The Market Today
President Not Satisfied with Stimulus Package, No Signature Yet
by Craig Dismuke, Dudley Carter
CORONAVIRUS UPDATE (VS Coronavirus Chartbook – PDF)
Monitoring the Virus Headlines: Brexit negotiations remained hung up on fisheries and trade between the U.K. and EU remained disrupted by anxieties about the virus variant. France said it hoped for freight transport from the U.K. to resume today after halting activity amid the new virus anxieties. Leaders of the U.K. said the disruptions in commerce could cause a food shortage before the EU said transports must start back up and issued guidance on how it could be done. France said it would allow EU citizens to travel back from the U.K. but would require a negative test before re-entering. Germany extended its travel ban to January 6 and the EU warned against any non-essential travel. Ireland reported the greatest daily increase in cases since late October and said it would shut down bars and restaurants from December 24 through January 12.
Purchase Applications Slow As Year Concludes: Mortgage applications for the week ending December 18 rose 0.8% as refi apps increased 3.8% but purchase apps dropped 4.6%. The average 30-year mortgage rate ticked up 1bp to 2.86% during the week. Purchase apps have pulled back over the last few weeks, but remain 22% above their average level from 2019. Refi apps continue to grind higher, now up 140% above their average level from last year.
Jobless Claims Data Improve But Participation in Unemployment Programs Remain Above 20 Million as Stimulus Hits Delay: Helped out by sizable declines in reported totals from California, initial jobless claims fell more than expected during the week ended December 19 and continuing claims dropped unexpectedly one week earlier. New claims had risen in four of the last five weeks before this morning’s report to their highest levels since early September, providing evidence the rapid virus spread and new restrictions across the country were slowing the recovery. Last week, however, claims fell 89k to 803k on a seasonally adjusted basis, encouraging directionally but still above the average levels from October and November. In addition to the improvement in new claims, continuing filings for unemployment dropped 170k to 5.34 million, better than the 5.56 million economists had expected and a new low for the pandemic. Away from the regular state programs, new filings under the PUA emergency program for the self-employed and gig workers also declined and older data showed transitions into emergency extension programs leveled off. As a result, total claims in all programs dropped 283k to 20.36 million in the first week of December. Participation in unemployment insurance programs remains at historically unprecedented levels as Congress’s stimulus package to extend key emergency support programs runs into unexpected delays at the White House (more below).
Business Investment Data Shows Strong Results for 4Q but Slowing Pace in November: Business investment in equipment grew at a slower rate than expected in November, although revisions to October’s data brought the overall level of activity to a higher level than expected. Capital goods orders excluding defense and aircraft, an indicator of future business investment in equipment, rose just 0.4% in November. However, October’s 0.8% increase was revised up to 1.6%. The shipment of those same core capital goods items, an indicator of current business investment in equipment, rose 0.4% in November but October’s tally was revised up from 2.4% to 2.6%. Bottom line: It now appears that business investment has been firmer than expected in the 4th quarter but that the pace of gain slowed in November.
November Personal Income Disappoints on Drop in Government Support: Arguably the most important economic data series to track during this crisis, November’s personal income data were disappointing, specifically because of the expiration of various government stimulus programs. Headline income was expected to drop 0.3% but fell 1.1%. A positive indicator for the labor market, wage income was actually positive, rising $39b (ann.) and within 0.3% of matching the February, pre-virus peak. As with most other indicators, the rate of improvement in wage income has slowed. The weakness in income came from a decline proprietors income. Making up more than 9% of total income, farm and non-farm proprietors’ income fell $163b (ann.), or 8.4%.
According to the BEA report, this was reflective of a decline in Paycheck Protection Program loans to businesses and farm payments from the Coronavirus Food Assistance Program. Also dragging on total income, government transfer payments dropped $127b (ann.) on a $27b drop in unemployment insurance and a $100b drop in “other” transfers. The $300/week UI bump declared by President Trump and run through FEMA emergency funds is categorized as “other” transfers. The program has expired in some areas. Bottom line: Wage income remains below its pre-virus level and the rate of improvement is slowing; meanwhile, the expiration of temporary federal support programs is beginning to drag on overall income.
PCE Inflation Remains Soft: PCE inflation was softer than expected in November, unchanged on a month-over-month basis at both the headline and core levels. This brought the year-over-year rates from 1.2% to 1.1% and unchanged at 1.4%, respectively. As Fed Chair Powell indicated during his post-FOMC presser last Wednesday, the Fed remains concerned about weak inflation pressures broadly. He noted, “There are significant dis-inflationary pressures around the world and there have been for a while and they persist today. It’s not going to be easy to have inflation move up.”
Consumer Confidence and New Home Sales Still to Come: The December U.M. Consumer Confidence report and November’s New Home Sales data will both be released at 9:00 a.m. CT. Both reports are expected to pull back fractionally.
Equities Finished Mixed as Uncertainties Remain Elevated: U.S. equities closed mixed on Tuesday with the Dow and S&P 500 declining while the Nasdaq notched another new record-high close. Despite Congress agreeing on a stimulus package and broader bill to fund the government for the remainder of the fiscal year, anxieties have increased this week following the identification of a new virus strain in the U.K. that led to traffic in and out of the U.K. being banned by many other countries around the globe. The global recovery appears to have slowed as the global outbreak has intensified in recent weeks, a story that is also playing out here at home. U.S. cases, hospitalizations, and fatalities have all set new records in recent weeks, leading many state and local governments to restrict mobility during a key holiday shopping and travel season. Data released Tuesday showed an unexpected and sharp decline for consumer confidence in December, reinforcing worries about weakening activity after a sharp snapback in the third quarter. As the S&P 500 dipped 0.2%, the 10-year Treasury yield fell 1.7 bps to 0.91%.
Markets Remain Relatively Calm as Stimulus Hits Unexpected Delay on President Trump’s Desk: U.S. equity futures and Treasury yields both edged higher prior to Wednesday morning’s flurry of economic releases, despite an unexpected delay at the White House in finalizing the spending and stimulus bills passed by Congress late Monday. President Trump was expected to sign the bill when it landed on his desk, but instead called the bill a “disgrace” late Tuesday on Twitter. Among a list of grievances with Congress’s fiscal allocations, President Trump criticized the $600 stimulus checks included for Americans as too small and said the small business support was insufficient. However, markets have so far brushed off the delay. The President stopped short of saying he would not sign the bills, likely because both received veto-proof support from Congress. Largely ignored due to the belief it was an unnecessary step, a seven-day stopgap spending bill was passed late Monday, pushing any risk of a government shutdown to next Monday. Just ahead of the trifecta of key U.S. economic reports scheduled for 7:30 a.m., futures for all three major equity indices were up by less than 0.2% and the 10-year Treasury yield was flat at 0.92%.
Consumer Confidence Slumps Unexpectedly as Current Assessment Tumbles: The Conference Board’s consumer confidence index widely missed expectations in December, showing the impact that the deteriorating virus situation and new widespread restrictions are having on sentiment and activity. After November’s initial 96.1 was revised down to 92.9, the index fell again unexpectedly to close out 2020. The drop from 92.9 to 88.6 left the index 8.4 points below the 97.0 expected and at its weakest level since August. The outlook improved slightly from 84.3 to 87.5, holding near the low end of the pandemic range, but the current assessment collapsed 15.6 points to a four-month low of 90.3, the second biggest drop (behind April 2020) since 2008. While the recently passed stimulus bill should shield consumer spending from a large decline, the drop in confidence reinforces concerns about a rough patch for the economy through the winter until vaccines can become more widely distributed.
Existing Home Sales Cool to Second-Strongest Level Since 2005: Following two monthly declines in the pending home sales index, which counts new signed contracts on existing home transactions, existing home sales, which are tallied when those contracts close, slipped as expected in November. The 2.5% decline was slightly worse than the 2.2% cooling economists had expected and marked the first monthly drop since May. Nonetheless, the 6.69-million-unit annualized pace was the second fastest since 2005 behind October’s 6.86 million, reflecting housing’s exceptional strength amid the pandemic-driven decline in mortgage rates to record-low levels. Sales cooled in three of the four geographic regions while activity was flat in the West. “Housing affordability, which had greatly benefitted from falling mortgage rates, are now being challenged due to record-high home prices,” the NAR’s chief economist noted. Months supply fell to 2.3 months, a new record for the series, sending the median price up 14.6% from a year ago, a fourth consecutive month with a double-digit increase.
Richmond Fed’s Manufacturing Index Moves Up Unexpectedly: The Richmond Fed’s Manufacturing Index recovered unexpectedly in December after a sharp drop in November. The 4-point increase beat the 4-point decline economists expected and showed that manufacturing activity has fared better than other sectors amid the ongoing slowdown resulting from the current virus surge. However, improvement in current new orders and employment gave the headline a lift while expectations for some of the key underlying metrics were mixed.