The Market Today

Stimulus Remains Stuck as Small Business Confidence Drops More than Expected in November

by Craig Dismuke, Dudley Carter

CORONAVIRUS UPDATE (VS Coronavirus Chartbook – PDF)

Monitoring the Virus Headlines: There was no stimulus breakthrough on Monday, although both sides continued to show a desire to find some agreement on more aid. Any stimulus has been said to possibly be linked to an omnibus bill to extend Congressional spending authority past Friday’s deadline, although a short stopgap spending bill that would give lawmakers a few extra days to finalize an agreement appears to be in the works. An aide for a Republican lawmaker said senators remain at a stalemate over liability protections, a measure a top GOP senator said Majority Leader McConnell had told Democrats was a must-have if a bill is to include money for state governments. With much focus on the continuing rise in cases, hospitalizations, and deaths, Dr. Fauci said Monday that the middle of January could “really get bad.” Dr. Birx, another top adviser to the White House, spoke with a similar concern over the weekend. In Europe, much of the attention has turned to the Brexit saga but there continued to be virus-related headlines. The Czech government said bars and restaurants must close at 8 p.m. and German Chancellor Merkel said she will seek agreement from state leaders to close all retail stores from December 27 to January 3. Elsewhere, Hungary said it will extend its general lockdown through January 11.



Small Business Confidence Drops on Economic Outlook: Small business confidence dipped more than expected in the NFIB’s November report, falling from 104.0 to 101.4.  While confidence did soften, it remains markedly stronger than it was as the pandemic initially unfolded. The index tracking the number of respondents expecting to increase inventories fell 7 points while those expecting a positive earnings trend fell 4 points.  One area that did drop back to a level almost consistent with the initial outbreak, the number of respondents expecting the economy to improve.  The index dropped 19 points to its third weakest monthly reading since 2016.  According to NFIB’s Chief Economist, Bill Dunkelberg, “Small business owners are still facing major uncertainties, including the COVID-19 crisis and the upcoming Georgia runoff election … The recovery will remain uneven as long as we see state and local mandates that target business conditions and disproportionately affect small businesses.”

Productivity Rebounds as Labor Costs Returning to Normal: Nonfarm productivity rose 4.6% in 3Q, slightly below the 4.9% initial estimate.  Output was up 43.4% after a 36.8% decline in 2Q, but remains down 3.4% on a year-over-year basis.  However, hourly compensation declined 2.3%, giving back some of the 24.3% jump in 2Q.  In total, unit labor costs fell 6.6% after a 12.3% increase in 2Q. On a year-over-year basis, unit labor costs remained elevated, up 4.0%.  Measures of productivity and labor costs will likely remain volatile until more of the labor market recovery has occurred and there are fewer restrictions on mobility.


Nasdaq Notched a Record as Non-Tech Stocks Struggled and Treasury Yields Declined: The Nasdaq closed up 0.5% and at a record-high Monday as a lack of additional progress on stimulus combined with a continued spike in virus cases to cause a rotation back into sectors that led the major indices higher during periods of stress throughout the pandemic. All three major indices ended last week at records, but the Dow (-0.5%) and S&P 500 (-0.2%) stumbled Monday as cyclicals lagged behind tech’s gains. Markets are likely to remain volatile this week amid a flurry of developments that could impact investor sentiment. Cases are at a record level and hospitalizations and deaths are climbing, however, the Pfizer-BioNTech vaccine could be approved by the FDA as early as this week. Stimulus talks have been linked with broader spending negotiations which must be settled by Friday absent a temporary stopgap bill to extend current spending authority, a move that appears to be likely. Compounding the uncertainty, the U.S. recently blacklisted several Chinese officials for recent Hong Kong actions and Brexit angst was rising as the clock wound down, with worrisome updates from both sides about the status of discussions. As equities turned lower, Treasury yields pulled back from their highest levels since March. The 2-year yield fell 1 bp to 0.14% while the 10-year yield dropped 4.3 bps to 0.92%.


Uncertainties Keep Markets at Bay: Riskier global assets remained weak in Tuesday’s overnight session as investors wait for movement on the key medical, economic, and political topics that have taken center stage this week. With cases surging and the economic recovery slowing, equities have been kept afloat near record levels in part by renewed efforts to pass more fiscal aid that could bridge the economy through an uncertain winter and nearer to the widespread roll out of vaccines. Congressional leaders have indicated a stopgap spending bill will likely be used to give negotiators on stimulus and an omnibus a few additional days past Friday’s deadline to work out the details. The U.K. remains prevalent in the headlines as the country begins vaccinations for the virus but struggles to clear the final stumbling blocks to a trade agreement with the EU. Prime Minister Johnson will travel to meet in person with the president of the European Commission, but said, “I’ve got to tell you, it’s looking very, very difficult at the moment.” The pound continued to weaken Tuesday while U.K. yields leveled off after a steep drop Monday. Treasury yields were essentially flat across the curve at 7:20 a.m. CT despite equities’ decline and the larger-than-expected drop in small business confidence. U.S. futures were down between 0.4% and 0.5%, reflecting similar declines across Asia and Europe. Europe’s Stoxx 600 dipped 0.4% amid the global uncertainties and despite a stronger-than-expected recovery, from 32.8 to 54.4, for economic expectations in December, a three-month high.


Consumer Credit Grows Less than Expected as Credit Card Balances Contract: Consistent with the general slowdown in spending indicators amid the latest case surge, non-real estate consumer credit outstanding rose by less than expected in October on net declines in the revolving categories. Growth in the nonrevolving groups, which are largely made up of student and auto loans, rose at a relatively consistent 4.8% annualized pace to start the fourth quarter. Revolving categories, however, which primarily consist of credit card borrowings, declined 6.7%, representing a net paydown of those balances and implying consumers remained reticent to rack up new debt. Since the October weakness, the spike in cases, deaths, and hospitalizations has been linked to weaker retail says and mobility trackers in November, a sign that consumer spending may have remained soft heading into the end of the year.

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