Economic Strength to Shine Through A Slew of Events

The stock market could easily be muted this week ahead of the November 3rd elections and despite a heavy calendar of corporate earnings reports.  Hope for fiscal stimulus may have to wait until after the elections.  Even without a new stimulus bill, the market should get comfort from evidence of strong economic growth in the next couple of weeks.  Q320 Real GDP Growth risks printing above consensus.  And, the Unemployment Benefits Claims data are back on a downtrend.

Consensus looks for Real GDP Growth to surge +31.9% (q/q, saar) in Q320 -- a strong rebound from -31.4% in Q220.  The risk, moreover, is for an even stronger print.  The Atlanta Fed Model's estimate is +35.3%, and there are reasons to think it is too low.  For example, its estimate of 37.4% Real Consumer Spending does not seem high enough, given the surge in September Retail Sales.

The Claims data suggest a continuation of above-trend economic growth in Q420.  California resumed submitting its figures to the Labor Department, including revisions to the prior week's reported figures.  As a result, Initial now show a 56k downward revision to 842k (was 898k) for the week ended October 10 and a further drop to 787k in the latest week (ended October 17).  This is a new low for the move down.

Continuing Claims reflect the downtrend in Initial, falling to 8.373 Mn from a downward-revised 9.397 Mn.  The latest figure is for the week just prior to the October Payroll Survey Week.   Nevertheless, if they stay near this level, they will point to a speedup in October Payrolls.  The relationship between Claims and Payrolls has broken down in the past couple of months.  But, a significant upward revision in Payrolls cannot be ruled out because of this breakdown. 

The Insured Unemployment Rate dropped to 5.7% from a downward-revised 6.4% in the prior week (was 6.8%).  This compares with 8.7% in the September Employment Survey Week, pointing to a drop in the October Unemployment Rate.  Moreover, the official Unemployment Rate has printed below the Insured Rate in each of the past 5 months (see table below).  A sub-5.7% Unemployment Rate would be a political shocker -- except that the October Employment Report will be released on November 6. 

  Insured Unemployment Rate Civilian Unemployment Rate 

Jan   1.2 3.6

Feb     1.2 3.5

Mar   1.2 4.4

Apr 12.4 14.7

May 14.3 13.3

Jun 13.2 11.1

Jul 11.6 10.2

Aug   9.9 8.4

Sep   8.7 7.9

Oct   5.7 na

 

Do US Economic Data Argue for More Fiscal Stimulus?

The stock market should continue to react to developments bearing on the probability of a fiscal stimulus bill being passed.  A pre-election bill does not appear promising, however.  Treasury Secretary Mnuchin will be in the Middle East for most of the coming week.  The Republican small Senate bill won't go anywhere.  And, Democrats don't appear willing to compromise further.  This stalemate could weigh on stocks leading up to the election.

Three economic data reports last week appeared to have mixed implications for further fiscal stimulus. Exceptionally strong September Retail Sales argued against its need.  But, the counter-consensus jump in Initial Unemployment Claims and decline in September Manufacturing Output (part of Industrial Production) argued the opposite.  While the weakness in the latter two may be exacerbated by technical factors, they, along with the still-high Unemployment Rate, suggest further fiscal stimulus won't hurt.  And, it is too soon to draw a firm conclusion about fiscal stimulus from the strong September Retail Sales.

The Retail Sales strength was widespread, with increases in brick and mortar stores notable.  The latter suggests that the sales bounce may have reflected expanded re-openings of shopping malls around the country.  The high Personal Saving Rate, as much of the earlier stimulus payments appears to have been unspent, may have fueled the surge in shopping.  Retail Sales need not slow sharply in October, as the effect of re-openings could continue.  Also, Amazon's Prime Day, as well as heavy discounting by other chains, will show up.  But, some pullback after a surge would not be unusual.  It is too soon to draw a conclusion about the need for additional fiscal stimulus from the September print.

The jump in Initial Claims in the latest week is disturbing.  Unless it reverses soon, the higher unemployment will hit consumer spending and slow the economy.  There is a technical issue regarding the number, however.  California suspended processing Initial Claims for a couple of weeks in order to get through a large backlog of Claims.  Their last reported weekly Claims figure is being carried forward until it resumes processing.  This figure could distort the overall Initial Claims data, since it would not correctly reflect seasonal w/w movements.  So, the Claims data should be viewed cautiously.

The decline in September Manufacturing Output would seem to support the weakness implied by Initial Claims.  The decline was not widespread, however.  A drop in Motor Vehicle Assemblies accounted for the decline.  The motor vehicle drop appears to reflect a return to pre-virus levels, after production was boosted in July and August to rebuild inventories.  Nevertheless, the flat Manufacturing Output Excluding Motor Vehicles still looks low relative to the increase in Total Hours Worked in Mfg (even excluding motor vehicles) in September (see table below).  Some technical factor may explain the difference.  Or, the difference could reflect an offset to the relatively stronger output over July-August. Output exceeded the increase in THW in July-August after essentially matching them over May-June.  In principle, output should rise faster than THW over time because of productivity gains, but there still could be m/m mismatches.  If the latter was the case in September, the flat Ex Auto Manufacturing Output overstates weakness.  But, its decelerating path over Q320 supports expectations of slower economic growth in Q420, which, at the minimum, does not argue against more fiscal stimulus.

           [                         (m/m percent change)             ]

            Total Hours Worked in Mfg            Mfg Output         Mfg Output Ex Motor Vehicles

 May                 4.9                                         3.6                             1.9     

June                  5.9                                         7.8                             3.9       

July                   2.5                                         4.3                            2.2

Aug                   0.6                                         1.1                            1.7

Sep                    0.4                                        -0.3                            0.0

Total                15.1                                       17.4

Did the Stock Market Rally Too Much Last Week?

The stock market may have rallied too much last week on excessive optimism regarding two of the non-economic issues mentioned in my blog -- Trump's health and the potential for additional fiscal stimulus.  But, a pullback may be modest and short-lived.

There may be less significance in the apparent resolution of these two issues than believed.  There is still much uncertainty about the size and timing of a stimulus bill.  Also, Biden's growing lead in the polls increases the odds that Trump will lose power in Washington even if he stays healthy.  Perhaps reflecting this changed status, some Republicans have voiced opposition to his upping of a stimulus package.  And, the Democrats don't look keen to compromise further. 

However, there are developments that could be market positives this week.  Apple's product announcement (October 13) and Amazon's Prime Day (October 13-14) should provide a boost.   Also, there is hope that corporate earnings reports, which start this week, will be better than expected -- as  have some early releases.  

Some more distant developments should limit a market pullback, as well.  A Democratic victory for the presidency and Senate would likely result in a large stimulus bill.  For awhile, the immediately positive effects of such a bill could outweigh the anti-growth implications of other policies they espouse.

Another development that will likely cushion any negative fall-out will be expectation of a successful vaccine.  News reports suggest a vaccine will be ready by the end of the year and be available to all the country by Spring.  A forecast of a post-vaccine return to normalcy should be a significant market positive after the November elections.  Even if Biden wins and the Democrats take control of the Senate, a return to normalcy would give the economy a boost ahead of any drag from their policies.

The most interesting US economic data release this week should be the September CPI.  If the consensus estimates of 0.2% m/m for Total and Core are correct, they would underscore the long time, if not difficulty, the Fed may face in making up for the past shortfall in inflation relative to their 2% target.  The annualized pace in September would be 2.4%.  It would likely be less for the PCE Deflator, which is the measure targeted by the Fed.  

Other data should confirm good economic growth in the last month of the quarter.  Consensus looks for +0.6% m/m Total and +0.4% Ex Auto September Retail Sales and +0.6% September Industrial Production.  While these gains are less than in August, they are still strong.    

 

 

 

 

 

 

 

Market Focus Turning to Non-Macroeconomic Issues, But Macro Looks OK

Over the next few weeks, the stock market focus should turn more exclusively to non-macroeconomic issues: /1/ President Trump's health, /2/ election-related developments and risks, /3/ corporate earnings, and /4/ potential for further fiscal stimulus.  These issues should exacerbate market volatility.  But, economic growth is ending Q320 at a good pace, which should keep market downside in check.

The early statements regarding Trump's fight of the Covid-19 infection are positive.  But, it's not clear how or how long it will evolve.  So, the market may just chase headlines until there is a firm conclusion.

Consensus looks for another large y/y decline in Q320 corporate earnings (-22%), but smaller than that of Q220 (-32%).  This expectation is supported by macro-economic evidence (see my September 20 blog).  Expectations of a large rebound in earnings next year could temper the import of weak Q320 profits, however. 

The market may put more weight on polls showing Biden ahead than it has in the past.  But, control of the Senate by Republicans or Democrats could be just as important to the market as who wins the Presidency.   Republican retention of the Senate would likely cushion the market impact of a Biden win.

The macroeconomic background should be supportive of stocks and mitigate negative fall-out from the other issues.  There was a strong V-shaped bounce in Q320 Real GDP.  The Atlanta Fed model's estimate of Q320 Real GDP Growth is now up to 34.6% -- and still could be too low.   GDP Growth should slow in Q420.  But, the pace is still likely to be above-trend. 

The September Employment Report was deemed weak in news stories.  But, this is not the case.  Most of the weakness reflected the impact of the virus on the education sector (mostly in government) and a decline in census workers.  Job Growth outside of education in the private sector was little changed from August: 946k versus 952k.  While the drop in the Unemployment Rate to 7.9% from 8.4% was largely a result of a drop in Labor Force Participation, the Rate would have edged down even without the latter.  The lower Participation was concentrated among women and likely resulted from the need to stay home with children while they do on-line schooling.

The most significant part of the Report was the increase in Total Hours Worked (THW), driven by both the increase in jobs and a higher Workweek.  THW in September were 4.1% (annualized) above the Q320 average -- a strong take-off point for Q420.  It is too soon to derive an estimate of Q420 Real GDP from this figure.  It could come down if the Average Nonfarm Workweek pulls back from its high September level.  Or, it can rise further.  Even a modest uptrend over Q420 could put THW 5% above the Q320 average -- suggesting the potential for a similar increase in Real GDP.  Note, the reliance on a longer workweek in September could have reflected business caution, but it also could have reflected a quick response to the re-openings -- in which case it bodes well for job growth ahead.

This week's calendar of US economic data is very light.  Consensus looks for a dip in the Non-Mfg ISM to 56.3 in September from 56.9 in August -- still a high figure.  Consensus sees a slight uptick in Initial Claims to 845k from 837k in the prior week.  This would still keep them on a downward trend.

The September FOMC Minutes and Fed speakers scheduled this week, including Powell, should reiterate the Fed's commitment to keep policy steady and rates low for an extended period.  The shortfall in inflation relative to the Fed's 2% target could take several years to unwind, assuming inflation picks up.