The Market Today
Retail Sales Show Virus Slowing Consumer in November
by Craig Dismuke, Dudley Carter
CORONAVIRUS UPDATE (VS Coronavirus Chartbook – PDF)
Monitoring the Virus Headlines: After an FDA report said Moderna’s vaccine appeared to be safe and effective, Canada announced it was expanding its vaccination efforts from 14 sites to 70 and Senate Minority Leader Schumer said he’d prefer a larger funding amount for vaccine distribution than what is currently in the bipartisan bill being negotiated in Congress. While no agreement was reached during U.S. trading hours, several party leaders said talks would continue later Tuesday evening. Prior to the evening negotiations, Senate Majority Leader McConnell said, “We’re still talking to each other, and I think there’s an agreement that we’re not going to leave here without the omni and a COVID package.” Late Tuesday evening after the second round of talks wrapped up, McConnell said “We’re making significant progress and I’m optimistic that we’re going to be able to complete an understanding sometime soon.” Senate Minority Leader Schumer made similar remarks to reporters and Speaker Pelosi said talks would continue this morning.
November’s Retail Sales Show Consumer Slowdown in November: November’s retail sales data give further evidence of a slowing in activity amid a resurgence of the virus, the associated restrictions, and some consumers likely choosing to self-quarantine. Headline sales fell 1.1% while October’s tally was revised down from +0.3% to -0.2%. Dragging sales lower was a 2.4% drop in gasoline sales on what appears to be lower usage rates. Oil prices actually rose, on average, from October to November from $31.6 per barrel to $41.4 per barrel. According to AAA, the average price for a gallon of regular grade gasoline fell from $2.17 per gallon to $2.12 per gallon from October to November. Building material sales rose 1.13% in November, remaining one of the few, consistently strong areas of activity. Auto sales fell a discouraging 1.66%. This left core sales to fall 0.5% MoM, versus expectations of a 0.2% increase. Leading the declines in core sales were a 6.8% drop in clothing/accessories and a 3.5% drop in electronics/appliances. Both evidence the impact of the virus on Black Friday sales. Additionally, restaurant sales fell 4.0%.
FOMC Policy Decision: The Fed will conclude their two-day FOMC meeting today with an Official Statement and a Summary of Economic Projections at 1:00 p.m. CT, and Chairman Powell will hold a press conference at 1:30 p.m. We expect the Committee to provide new forward guidance based on vague qualitative guideposts. The great uncertainty heading into the meeting is if they will move forward with any changes to their actual asset purchases. The virus and the associated restrictions are damaging the economic recovery again, although the data show the impact has been less severe than in the spring when 41 states implements broad shutdowns. Exacerbating the concerns, Congress has yet to pass additional stimulus plan. While the argument is compelling for the Fed to tweak its QE in an accommodative fashion, there is no consensus among economists that they will do so today. Regardless of the timing, the current path does point to additional accommodation at some point.
Stocks and Treasury Yields Rose on Hopes for Additional Fed and Fiscal Support: Treasury yields rose and U.S. equities recovered nicely Tuesday as investors hoped Congress and the Fed would soon reinforce past stimulus efforts with pledges to provide additional support. Top leaders from Congress and Treasury Secretary Mnuchin held a call to discuss the ongoing search for an aid bill of a size and scope that both parties can agree on. At the same time, markets expect the Fed to clarify its plans for asset purchases, with some forecasting actual changes could be made to those purchases at the conclusion of today’s meeting to increase policy accommodation. Combined with a vaccine, the prospects for further policy support have helped offset the significant concerns related to the recent surge of cases, hospitalizations, and fatalities that have led to new mobility restrictions, both of which appear to have driven a slowdown in the pace of economic recovery. The S&P 500 advanced 1.3% with all 11 sectors closing in the black and the broader index just shy of a record. However, the tech-heavy Nasdaq and Russell 2000, a broader gauge of main street stocks, both set new all-time highs. The 10-year Treasury yield finished up 1.5 bps to 0.91%, down slightly from its daily high above 0.92%.
Risk Assets Get a Boost from Stimulus Talks, Brexit Path, and Surprisingly Solid European PMIs: There were signs of additional progress towards a compromise stimulus package late Tuesday evening, giving market sentiment a boost ahead of some key U.S. economic data and a highly-anticipated Fed decision later in the day. Senate Majority Leader McConnell and Senate Minority Leader Schumer both cited progress in talks among top congressional leaders and signaled some optimism that a deal could be reached “soon.” House Speaker Pelosi said “We’ll be back early, and we’ll be on schedule to get the job done.” The more synchronous sounds from the party leaders set the stage for U.S. equity futures and Treasury yields to rise alongside a positive start in Europe. With the clock winding down on year-end expiration of the Brexit transition period and after recent talks showed signs of potentially breaking down, the European Commission president said “I cannot tell you whether there will be a deal or not. But I can tell you that there is a [narrow] path to an agreement now.” She noted that “two issues still remain outstanding,” and said “The next days are going to be decisive.”
Treasury Yields Inched Up Before U.S. Data and Afternoon Fed Decision: The pound and euro both strengthened against the U.S. dollar and Europe’s Stoxx 600 was up nearly 0.9% around 6:45 a.m. CT. Giving further support to the solid daily trend for risk assets, preliminary December PMI data for Europe’s top two economies were notably stronger than expected, particularly considering that both remained under partial lockdowns during the initial survey period. France’s manufacturing PMI rose from 49.6 to 51.1 (expected 50.1) and the services index jumped from 38.8 to 49.2 (40.0). Germany’s manufacturing PMI improved from 57.8 to 58.6 (56.5) and its services PMI posted a surprise gain from 46.0 to 47.7 (44.0). Combined, the results pushed the Eurozone’s preliminary December reading for manufacturing up from 53.8 to 55.5 (53.0) and for services up from 41.7 to 47.3 (42.0). While U.S. PMIs later this morning are expected to show activity slowing in the first half of the month, the 10-year yield was up 3.5 bps at a session-high 0.94% just before the retail sales results were released and S&P 500 futures were holding a 0.3% gain. After the notably disappointing spending report, the 10-year yield remained 3.1 bps higher on the day.
Manufacturing Output Continues Its Recovery in November: Industrial production edged out expectations with a 0.4% gain while October’s 1.1% increase was revised down to 0.9%. In the details, however, utilities usage was exceptionally weak, dropping 4.3% from October as temperatures were above average across most of the country, while mining output increased 2.3% and the manufacturing recovery continued. The manufacturing component index rose 0.8% in November, doubling the expected 0.4% gain, and October’s 1.0% initial estimate was nudged up to 1.1%. Manufacturing has recovered strongly, up 21% from the April lows, but still remains 3.6% below pre-pandemic levels.