The big question is whether last week's market reversals were the start of sharp corrections. There was some acknowledgement among commentators last week that Trump's pro-growth policies may be altered or delayed in Congress -- a factor I highlighted last week as a potential trigger for market corrections -- and markets tend to be fast to react to such risks. Other potential triggers for a near-term correction are disappointing Q416 corporate earnings and softer-than-expected macroeconomic data. But, a review of the evidence suggests that these fundamental factors should not result in sharp market corrections, although they risk being on the softer-than-consensus side. In this case, we could see further modest unwinding in the markets for a couple of weeks before a pro-Trump move into the January 20th inauguration.
Q416 Corporate Earnings
Consensus appears to be north of 3% (y/y) for Q416 S&P 500 earnings, versus +1.6% in Q316. Most of the expected pickup in earnings growth is likely in the energy sector, given the sharp y/y run-up in oil prices. But, there are some negatives outside of the energy sector, including the stronger dollar, higher energy costs, and somewhat faster labor costs. This suggests the risk of disappointment for some non-energy corporations, but the negatives don't look large. Note that the slowdown in job growth in October-November (see below) could be attempts by companies to hold down labor costs in the face of higher wage rates.
(y/y percent change)
Real GDP Oil Prices Trade-Weighted Dollar Average Hourly Earnings
Q316 1.7 -3.4 2.2 2.6
Q416 1.7-1.9 +16.4 3.9 2.7
December Mfg ISM
Consensus is for an uptick to 53.5 from 53.2 in November -- putting it at the highest level for the year. The evidence from other surveys, however, is mixed. The 3 surveys that have done the best job predicting m/m increases or decreases in H216 are the Markit Mfg PMI, Chicago PM and Richmond Fed Mfg Index. Markit Mfg PMI (the preliminary print -- the final print is released on Tuesday, ahead of the Mfg ISM) and Richmond Fed predict an increase, while Chicago PM predicts a decline.
Other evidence is mixed, as well. Seasonals add a tick more to the m/m change in the December Mfg ISM than the prior year's seasonals. But, an inventory correction in the motor vehicle sector -- seen in a decline in motor vehicle assemblies in November -- could show up negatively in the December Index. And, the stronger dollar could weigh on it, as well.
Even if the Mfg ISM declines in December, its level still should be at a decently high level. So, any market reaction is likely to be muted.
December Employment Report
Consensus is:
December November (actual)
Total Payrolls 175k m/m 178k m/m
Private Payrolls 170k m/m 156k m/m
Unemployment Rate 4.7% 4.6%
Average Hourly Earnings 0.3% m/m -0.1% m/m
The consensus estimate for Payrolls risks being too high. Consensus is building in +5k for Government Workers (difference between Total and Private), but the likelihood is for an unwinding of the approximately 15k election workers hired temporarily in November. There could be an unwinding of other election-related jobs in the private sector, as well. Private Payrolls should be no greater than the 170k consensus, which is in line with the H216 and 12-month trends, and very possibly closer to the +145k October-November average. Note that Retail Jobs fell in October and November, as holiday hiring has been weaker than seasonal (consistent with the shift in holiday buying over the internet from stores). This drag could continue in December. A snapback is likely in January (due in early February), when post-holiday firing is not as great as seasonals expect.
An uptick in the Unemployment Rate is a good bet, given how much it fell in November. There is no consistent message from history that the November Rate falls in presidential election years, so last month's drop likely was to a large extent catch-up for the above-trend GDP Growth in Q316, as well as still decent growth in Q416. The NY Fed GDP model projects 1.8% for Q416, while the Atlanta Fed model projects 2.5%. There is still more to see before these models have their final estimates for the quarter. At this point, I'm leaning toward the NY Fed projection -- which is still near trend GDP growth.
A bounce-back in Average Hourly Earnings also is a good bet. Calendar considerations suggests a 0.3% print, after they suggested a weak print in November. The y/y would return to 2.8% from 2.5% in November, putting it back to its highest level since early 2006.
No comments:
Post a Comment