The Market Today
Mixed Bag of Economic Data Heading into Holiday
by Craig Dismuke, Dudley Carter
Employment Income Gains and Government Transfers Remain Elevated: Personal income rose 0.4% MoM in November on another strong gain for employment income and still-elevated government transfer payments via the prepayment of the child tax credit. Employment income rose 0.4% MoM and is now up 8.9% from its pre-pandemic level despite almost 4 million payrolls still missing. Other government transfer payments remained elevated accounting for the prepayment of the child tax credits, and are currently 25% above their June 2021 level. Government transfers accounted for 16.9% of total personal income in February 2020 but now account for 19.0%. Personal spending rose 0.6% MoM. However, price increases accounted for all of the monthly gain in spending; real personal spending was, disappointingly, unchanged in November. With spending outpacing income, the savings rate fell from 7.1% to 6.9%, its lowest level since 2017.
Add Two More Inflation Reports to the Firmest Since the Early 80s: The November PCE inflation report showed headline inflation up 0.6% MoM bringing the YoY rate up to 5.7%, its fastest rate since 1982. Similarly, core PCE rose 0.5% MoM bringing the YoY rate up from 4.2% to 4.7%, matching its highest level since 1983. Goods inflation rose 0.9% MoM bringing the YoY rate up from 7.6% to 8.5% as demand for goods continues to outpace the supply side’s capacity. Services inflation has, thus far, been more benign although it is poised to accelerate in 2022 with the backdrop of rising wages and rents. Services PCE rose 0.5% MoM bringing the YoY rate up from 3.8% to 4.3%.
Jobless Claims Continue Strong Run: Seasonally adjusted initial jobless claims matched expectations at 205k for the week ended December 18, flat from the prior week. The four-week average for new claims inched up from 203.5k to 206.3k, its second lowest level of the pandemic, showing a lack of layoffs as businesses continue to operate within an unusually tight labor market. On a non-seasonally adjusted basis, claims declined 11.9k and remain decoupled from the historic trend of new filings rising into year-end. Twenty-six states reported increases in new claims. Seasonally adjusted continuing claims fell less than expected from 1.867mm to 1.859mm during the week of December 11. Nonetheless, the new level represents a new low for the pandemic era.
Durables Top Expectations Despite Disappointing Business Activity: Total durable goods orders rose 2.5% in November’s preliminary report and 0.8% when the volatile transportation categories are removed from the calculation. Both measures beat expectations and reflected an acceleration from October. Orders of vehicles and parts rose 1.0% while private aircraft orders jumped 34.1%. Looking at the indicators of business investment in equipment, however, both orders and shipments came up short of economists’ forecasted gains. Capital goods orders excluding those transportation gains and defense items declined 0.1%, disappointing expectations for a 0.7% gain, while shipments rose 0.3%, half as much as expected. Business investment in equipment contracted at a 2.3% annualized rate in this week’s final 3Q GDP report. Through two months of data for 4Q, orders are tracking a 7.9% annualized gain while shipments are up 6.5%.
OTHER ECONOMIC NEWS
Strong Existing Home Sales Come Up Short of Expectations: Existing home sales rose 1.9% in November to 6.46 million annualized units, a bit softer than the 2.9% monthly gain and 6.53 million pace economists expected. Nevertheless, November’s sales pace was the strongest since January. Sales were flat in the Northeast but a 2.9% gain in the South led improvements across the remaining three geographic regions. Months’ supply fell from 2.3 to 2.1, the lowest reading since February, and the median price rose from $352.7k to $353.9k, a 13.9% increase compared with the previous November. The annual price gain was the fastest in three months but well below the record 21.9% three-month average pace from June. The NAR’s chief economist said, “Determined buyers were able to land housing before mortgage rates rise further in the coming months. Locking in a constant and firm mortgage payment motivated many consumers who grew weary of escalating rents over the last year.”
Consumer Confidence Jumps More Than Expected Despite Omicron’s Emergence: The Conference Board’s consumer confidence index rose from 111.9 to 115.8 in December, a third consecutive monthly gain and the strongest reading since July. The current assessment softened marginally as the labor market differential, which nets responses saying jobs are plentiful with responses that jobs are hard to get, pulled back from a 21-year high to the lowest level since May. However, the level remains strong and consumers’ expectations for the labor market six months from now improved. The solid outlook for employment joined with expectations for better business conditions to offset slightly less enthusiasm about income growth, lifting the expectations index to a five-month high. Notably, inflation expectations remained high but edged down from a 13-year high. Despite some signs that consumer spending may have slowed in recent weeks, plans to purchase a car (five-month high), a home (matched the highest level since July 2020), or a major appliance (five-month high) all rose. Despite omicron’s emergence, the number of consumers planning a vacation rose to a new high for the pandemic.
Early Studies Show Lower Hospitalization Risk for Omicron Infections: Bloomberg aggregated results from three separate studies comparing hospitalizations tied to the Omicron and Delta variants. From that report: “The Omicron variant of COVID-19 may be less likely to land patients in the hospital than the delta strain, according to a trio of studies of preliminary data. Researchers in Scotland suggest omicron is associated with a two-thirds reduction in the risk of hospitalization when compared with the earlier variant, though omicron was 10 times more likely than delta to infect people who’d already had COVID. An Imperial College London team working with a larger set of data from England found that people with omicron were 15% to 20% less likely to visit the hospital and 40% to 45% less likely to require an overnight stay. The fresh data add to earlier findings Wednesday showing that South Africans contracting COVID-19 are 80% less likely to be hospitalized if they catch the new variant, compared with other strains. Omicron infections are also associated with a 70% lower risk of severe disease than delta, the study by the National Institute for Communicable Diseases showed.”
Virus Developments: Pfizer received emergency approval from the FDA for its at-home COVID-19 pill, Paxlovid, the first of its kind to get the nod from drug regulators. Several European countries announced new restrictions to fight the Omicron wave. Spain’s prime minister ruled out a lockdown but reintroduced a mandatory outdoor mask mandate. Belgium said professional sporting events will now take place without fans in attendance. Austria announced restrictions for restaurants and other public events. In the U.S., the Buffalo Bills will now require anyone entering the stadium to provide proof of vaccination. New York City’s mayor said he hopes New Year’s Eve events will take place as scheduled. California’s governor said the state had ordered 6 million testing kits and noted new infections almost doubled over the last week. He also said students will be tested in lieu of school closures and will mandate health care workers get a booster shot.
Treasury Yields Dipped Wednesday Even as Stocks Stayed Optimistic: Treasury yields finished Wednesday little changed even as stocks rallied for a second day since omicron worries sparked a Monday sell-off. The S&P 500 jumped 1.0% as every sector gained, outpaced by a 1.2% gain for the Nasdaq but in front of the Dow’s 0.8% increase. Consumer discretionary stocks closed in the top spot, boosted by broad gains but led by a sharp increase in shares of Tesla that broke the stock out of a multi-week downtrend. Data released earlier in the day showed an unexpected increase in consumer confidence in December despite Omicron’s emergence (more above). Even as stocks jumped, Treasury yields remained subdued. The 2-year yield slipped 0.6 bps to 0.66% while the 10-year yield declined 1.0 bps to 1.45%.
Before Thursday’s influx of morning data, Treasury yields had finally pushed higher as stocks, both domestic and foreign, extended their post-Monday recovery. Market sentiment has been on the mend since Monday on hopes the preliminary data showing Omicron is less severe than Delta or other variants (more above) stands the test of time. Trailing slightly larger increases across Asia and Europe, U.S. index futures had gained 0.3% on average around 7:00 a.m. CT. Also behind bigger moves in Europe, the 2-year Treasury yield had risen 1.3 bps to 0.67% while the 10-year yield added 1.9 bps to 1.47%. Following the flood of reports at 7:30 a.m. CT, the whole of the Treasury curve remained more than 1 bps higher on the day.