The markets may continue to trade cautiously this holiday week as they await resolution of 3 key items: /1/ US/China negotiations, /2/ strength of US economic speedup, and /3/ Impeachment Inquiry. However, the tone should be positive for stocks, ahead of Black Friday, as sales estimates are moving up for the holiday season.
US/China Negotiations
These negotiations should always have been seen as difficult to close, as the US demands require China to make fundamental changes to their economic/political system. But, the Chinese appear to be changing slowly, with the latest being new laws regarding intellectual property. An interesting development is the Congressional bill in support of Hong Kong protestors. The question is whether it will push the Chinese to acquiesce to a greater extent than it has been willing to do in exchange for Trump not signing the bill. Chinese officials apparently already invited top US officials to Beijing to discuss the negotiations.
Strength of US Economic Speedup
The evidence so far suggests the weakest part of the slowdown is behind us, but the re-acceleration is modest at best. The Flash Markit Purchasing Managers Indexes improved in November, but their levels are still relatively low. The Unemployment Claims data have moved up in the past 2-3 weeks, suggesting either that the labor market is catching up to earlier economic slowing or that growth remains subdued. Indeed, the Atlanta Fed model still puts Q419 Real GDP Growth at a meager +0.4% (q/q, saar). To be sure, this estimate could be overly influenced by the low October Mfg ISM. If so, it should move up if the Mfg ISM increases in November.
This week's data are mostly minor. The most interesting -- October Durable Goods Orders -- may not be recent enough to accurately portray whether there has been an improvement in demand for manufactured goods. They still may be reflective of the weak part of the slowdown.
Impeachment Inquiry
The Inquiry is on hold for the next couple of weeks while Congress is in recess. Some commentators think the Democrats will gauge the sense of the electorate during this break before deciding how to proceed. While a number of Republican commentators are pushing for censure rather than impeachment, the Democrats may be too far committed to the latter to do so. Whatever they decide, it still looks as if the Senate will not go along with removing Trump from office.
Black Friday and Holiday Season
Stocks should be optimistic about the holiday season. Besides there being easy year-over-year comparisons, analysts have been raising their estimates of holiday sales. The National Retail Federation now thinks sales could exceed the upper end of the 3.8-4.2% y/y range that it had estimated in October.
Sunday, November 24, 2019
Sunday, November 17, 2019
A Wait-And-See Mode in the Markets and a Bi-Partisan Way-Out
The markets are likely to be in a wait-and-see mode over the next few weeks, neither moving up or down decisively. Besides the outcomes of the impeachment inquiry and US/China negotiations, they will be waiting for evidence that US and global economic growth are speeding up. Although last week's US economic data were soft, they did not derail expectations of a speedup in growth following a US/China trade agreement. These expectations should continue to support the stock market rally. Meanwhile, Treasury yields no longer look excessively high after the intermediate-/long-end shed about 10 BPs last week.
Treasury yields may very well stay near these lower levels for awhile. Some considerations suggest the recent weakness is over, but early evidence does not suggest a sharp recovery. Manufacturing Output should rebound in November now that the GM strike is over. Moreover, retail sales could speed up in the holiday season, after a pullback in spending by the strikers and other strike-impacted workers may have weighed down sales in October. But, the Claims data so far do not point to a sharp acceleration in growth (see below). So, the Atlanta Fed model's estimate of Q419 Real GDP is likely to move up in coming weeks, after it was lowered to a meager 0.3% from 1.0% as a result of last week's data. But, it may not get to 2.0% soon.
This week's US economic calendar is light, with perhaps the most important being the Claims data and Markit PMIs on Thursday and Friday, respectively. Last week's Claims release did not support expectations of a speedup in growth. Initial Claims jumped 10k w/w to 225k, their highest level since June. While Continuing Claims fell, they remained in the upper end of the range seen since last April. Consensus looks for Initial to reverse the jump but for Continuing to stay high in this week's report.
Consensus looks for the Markit Flash Mfg PMI to edge up to 51.5 from 51.3 for the Services PMI to rise to 51.2 from 50.6. Both estimates keep the PMIs at relatively soft levels. But, this would be the 2nd m/m increase in a row for the Mfg PMI. It has led the Mfg ISM this year, so another increase would bode well for the Mfg ISM.
The Markit Flash PMIs for European Mfg, due Friday, may be the most important of the week's releases. The Euro Area and German Mfg PMIs have been particularly weak, so even a 1-2 point increase would keep them at a soft level. But, it would be an encouraging sign that global growth is about to pick up. Note that PMIs measure the number of companies seeing better or worse variables such as production, orders, and employment. So, the PMI would increase if more companies see improvement even if the extent of improvement is slight.
A Bi-Partisan Way Out of the Impeachment Inquiry
A conceivable way-out of this partisan-skewed Inquiry is for the House Intelligence Committee to recommend a reprimand, or censure, of President Trump rather than impeachment. Many Republicans have expressed disapproval of Trump's attempt to get the Ukrainians to investigate Biden and his son. So, they may go along with a Congressional reprimand. Although this would fall short of impeachment, Democrats might go along since the result would be bi-partisan. It would probably have minimal impact on the Presidential election next year, since Trump's many inappropriate actions are pretty much acknowledged by both sides. From a market perspective, it would be a positive for stocks.
Treasury yields may very well stay near these lower levels for awhile. Some considerations suggest the recent weakness is over, but early evidence does not suggest a sharp recovery. Manufacturing Output should rebound in November now that the GM strike is over. Moreover, retail sales could speed up in the holiday season, after a pullback in spending by the strikers and other strike-impacted workers may have weighed down sales in October. But, the Claims data so far do not point to a sharp acceleration in growth (see below). So, the Atlanta Fed model's estimate of Q419 Real GDP is likely to move up in coming weeks, after it was lowered to a meager 0.3% from 1.0% as a result of last week's data. But, it may not get to 2.0% soon.
This week's US economic calendar is light, with perhaps the most important being the Claims data and Markit PMIs on Thursday and Friday, respectively. Last week's Claims release did not support expectations of a speedup in growth. Initial Claims jumped 10k w/w to 225k, their highest level since June. While Continuing Claims fell, they remained in the upper end of the range seen since last April. Consensus looks for Initial to reverse the jump but for Continuing to stay high in this week's report.
Consensus looks for the Markit Flash Mfg PMI to edge up to 51.5 from 51.3 for the Services PMI to rise to 51.2 from 50.6. Both estimates keep the PMIs at relatively soft levels. But, this would be the 2nd m/m increase in a row for the Mfg PMI. It has led the Mfg ISM this year, so another increase would bode well for the Mfg ISM.
The Markit Flash PMIs for European Mfg, due Friday, may be the most important of the week's releases. The Euro Area and German Mfg PMIs have been particularly weak, so even a 1-2 point increase would keep them at a soft level. But, it would be an encouraging sign that global growth is about to pick up. Note that PMIs measure the number of companies seeing better or worse variables such as production, orders, and employment. So, the PMI would increase if more companies see improvement even if the extent of improvement is slight.
A Bi-Partisan Way Out of the Impeachment Inquiry
A conceivable way-out of this partisan-skewed Inquiry is for the House Intelligence Committee to recommend a reprimand, or censure, of President Trump rather than impeachment. Many Republicans have expressed disapproval of Trump's attempt to get the Ukrainians to investigate Biden and his son. So, they may go along with a Congressional reprimand. Although this would fall short of impeachment, Democrats might go along since the result would be bi-partisan. It would probably have minimal impact on the Presidential election next year, since Trump's many inappropriate actions are pretty much acknowledged by both sides. From a market perspective, it would be a positive for stocks.
Sunday, November 10, 2019
Have Treasury Yields Risen Too Much?
The most striking market action last week was not the new record highs set by the stock market but the sharp rise in intermediate- to long-term Treasury yields. They rose 12 to 22 BPs, with the 10-year ending the week just shy of 2.00% at 1.94%. An increase in these yields was expected, for the the reasons I gave in last week's blog, but the extent risks being overdone for now. There is still no confirmation of the October Employment Report that economic growth is speeding up, Indeed, the Atlanta Fed model's early estimate of 1.0% Q419 Real GDP Growth is very low. And, inflation still seems to be subdued, despite the ominous sign from Compensation/Hour -- the broadest measure of labor costs -- which were up 4.5% (y/y) in Q319, well above the near-3.0% pace seen in other labor cost measures (e.g., Average Hourly Earnings and Employment Cost Index).
This week's US economic data will probably not change the macro picture by much. The consensus estimate of +0.4% m/m for October Ex Auto Retail Sales probably has to be combined with an upward revision to September's -0.1% to notably boost the Atlanta Fed model's estimate of Q419 Real GDP Growth. The latter assumes consumption will slow to 2.1% from 2.9% in Q319. Some upward revision to the model's 1.0% estimate is likely, since it is too low relative to Total Hours Worked in the October Employment Report. But, it will probably take more than an upward revision in consumption to pull the model estimate up to around 2.0%. A pace below that would argue against the run-up in Treasury yields seen last week.
The consensus estimate of -0.4% m/m for October Industrial Production risks being too high, given the larger drop in Total Hours Worked in Manufacturing that month (see last week's blog). But, IP should rebound in November, now that the GM strike is over. So, a weak print for October should be dismissed.
Meanwhile, even if Q419 Real GDP forecasts are raised from very low early figures, a near-trend 0.2% m/m in the October Core CPI, as consensus expects, would keep the y/y steady at 2.4% and signal no significant inflation pressures. There are some downside risks to the consensus estimate, to boot. For example, apparel prices could fall again, or at least stay soft, as a result of bi-monthly sampling. And, airfares could fall, following the decline in oil prices.
This week's US economic data will probably not change the macro picture by much. The consensus estimate of +0.4% m/m for October Ex Auto Retail Sales probably has to be combined with an upward revision to September's -0.1% to notably boost the Atlanta Fed model's estimate of Q419 Real GDP Growth. The latter assumes consumption will slow to 2.1% from 2.9% in Q319. Some upward revision to the model's 1.0% estimate is likely, since it is too low relative to Total Hours Worked in the October Employment Report. But, it will probably take more than an upward revision in consumption to pull the model estimate up to around 2.0%. A pace below that would argue against the run-up in Treasury yields seen last week.
The consensus estimate of -0.4% m/m for October Industrial Production risks being too high, given the larger drop in Total Hours Worked in Manufacturing that month (see last week's blog). But, IP should rebound in November, now that the GM strike is over. So, a weak print for October should be dismissed.
Meanwhile, even if Q419 Real GDP forecasts are raised from very low early figures, a near-trend 0.2% m/m in the October Core CPI, as consensus expects, would keep the y/y steady at 2.4% and signal no significant inflation pressures. There are some downside risks to the consensus estimate, to boot. For example, apparel prices could fall again, or at least stay soft, as a result of bi-monthly sampling. And, airfares could fall, following the decline in oil prices.
Sunday, November 3, 2019
Economic Data Back in Focus
Many of the hurdles faced by the stock market have fallen by the wayside. Corporate earnings are better than expected, the Fed is on hold, a Brexit resolution has been delayed to January, and the "first phase" US/China agreement appears to be on track. The House Impeachment Inquiry remains, but at this point Trump's removal would seem a long shot. With Pelosi expecting a House vote by Thanksgiving, how it will play out in the Senate will likely be known by then. Until that is fully resolved, the markets will probably be more focused on whether the US and global economies will soon be speeding up.
Evidence on economic growth so far is mixed. Most Purchasing Manager Surveys moved up in October, but they are still at weak levels. Construction Spending was up for Residential and Public activity in September, but business-related construction fell further. The most positive data were the surge in October Payrolls (adding back GM strikers) and the concomitant increase in Total Hours Worked. THW in October were 1.2% (annualized) above the Q319 average. This is a strong start, considering they rose 1.0% in Q319. They raise doubt on the Atlanta Fed model's early estimate of 1.1% (q/q, saar) Q419 Real GDP Growth. The risk is that the model's estimate will move up as more data come in.
The most important economic development would be signs manufacturing weakness is ending. This will not be seen in the October Industrial Production Report, due November 15. Manufacturing Output should drop, as THW in Manufacturing fell 0.7% m/m last month. However, this should be followed by a bounce in November, if only because of a rebound in motor vehicle production now that the GM strike is over. Any positive impact from a US/China trade resolution would presumably be seen in data over the next few months, as well.
The markets should move to help sustain economic growth. The dollar should fall further as the US/China dispute gets resolved. Elimination of the threat of more tariffs should lift the expected trade deficit, putting downward pressure on the dollar. In addition, stocks should continue to rally in anticipation of better economic growth now that the dispute has wound down. While the longer-term Treasury yields should rise, they may not rise much given Friday's October Employment Report showing a higher Labor Force Participation Rate. The latter means faster growth need not be inflationary
Until signs of manufacturing improvement appear, the Fed remains a backup. Although the October FOMC Statement dropped the phrase "will act as appropriate to sustain the expansion, " Powell's comment that the the Fed will act ahead if it sees evidence requiring a "material re-assessment of its outlook" essentially means the same thing. The Fed should be viewed as being in the background to keep the economy growing if needed.
Evidence on economic growth so far is mixed. Most Purchasing Manager Surveys moved up in October, but they are still at weak levels. Construction Spending was up for Residential and Public activity in September, but business-related construction fell further. The most positive data were the surge in October Payrolls (adding back GM strikers) and the concomitant increase in Total Hours Worked. THW in October were 1.2% (annualized) above the Q319 average. This is a strong start, considering they rose 1.0% in Q319. They raise doubt on the Atlanta Fed model's early estimate of 1.1% (q/q, saar) Q419 Real GDP Growth. The risk is that the model's estimate will move up as more data come in.
The most important economic development would be signs manufacturing weakness is ending. This will not be seen in the October Industrial Production Report, due November 15. Manufacturing Output should drop, as THW in Manufacturing fell 0.7% m/m last month. However, this should be followed by a bounce in November, if only because of a rebound in motor vehicle production now that the GM strike is over. Any positive impact from a US/China trade resolution would presumably be seen in data over the next few months, as well.
The markets should move to help sustain economic growth. The dollar should fall further as the US/China dispute gets resolved. Elimination of the threat of more tariffs should lift the expected trade deficit, putting downward pressure on the dollar. In addition, stocks should continue to rally in anticipation of better economic growth now that the dispute has wound down. While the longer-term Treasury yields should rise, they may not rise much given Friday's October Employment Report showing a higher Labor Force Participation Rate. The latter means faster growth need not be inflationary
Until signs of manufacturing improvement appear, the Fed remains a backup. Although the October FOMC Statement dropped the phrase "will act as appropriate to sustain the expansion, " Powell's comment that the the Fed will act ahead if it sees evidence requiring a "material re-assessment of its outlook" essentially means the same thing. The Fed should be viewed as being in the background to keep the economy growing if needed.
Friday, November 1, 2019
October Employment Report is Strong
The October Employment Report is strong. The underlying Payrolls are stronger than the +128k print, and the uptick in the Unemployment Rate shows greater participation in the labor force not softer demand.
While Nonfarm Payrolls printed +128k m/m, they were held down by two one-off factors: 46k GM strikers and 17k fewer census workers. Excluding these two factors, Payrolls would have risen 191k. Moreover, there were layoffs outside of GM that resulted because of the strike. They, too, should be temporary. The composition of the Payroll gain shows notable increases in Construction (both residential and nonresidential) and Retail (possibly setting up for the holiday season).
The uptick in the Unemployment Rate to 3.6% from 3.5% resulted from an increase in the Labor Force Participation Rate. This caused Labor Force to climb by more than the very decent +241k increase in Civilian Employment. A rising Participation Rate -- which runs counter to the demographically-driven downtrend in the Rate (as more older people retire) -- boosts the potential growth rate of the economy.
The Nonfarm Workweek was steady at 34.4 Hours. This, too, is a strong showing, sine it could have been negatively impacted by the GM strike. The workweek in manufacturing, indeed, fell m/m.
The 0.2% m/m increase in Average Hourly Earnings also is stronger than it appears. Calendar considerations and the compositional impact of the GM strike could have held it down by more. Along with the upward revision to September to +0.4% from +0.3%, the y/y was steady at 3.0% -- still in line with trend.
While Nonfarm Payrolls printed +128k m/m, they were held down by two one-off factors: 46k GM strikers and 17k fewer census workers. Excluding these two factors, Payrolls would have risen 191k. Moreover, there were layoffs outside of GM that resulted because of the strike. They, too, should be temporary. The composition of the Payroll gain shows notable increases in Construction (both residential and nonresidential) and Retail (possibly setting up for the holiday season).
The uptick in the Unemployment Rate to 3.6% from 3.5% resulted from an increase in the Labor Force Participation Rate. This caused Labor Force to climb by more than the very decent +241k increase in Civilian Employment. A rising Participation Rate -- which runs counter to the demographically-driven downtrend in the Rate (as more older people retire) -- boosts the potential growth rate of the economy.
The Nonfarm Workweek was steady at 34.4 Hours. This, too, is a strong showing, sine it could have been negatively impacted by the GM strike. The workweek in manufacturing, indeed, fell m/m.
The 0.2% m/m increase in Average Hourly Earnings also is stronger than it appears. Calendar considerations and the compositional impact of the GM strike could have held it down by more. Along with the upward revision to September to +0.4% from +0.3%, the y/y was steady at 3.0% -- still in line with trend.
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