Fears of the coronavirus disrupting international trade as well as the Chinese domestic economy activity has bumped economic news and possibly earnings reports from being primary movers of the stock market in the near term. So, while upcoming US economic data are likely to confirm slightly above-trend GDP growth, indications that the spread of the virus is under control may be what is needed to lift stocks at this point.
A prior virus scare was the Ebola outbreak that showed up in the US in September 2014. The market's impact lasted about a month during which the S&P 500 Index fell about 3.0%. A similar market response now would bring the Index down to about 3200 from about 3300 last week. The current situation could be worse, however, given China's importance in world trade. A virus-related disruption of trade would have a larger negative impact on the world economy than this earlier virus.
The market may hope for some word of hope by the Fed at this week's FOMC Meeting. While Powell may mention the virus as a downside risk to the outlook, evidence of its impact on US economic activity will likely be needed to persuade officials to ease policy. This dependency, in fact, would be no different from its current policy approach of being guided by the upcoming data and their implications for the outlook. So, any solace for the market from Powell comments should be short-lived.
The market may get some solace from decent US economic data this week, but not all the risks are supportive. /1/ Consensus looks for a modest 0.2% m/m increase in December Ex Transportation Durable Goods Orders -- a positive for the markets given all the negative sentiment about manufacturing. But, an anticipatory decline in Boeing-related orders is a downside risk. /2/ The consensus estimate of a slightly above-trend 2.1% for Q419 Real GDP Growth would seem to be more reasonable than the Atlanta Fed models' trend-like 1.8% estimate, given the decline in the Unemployment Rate in the quarter. Note that both estimates could change from evidence in the Durable Goods report. /3/ The consensus estimate of 0.1% m/m for the December Core PCE Deflator, with the y/y steady at 1.6%, risks being too low. Because of the jump in airfares in the PPI, the risk is for a 0.2% m/m increase. The y/y could rise to 1.7%. This result would be a market negative since it argues against Fed easing.
While the initial impact of the coronavirus scare seems to be dis-inflationary, as oil prices have fallen sharply, the opposite may be true ahead if trade disruptions lead to shortages.
Sunday, January 26, 2020
Sunday, January 19, 2020
Good Economic Growth to Support Stock Market Rally
The stock market could be subject to some caution ahead of the key earnings releases this week and next. But, the impeachment trial should remain as background noise for the markets. And, unless there are major earnings disappointments, the stock market rally should continue into February, as evidence mounts of decent economic growth in Q120 -- with one caveat.
Last week's data shows the economy moving on all cylinders in December. Ex Auto/Ex Gasoline Retail Sales rose a solid 0.5% m/m, putting them about 1.0% (annualized) above the Q419 average. While these sales can be volatile, so there is no guarantee they'll continue to rise in January or February, the December jump is a good take-off point. Similarly, the surge in Housing Starts is probably one-off (weather related?), but should translate into continued growth in Residential Construction in Q120. And, the 0.5% m/m increase in Non-Auto Manufacturing Output raises the possibility that this sector's growth will speed up now that the US/China trade agreement is in place. The one caveat is that the stoppage of Boeing 737 Max production should subtract significantly from Q120 GDP and Industrial Production growth. But, this will be one-off.
The Claims data, the broadest high-frequency measure of the economy, are encouraging. Initial Claims fell to the low end of their range in the latest week. Continuing Claims also fell, but they remain at a high level. They need to fall further to confirm a speedup in growth. However, as they now stand, the data raise the risk of a speedup in January Payrolls.
Forward-looking evidence regarding the economy is strengthening, helped in part by the stock market rally. The ECRI Leading Index rose to a new high over the first two weeks of January (see chart below). And, the Phil Fed's daily ADS Index shows a sharp improvement since Christmas week. Regarding economic data, it will be important for the outlook and the markets if the forward-looking indicator of capital spending -- nondefense capital goods orders excluding civilian aircraft -- continues, if not accelerates, the upward movement seen in October and November.
ECRI Leading Index (level)
Dec 2018 Jan 2020
Two Reminders:
1. I post comments on many US economic data releases on Linked In and Twitter.
2. My book "Finding Judaism in the Torah" is available on www.amazon.com. It offers new insight into old ideas, regardless of religion.
Last week's data shows the economy moving on all cylinders in December. Ex Auto/Ex Gasoline Retail Sales rose a solid 0.5% m/m, putting them about 1.0% (annualized) above the Q419 average. While these sales can be volatile, so there is no guarantee they'll continue to rise in January or February, the December jump is a good take-off point. Similarly, the surge in Housing Starts is probably one-off (weather related?), but should translate into continued growth in Residential Construction in Q120. And, the 0.5% m/m increase in Non-Auto Manufacturing Output raises the possibility that this sector's growth will speed up now that the US/China trade agreement is in place. The one caveat is that the stoppage of Boeing 737 Max production should subtract significantly from Q120 GDP and Industrial Production growth. But, this will be one-off.
The Claims data, the broadest high-frequency measure of the economy, are encouraging. Initial Claims fell to the low end of their range in the latest week. Continuing Claims also fell, but they remain at a high level. They need to fall further to confirm a speedup in growth. However, as they now stand, the data raise the risk of a speedup in January Payrolls.
Forward-looking evidence regarding the economy is strengthening, helped in part by the stock market rally. The ECRI Leading Index rose to a new high over the first two weeks of January (see chart below). And, the Phil Fed's daily ADS Index shows a sharp improvement since Christmas week. Regarding economic data, it will be important for the outlook and the markets if the forward-looking indicator of capital spending -- nondefense capital goods orders excluding civilian aircraft -- continues, if not accelerates, the upward movement seen in October and November.
ECRI Leading Index (level)
Dec 2018 Jan 2020
Two Reminders:
1. I post comments on many US economic data releases on Linked In and Twitter.
2. My book "Finding Judaism in the Torah" is available on www.amazon.com. It offers new insight into old ideas, regardless of religion.
Sunday, January 12, 2020
This Week's Events
The stock market has to contend with a number of events this week -- /1/ signing of US/China Phase 1 agreement, /2/ Senate impeachment trial, /3/ start of corporate earnings releases, /4/ risk of an Iranian reaction to Trump's imposition of new sanctions, and /5/ some key US economic data. None is likely to be a major hurdle for the market.
The question with regard to the Phase 1 agreement is whether this will be a "buy the rumor, sell the fact" situation. The market already responded positively to the announcement, so will there be profit taking when the agreement is signed? Some analysts think the market reaction will depend on the details of the pact. It is doubtful, however, that the effects of the pact can be fully foreseen. So, while there will be lots of opinion voiced, there is likely more uncertainty than might be heard. Perhaps the most important implication of the pact is that a trade war has been averted and that there is precedence for more agreements in the future. Any profit-taking in the market, therefore, will probably be short-lived.
The Senate impeachment trial should be a non-event, as long as acquittal is assured. The issue of witnesses may have more negative potential for Democrats than for Republicans. If Schiff, Biden and son are called, their testimonies may help Republicans more than Democrats, politically. What they purportedly did smacks of dishonesty to say the least. If Bolton is called, his testimony presumably will only corroborate what everyone knows -- that Trump was involved in holding back military aid to Ukraine. The issue would remain whether this action warrants impeachment. On balance, the result of the witnesses would likely be more favorable for Republicans than Democrats. This should be a positive for the stock market. But, since it risks hurting the moderate Biden and helping the left-wing Democratic candidates, the market impact is not clear.
Corporate earnings should be stronger in Q419 than in Q319, as I discussed in my December 29 blog. But, consensus looks for about a 1.5% y/y decline, so individual company results should be mixed. Nevertheless, with corporate earnings expected to speed up in 2020, the market impact of negative Q419 earnings should be transitory.
No one knows if or what Iran will do in response to Trump's imposition of further sanctions. This uncertainty should weigh on the stock market, particularly if Iran issues dire threats. But, as a businessman involved in the Middle East once told me, Arabic/Iranian rhetoric is typically more extreme than their actions. Last week's missile attack seems to support this view. The distinction between threats and action should be kept in mind in evaluating how this situation develops.
Consensus looks for a moderate 0.2% m/m December Core CPI and a strong 0.5% m/m increase in Ex Auto Retail Sales. December Industrial Production should be flattish, similar to the -0.1% m/m consensus. (Some of the December weakness in the manufacturing sector could be in anticipation of the stoppage of the Boeing 737 Max production in January.) Prints near these estimates should have little impact on the stock market, as together they would point to the continuation of moderate economic growth. The Atlanta Fed model's projection of 2.3% for Q419 Real GDP should be little changed after these releases.
The question with regard to the Phase 1 agreement is whether this will be a "buy the rumor, sell the fact" situation. The market already responded positively to the announcement, so will there be profit taking when the agreement is signed? Some analysts think the market reaction will depend on the details of the pact. It is doubtful, however, that the effects of the pact can be fully foreseen. So, while there will be lots of opinion voiced, there is likely more uncertainty than might be heard. Perhaps the most important implication of the pact is that a trade war has been averted and that there is precedence for more agreements in the future. Any profit-taking in the market, therefore, will probably be short-lived.
The Senate impeachment trial should be a non-event, as long as acquittal is assured. The issue of witnesses may have more negative potential for Democrats than for Republicans. If Schiff, Biden and son are called, their testimonies may help Republicans more than Democrats, politically. What they purportedly did smacks of dishonesty to say the least. If Bolton is called, his testimony presumably will only corroborate what everyone knows -- that Trump was involved in holding back military aid to Ukraine. The issue would remain whether this action warrants impeachment. On balance, the result of the witnesses would likely be more favorable for Republicans than Democrats. This should be a positive for the stock market. But, since it risks hurting the moderate Biden and helping the left-wing Democratic candidates, the market impact is not clear.
Corporate earnings should be stronger in Q419 than in Q319, as I discussed in my December 29 blog. But, consensus looks for about a 1.5% y/y decline, so individual company results should be mixed. Nevertheless, with corporate earnings expected to speed up in 2020, the market impact of negative Q419 earnings should be transitory.
No one knows if or what Iran will do in response to Trump's imposition of further sanctions. This uncertainty should weigh on the stock market, particularly if Iran issues dire threats. But, as a businessman involved in the Middle East once told me, Arabic/Iranian rhetoric is typically more extreme than their actions. Last week's missile attack seems to support this view. The distinction between threats and action should be kept in mind in evaluating how this situation develops.
Consensus looks for a moderate 0.2% m/m December Core CPI and a strong 0.5% m/m increase in Ex Auto Retail Sales. December Industrial Production should be flattish, similar to the -0.1% m/m consensus. (Some of the December weakness in the manufacturing sector could be in anticipation of the stoppage of the Boeing 737 Max production in January.) Prints near these estimates should have little impact on the stock market, as together they would point to the continuation of moderate economic growth. The Atlanta Fed model's projection of 2.3% for Q419 Real GDP should be little changed after these releases.
Friday, January 10, 2020
December Job Growth Below Consensus, But...
The December Employment Report shows job growth slowing toward trend in the last month of the year. But the underlying labor market remains strong. Some of the slowing could reflect volatility after the November jump. And, there may be some special factor behind weakness in manufacturing jobs. There is evidence that some sectors, like construction, are strengthening. The jobs slowdown is not enough to derail the stock market rally, but it should keep Treasury yields from rising.
While the +145k Payroll gain is smaller than consensus, it still above the near-110k pace consistent with a steady Unemployment Rate. While the headline Unemployment Rate was steady at 3.5%, it actually slipped to 3.50% from 3.54% in November.
The Payroll composition shows mostly smaller gains than in November, which is not surprising given the latter's out-sized 256k Payroll jump (even taking account of the 44k returning GM strikers). Most interestingly, Construction Jobs jumped 20k m/m in December, but not because of construction of new residential homes. The gain was mostly in nonresidential, which suggests this component of the sector may have ended its recent downtrend -- important in the big picture question whether business investment will speed up. In contrast, the 12k drop in Manufacturing Jobs suggests business investment is still weak. The jobs drop was accounted for by declines in Primary Metals, Fabricated Metals and Machinery. Some of these declines, however, may have been in anticipation of the stoppage of the Boeing 737 Max production beginning in January.
The Boeing shutdown should weigh noticeably on Q120 Real GDP Growth. But, Total Hours Worked still look decent going into the quarter. THW in December are 0.5% (annualized) above the Q419 average. With modest gains in the next 3 months, THW in Q120 could easily match the 1.1% (q/q, saar) increase in Q419.
Meanwhile, wage inflation so far remains in check. While calendar considerations could be behind the below-consensus 0.1% m/m increase in December Average Hourly Earnings, it is still a noteworthy sign the tighter labor market is not putting heavy pressure on labor costs. The y/y fell to 2.9% from 3.1% in November. It is well below the 3.3% in 2018. The latter reflected in part a wave of minimum wage hikes. With another wave happening in 2020, wage inflation could pick up in coming months.
While the +145k Payroll gain is smaller than consensus, it still above the near-110k pace consistent with a steady Unemployment Rate. While the headline Unemployment Rate was steady at 3.5%, it actually slipped to 3.50% from 3.54% in November.
The Payroll composition shows mostly smaller gains than in November, which is not surprising given the latter's out-sized 256k Payroll jump (even taking account of the 44k returning GM strikers). Most interestingly, Construction Jobs jumped 20k m/m in December, but not because of construction of new residential homes. The gain was mostly in nonresidential, which suggests this component of the sector may have ended its recent downtrend -- important in the big picture question whether business investment will speed up. In contrast, the 12k drop in Manufacturing Jobs suggests business investment is still weak. The jobs drop was accounted for by declines in Primary Metals, Fabricated Metals and Machinery. Some of these declines, however, may have been in anticipation of the stoppage of the Boeing 737 Max production beginning in January.
The Boeing shutdown should weigh noticeably on Q120 Real GDP Growth. But, Total Hours Worked still look decent going into the quarter. THW in December are 0.5% (annualized) above the Q419 average. With modest gains in the next 3 months, THW in Q120 could easily match the 1.1% (q/q, saar) increase in Q419.
Meanwhile, wage inflation so far remains in check. While calendar considerations could be behind the below-consensus 0.1% m/m increase in December Average Hourly Earnings, it is still a noteworthy sign the tighter labor market is not putting heavy pressure on labor costs. The y/y fell to 2.9% from 3.1% in November. It is well below the 3.3% in 2018. The latter reflected in part a wave of minimum wage hikes. With another wave happening in 2020, wage inflation could pick up in coming months.
Sunday, January 5, 2020
Stock Market Correction In Play?
The stock market faltered last week as a result of an external event -- killing of Iranian General Soleimani -- and soft US economic data -- Mfg ISM. These factors -- fallout from the killing and more soft data -- will likely persist in the coming week, leading to a deepening of the stock market correction that may have begun last week. So-called news analysis and possibly more rhetoric from Iran should dominate headlines. A soft December Employment Report on Friday is the risk, as well.
While news analysts will probably continue to fret over the potential negative fall-out from the killing, the truth is more likely that no one knows what will happen. Nevertheless, risk of a disruption in the Middle East oil supply should keep oil prices elevated for awhile.
While the expansion of oil production in the US through fracking has made the net effect of higher oil prices neutral in terms of Real GDP, since a positive reaction in production would offset a negative reaction in consumption, this might not be the case now. This is because there may not be an immediate and strong boost to US oil production in response to the higher oil prices. A significant response presumably would require an expectation that the higher prices will persist for a long time. Meanwhile, higher gasoline prices will be a drag on the consumer. Each $1/bbl increase in price should translate into 2-3 cents per gallon of gasoline and subtract about $3.5 Bn (annualized) from consumer purchasing power on other goods and services. So, the net effect of the higher oil prices could be negative in terms of Real GDP in the near term.
The December Employment Report should be soft. The Unemployment Claims data point to a slowdown in Payrolls from November +265k print. Consensus looks for +160k m/m, which is below the +205k prior 3- month average. But, the risk is for an even bigger slowdown, based on the Claims data. Note that the ADP Estimate, due Wednesday, may be too high as it catches up from its bad miss in November (+67k).
Other parts of the Report may come in softer than consensus, as well. While there is no reliable evidence to predict the m/m direction of the Unemployment Rate, the weaker Claims data suggest the risk is for an uptick rather than the steady 3.5% consensus estimate. Also, calendar considerations suggest a 0.1-0.2% m/m Average Hourly Earnings rather than the 0.3% consensus estimate. The y/y would be 2.9-3.0% versus 3.1% in November (which is also the consensus estimate).
While news analysts will probably continue to fret over the potential negative fall-out from the killing, the truth is more likely that no one knows what will happen. Nevertheless, risk of a disruption in the Middle East oil supply should keep oil prices elevated for awhile.
While the expansion of oil production in the US through fracking has made the net effect of higher oil prices neutral in terms of Real GDP, since a positive reaction in production would offset a negative reaction in consumption, this might not be the case now. This is because there may not be an immediate and strong boost to US oil production in response to the higher oil prices. A significant response presumably would require an expectation that the higher prices will persist for a long time. Meanwhile, higher gasoline prices will be a drag on the consumer. Each $1/bbl increase in price should translate into 2-3 cents per gallon of gasoline and subtract about $3.5 Bn (annualized) from consumer purchasing power on other goods and services. So, the net effect of the higher oil prices could be negative in terms of Real GDP in the near term.
The December Employment Report should be soft. The Unemployment Claims data point to a slowdown in Payrolls from November +265k print. Consensus looks for +160k m/m, which is below the +205k prior 3- month average. But, the risk is for an even bigger slowdown, based on the Claims data. Note that the ADP Estimate, due Wednesday, may be too high as it catches up from its bad miss in November (+67k).
Other parts of the Report may come in softer than consensus, as well. While there is no reliable evidence to predict the m/m direction of the Unemployment Rate, the weaker Claims data suggest the risk is for an uptick rather than the steady 3.5% consensus estimate. Also, calendar considerations suggest a 0.1-0.2% m/m Average Hourly Earnings rather than the 0.3% consensus estimate. The y/y would be 2.9-3.0% versus 3.1% in November (which is also the consensus estimate).
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