A Relief Rally and Then?

The stock market is likely to trade cautiously, if not pull back further, on fears of violence ahead of the January 20th inauguration.  This could set up for a relief rally if any violence is contained and the inauguration goes smoothly.  The market focus should then shift to Q420 corporate earnings (see last week's blog), speed of vaccine implementation, and extent to which Biden's stimulus proposal will get through Congress.  

A speedup in vaccine implementation and size of fiscal stimulus are important since the impact of the renewed shutdowns appears to be growing.  The latest jump in Initial Unemployment Claims to 965k and the 0.7% m/m drop in December Retail Sales raise that risk.  To be sure, there may be other factors behind these prints.

The Claims jump could be at least in part a one-off catch-up from slow processing in the two  prior weeks, both of which contained holidays.  If so, Initial Claims could fall sharply in this week's report.  The consensus estimate of a decline to 860k is not enough to cancel the weakness implied by last week's print.  Initial need to fall below the 846k average of the past 3 weeks to put them below the underlying trend of these weeks.  And, they have to fall below the 741k November average to fully unwind the impact of the renewed shutdowns.

Some of the December Retail Sales drop could have been just payback for much of holiday shopping having been pulled ahead to October and November.  If this is the case, consumer spending should resume climbing in the next couple of months.  Even so, the soft take-off point points to a slowdown in Q121 Consumer Spending.

Biden's anti-covid stimulus proposal contains a number of components that are opposed by Republicans, particularly the increase in stimulus payments and funds to state governments.   How far Biden is willing to compromise could be important to the market.  If he does not and uses one of the three procedures available to him to push it through with just a majority vote in the Senate, the market might put more weight on his proposed tax hike proposal -- a market negative.  But, if he does compromise and gets bi-partisan support,  the market will probably take it as a positive.

This week's US economic calendar is light.  December Housing and January Mfg data are expected to be mixed.  Housing Starts are seen up, but Permits and Existing Home Sales down.  The January Phil Fed Mfg Index is seen up, but Markit US Mfg PMI down.  All changes are expected to be minor.