential travel of more than 9.3 miles in certain virus hot spots. Italy announced an extension of similar measures through the middle of this month. Elsewhere, Denmark maxed out its virus alert level warning and shrank allowable public gathering sizes from 10 to 5. Following its own surge of cases and hospitalizations, Ireland said it could soon ratchet down restrictions. On a more upbeat note, the EU granted Moderna’s vaccine emergency approval early Wednesday morning.
GEORGIA SENATE RUNOFFS
Close: Democrat Raphael Warnock has been projected to have beaten incumbent Republican Kelly Loeffler. The race between Democrat Jon Ossoff and incumbent Republican David Perdue remains too close to call. Georgia’s Secretary of State Raffensperger told CNN last night that there remain about 200,000 votes still to be counted and expects to have a better sense of the outcome near midday today. If Democrats win both seats, as now appears to be a strong possibility, a 50/50 tie will result in the Senate with the Vice President breaking ties. Market expectations for this outcome are for more spending, including on additional stimulus measures. However, history shows that 50/50 splits in the Senate yields power to most moderate Senators. If this proves to be the final outcome, Senators such as West Virginia’s Joe Manchin (D) and Maine’s Susan Collins (R) will become critical to the scope of legislation that can get through the senior chamber. Senator Manchin, for example, would be expected to support more stimulus but not support wholesale increases in tax rates nor a Green New Deal energy policy.
ADP Report Shows Private Sector Job Losses in December: The December ADP Employment report projected a loss of 123k private sector payrolls, the first report of monthly job loss since April. The losses were spread across sectors with goods-producing jobs down 18k and service sector jobs down 105k. The leisure and hospitality sector led the declines losing 58k jobs. Trade, transportation, and utilities sector jobs declined 50k and manufacturing jobs fell 21k. Not surprisingly, construction jobs actually rose 4k. Going into Friday’s BLS jobs data, the leasing indicators are mixed but expectations for a notably weak month have been bolstered by the ADP report.
Mortgage applications for the week ending January 1 rose 1.7% as purchase apps dropped 1.5% but refis increased 3.0%. The 30-year mortgage rate inched down 4 bps to 2.86%, 1 bp from the record low from December.
Markit PMIs, Factory Orders, Fed Minutes, Election Watch: The December final revisions to the Markit Services and Composite PMIs are scheduled for 8:45 a.m. CT. November’s Factory Orders report is scheduled for 9:00 a.m. The Fed’s December 16 FOMC Meeting Minutes will be released at 1:00 p.m. However, the markets will be primarily focused on the election results trickling in from Georgia.
Stocks Recovered as Oil Jumped and Yields Rose on Better Manufacturing Data: While investors awaited results from Senate run-off elections in Georgia, U.S. stocks staged a solid energy-led recovery Tuesday and the Treasury curve climbed higher and steeper after a better-than-expected manufacturing report. After slumping 1.5% to start 2021, the S&P 500 gained 0.7% Tuesday as energy names soared more than 4.5% amid a spike in oil prices to lead gains across all eleven sectors. Saudi Arabia announced an unexpected unilateral cut of one million barrels of daily crude production for February and March, overwhelming a much smaller net increase in output from other OPEC+ countries and jolting oil prices to ten-month highs. U.S. WTI rallied nearly 5% to $49.93 per barrel, its best day since early November and highest level since late February. Materials and industrials finished as the second- and third-best performing sectors after the ISM’s manufacturing index rose unexpectedly to a 28-month high in December (more below), signaling a continued resilience for manufacturers in the darkest days yet of the pandemic. Treasury yields also responded quickly to the manufacturing data, jumping to session highs shortly after its release. After reaching as high as 0.962% intraday, less than 3 bps from its highest level since the pandemic began, the 10-year Treasury yield settled up 4.2 bps at 0.955%.
10-Year Treasury Yield Breaks Above 1.00% as Senate Elections Tilt in Democrats’ Favor: While final results are still pending, the two Senate run-off elections tilted in favor of Democrats later Tuesday evening, developments that helped drive the 10-year Treasury above 1.00% for the first time since March. As discussed above, an evenly split Senate would make major policy changes more difficult than the level of control pre-November polls had predicted, but nevertheless increases on the margin the policy possibilities for the new Biden administration, particularly on additional stimulus. In response, Treasury yields jumped as election results rolled in, pushing the 10-year yield up as much as 7.9 bps overnight to as high as 1.03%. Even after ADP’s prediction of a payroll contraction in December, the 10-year yield remained 6.5 bps higher on the day at 1.02%. With the 2-year yield 1 bp higher, the spread between the two securities widened to more than 88 bps, the most since August 2017. The political and interest rate developments have caused a divergence in equity futures. The tech-heavy Nasdaq, which has soared during the pandemic and amid low rates, lost 1.4% while the more value-oriented Dow inched into positive territory.
Global Assets Respond to U.S. Market Shifts: Similar market shifts have also unfolded outside of the U.S. Sovereign yields were exclusively higher with most curves moving in a steepening fashion. Earlier in the session, Asian equities closed mixed and European equities were being led higher by similar dynamics to those driving U.S. equities. With cyclical sectors leading with solid gains and tech stocks slipping into negative territory, the Stoxx Europe 600 was up nearly 1% at 7:30 a.m. CT. December PMI Data overnight from the two continents showed an unexpected slowdown in China’s services sector and broader contraction of the European economy than was initially estimated.
Manufacturing Remained Solid at Year’s End: The ISM’s U.S. Manufacturing Survey was surprisingly strong in December at a 28-month high, but also included signs that the virus was impacting activity. The headline index rose unexpectedly from 57.5 to 60.7, better than the median expectation for a small decline to 56.8. Encouragingly, the new orders index rose 2.8 points to match its best level since 2004, employment returned to expansionary territory with a 3.1-point gain, and production rose 4.0 points to its strongest level since 2011. That optimistic messaging was a noticeable theme in the comments section alongside mentions of disruptions to activity caused by the pandemic. Echoing those frustrations, the supplier deliveries index jumped 5.9 points to its highest level since the initial spring disruptions and the prices paid index spiked 12.2 points to its highest level since 2018. The ISM’s Chair summarized, “The manufacturing economy continued its recovery in December, …companies and suppliers continue to operate in reconfigured factories, but absenteeism, short-term shutdowns to sanitize facilities and difficulties in returning and hiring workers are causing strains that are limiting manufacturing growth potential.”
Evans and Mester Say the Same Thing on a Different Day: For a second day in a row, Chicago Fed President Evans and Cleveland Fed President Mester provided public commentary on their economic outlooks. Not surprisingly, the tone was highly consistent. Both believe the economy will experience a bumpy start to the new year amid the virus surge but see better days ahead as vaccines are rolled out. However, neither are concerned about inflation picking up quickly and, therefore, expect monetary policy to remain accommodative for quite some time.