The stock market appears to be looking past the latest upsurge in virus cases, as mostly good news about vaccines have boosted expectations of an end to economic displacements sometime next year. In addition, growth has been exceptionally strong at the start of Q420. And, Biden's choice of Janet Yellen to be Treasury Secretary bolsters expectations of a continuation of strong growth next year.
The economy's recent strength is captured in the Atlanta Fed model's latest forecast. On Friday, the forecast was boosted to 11.0% (q/q, saar) from 5.6%, as newly released data showed both consumer spending and business equipment spending climbing much faster than the model had estimated previously. Its latest forecast is far less of a slowdown from the +33.1% Q320 GDP pace than most economists had expected. To get the bearish forecasts of sub-3.0% for Q420 Real GDP growth requires a decline in the second half of Q420.
This week's key US economic data are not likely to signal such weakness. But, if they do signal a sharp weakening, the market could view it as increasing the odds of large fiscal stimulus in early 2021.
Consensus estimate of a dip in the November Mfg ISM to 57.9 from 59.3 in October would keep the Index at a high level. The Phil Fed Mfg Index supports the consensus estimate. While the Market Mfg PMI rose in November, it could have been catch-up to the strength seen in the October Mfg ISM.
The consensus estimate of +500k m/m November Payrolls, with Private Payrolls +650k, risks being too low. The Claims data point to a slowdown in Private Payrolls from October's enormous +906k. But, they still suggest a large increase. Census workers should subtract about 95k from the m/m change in November Payrolls, versus -138k in October. With other government workers likely being cut, as well, the implicit consensus estimate of -150k for total government jobs may be reasonable.
The consensus estimate of a 6.7% Unemployment Rate, versus 6.9% in October, risks being too high. The Insured Unemployment Rate, calculated from the Claims data, fell a full percentage point between the October and November survey weeks. Even if the Unemployment Rate falls somewhat more than consensus, it still would be well above the 3.5% pre-virus level and support arguments for fiscal stimulus.
On the political front, Biden's choice of Janet Yellen as Treasury Secretary bolsters the view of continuing strong economic growth next year. She is pro-growth, having argued for a low-interest rate monetary policy when at the Fed (using optimal control projections of the Fed's econometric model of the US economy -- among the first to demonstrate such projections was my PhD dissertation, a number of years earlier). So, she should support the Fed’s current easy policy as well as anti-virus fiscal stimulus. But, she probably won’t stand in the way of a re-distributional tax increase. While the latter would be a market-negative, it is an issue for next year and could depend on the outcome of the two Georgia run-off Senate elections on January 5.
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