The Market Today
President-Elect Biden Proposes $1.9T Stimulus; Noisy December Retail Sales Report
by Craig Dismuke, Dudley Carter
CORONAVIRUS UPDATE (VS Coronavirus Chartbook – PDF)
Monitoring the Virus Headlines: German Chancellor Merkel is said to ask state governments to approve stricter lockdowns with a final decision possibly coming next week. Spain reported a record number of new infections for a third consecutive day. And France announced a nationwide 6 p.m. curfew starting Saturday, with the possibility of a new lockdown if the virus situation doesn’t improve. However, most of the focus was on the imminent release of President-elect Biden’s emergency stimulus proposal. After a report late Wednesday night indicated the bill could reach as high as $1.3 trillion, a reported draft of the bill floated late Thursday afternoon showed it would actually request $1.9 trillion of new spending. Not only will the size of the bill make it difficult to garner enough Republican support necessary to pass the bill, the nature of the requests could draw rebuke from the opposition. Among the major line items, the proposal includes $1,400 direct payments to individuals, $400 weekly federal unemployment supplement through September, $350 billion for state and local aid, $130 billion to assist schools in reopening, $160 billion for vaccinations and testing, a minimum wage increase to $15 per hour, and extension of the eviction moratorium from the end of this month through September. Officials have indicated the plan would be the first part of a two-phase plan, and would not include cost-offsetting measures because of the low-interest-rate environment. In his speech detailing the plan, the President-elect said, “Even our debt situation will be more stable, not less stable, if we seize this moment with vision and purpose.”
Retail Sales Rise to Record-High Levels in December Despite Deteriorating COVID-19 Situation: Retail sales disappointed expectations in December, falling 0.7% at the headline level. November’s tally was revised lower from -1.1% to -1.4%. By category, non-store retailers saw a 5.8% drop, the second largest monthly decline since 2001. Restaurant sales slipped another 4.5% and electronics and appliances sales fell 4.9%. At the core level, retail sales dropped 1.9% in December while November’s total was revised down from -0.5% to -1.1%. At first blush, the narrative of a slowing pace of consumption at year-end seems to be affirmed by the results. However, the real picture has been skewed by the seasonal adjustments. November and December historically bring large increases in the actual level of sales. In 2020, November saw a surprising rate of decline in November, particularly associated with holiday sales around the Thanksgiving weekend (including Black Friday). This year, sales fell sharply in restaurants, autos, gasoline stations, building materials, and health/personal care. Sales then jumped in December in every major category, but not enough to overcome the weakness in November. At both the headline and core levels, retail sales rose in December to their highest levels on record, up 13.5% and 14.2%, respectively. Considering the limitations on mobility (restrictions or self-chosen) given the rapid ascent in COVID-19 cases in December, the results appear to be fairly encouraging – despite the seasonal adjustments.
Election Impact on Economists’ Projections: The first Bloomberg Survey of Economists capturing the Senate election results is scheduled for release at 8:00 a.m. CT today. Look for growth and rate projections to be revised up on the prospect of additional stimulus.
Manufacturing Output: The December Industrial Production and Capacity Utilization report is scheduled for 8:15 a.m. CT and is expected to show manufacturing output, still down 3.6% from its pre-virus level, rise 0.5%.
Consumer Confidence: At 9:00 a.m. CT, the University of Michigan’s first Consumer Confidence report for 2021 is expected to show another pullback in sentiment.
Stocks Struggled but Treasury Yields were Jolted Higher on Reports that Stimulus Proposal Will Near $2 Trillion: The recent trend for higher and steeper Treasury yields returned Thursday despite a surprisingly sharp increase in jobless claims and a move lower for the major equity indices. The S&P 500 finished down 0.4% on the day, the underperformer of the big three indices with the Dow dropping 0.2% and the Nasdaq slipping 0.1%. However, the sector dynamics continued to reflect an optimistic undercurrent with a rotation out of tech names and into sectors such as energy, financials, and industrials, those that tend to outperform in better economic times. The signs of continued hopes for a sustained economic recovery were also evident in the Treasury market, and became more so in afternoon trading. Yields were volatile Thursday, shooting up from 1.07% to 1.11% in Asian trading on speculation President-elect Biden’s aid proposal could total $1.3 trillion, back down below 1.09% after the jobless claims data, and back up again to new highs on a report the stimulus proposal could be even larger. The 10-year finished up 4.6 bps at 1.13%, near its high mark on the day, after multiple media outlets reported that the size of the Biden proposal to be released later in the evening would be around $1.9 trillion.
Equities Slip after Biden Confirms $1.9 Trillion Aid Proposal: Global shares headed lower Friday after President-elect Biden confirmed his plan for $1.9 trillion in immediate emergency aid in a speech Thursday evening and in front of the first look at U.S. bank earnings. Stocks were generally softer in Asia and collectively weaker across Europe. The tension between the positive forces of vaccine deployments and stimulus efforts and negative forces of weak economic data and virus worries have intensified throughout the week. In addition to the stimulus proposal, currently approved vaccines have continued to be administered around the globe and an early study indicated the Johnson & Johnson shot produced positive results. However, U.S. small business confidence decline dropped sharply in December and initial jobless claims posted their largest weekly increase since March. Data released overnight showed the U.K.’s economy, which returned to lockdown amid the rapid spread of a COVID-19 variant strain, contracted 2.6% in November, less than expected but the first decline in overall activity since April.
Treasury Yields Reverse Most of Wednesday’s Rise on Soft Equities, Weak Retail Sales: U.S. equity futures were broadly weaker as shares of JPMorgan Chase, Citigroup, and Wells Fargo all declined despite topping earnings expectations. JPMorgan posted a record profit on strong results from its trading business and a release of $3 billion in loan loss reserves. JPMorgan’s CEO said, “While positive vaccine and stimulus developments contributed to these reserve releases this quarter, our credit reserves of over $30 billion continue to reflect significant near-term economic uncertainty and will allow us to withstand an economic environment far worse than the current base forecasts by most economists.” Before the retail sales report was released, Treasury yields had reversed a sizable portion of Thursday’s rise, with the 10-year yield down 3.0 bps to below 1.10%. Despite the significant disappointment in consumer spending to close the year, the 1.10% level was holding at 7:40 a.m. CT.
Powell Puts Emphasis on Prior Statements that Fed Policy is Currently Well Positioned: Fed Chair Powell made it clear Thursday in a webinar hosted by Princeton that he’s comfortable with the current stance of policy and sees no reason to alter either rates or asset purchases in the near futures. He responded “no time soon” when contemplating a question about when the Fed could raise rates and said “now is not the time” to discuss when the Fed could end their asset purchases. “We know we need to be very careful in communicating about asset purchases, …Now is not the time to be talking about exit. I think that is another lesson of the global financial crisis, is be careful not to exit too early.” He went on to add, “We’ll let the world know, …We’ll communicate very clearly to the public and we’ll do so, by the way, well in advance of active consideration of beginning a gradual taper of asset purchases.” In a wide-ranging interview that discussed topics from debt levels to details behind the Fed’s new inflation framework, Powell said he expects weak global growth is “going to hang around for a while” but noted he is optimistic about the recovery. A couple of key reasons for his brightening outlook were the historically fast work of scientists in creating a vaccine and the quick and powerful response from the Fed and Congress, which he contrasted to less aggressive actions following the Great Recession.