Market Hurdles Arise

The stock market's tendency is to climb in the week after Christmas.  But, Trump set up a couple of hurdles.  His dislike of the stimulus bill raises the risk that he won't sign the bill.  And, his dislike of the absence of a internet-company provision in the Spending bill raises the risk of a government shutdown.  These actions are on top of the caution that might emerge in the approach to the January 5 Senate run-off races in Georgia.   The macroeconomic background still looks good, as the latest Unemployment Claims data improved in the latest week.

The Claims data suggest the impact of the renewed shutdowns has been small and temporary.  /1/ The 89k w/w drop in Initial to 803k puts them at their lowest level since the end of November.  /2/ The 170k drop in Continuing Claims to 5.337 Mn shows no significant or lasting impact of the jump in Initial that preceded it.  The Continuing's further decline suggests re-hiring is strong.  Nevertheless, the Claims data point to a slowdown in December Payrolls (ex census workers) from November’s 338k m/m pace. But, the slowdown may be small.  The Insured Unemployment Rate fell 0.2% pt w/w to 3.6%, putting it 0.7% pt below the November level.  It points to another decline in the Civilian Unemployment Rate in December.  This would be consistent with above-trend economic and job growth this month.

Fed Chair Powell made an important point during his post-FOMC Meeting news conference, arguing against those who believe the stock market is overvalued.  He said that while the Price/Earnings Ratio of the overall market appears to be high, this is not the case if the low long-term Treasury yields are taken into account.  While these yields are likely to stay low for now, his comment implies that a significant backup in them would likely stop the stock market rally.

 

One development that could push up longer-term Treasury yields is a falling dollar.  A falling dollar could be inflationary as well as depress foreign demand for US assets.  So far, there is no evidence that the weakness in the dollar has boosted inflation -- a weaker dollar should boost import prices.  But, the latest data do not show this.  The +0.1% m/m increase in November Import Prices shows no significant inflation pressures.  Non-Fuel Import prices fell 0.3% m/m, pushed down by a drop in food prices.  Capital Goods Prices rose 0.1% and Non-Auto Consumer Goods Prices were flat.  In particular, prices of imports from China ticked up 0.1 percent in November following no change in each of the previous 2 months.  It suggests companies were offsetting the weaker dollar by cutting profit margins.