Short Squeeze, Fiscal Stimulus and Key US Economic Data

The shock from the short squeeze of GameStop and other stocks overrode any positive effect from above-consensus earnings and an easy Fed last week.  The attendant sharp volatility, particularly the steep declines, could have scared monies away from the market.  The talk was of hedge funds needing to sell stock holdings to offset losses or build liquidity.  The extreme volatility also could have prompted money managers to shift out of equities for window-dressing purposes at month end.  In addition, the phenomenon of excessive speculative bubbles (prices rising independently of fundamentals) at market peaks was talked about, reinforcing the bears' message that the market was due for a pullback.  If the short squeeze and attendant fall-out were the only factors hitting the stock market, the latter should soon settle down, as positions are reset.

But, developments in Washington are becoming more problematic for the market.  It is taking longer-than-desired to pass a stimulus bill.  On top of  this, the Trump impeachment trial, scheduled to begin February 8, could further impede progress towards an agreement on one. 

While some disappointment on the extent of roll-out of the vaccines also may be beginning to weigh on the market, this issue should disappear over the next few months.  The vaccinations remain a catalyst for stronger economic growth in H221.  

With these developments at the forefront, this week's key US economic data may have little market impact:

The January Mfg ISM is expected to be little changed from the high 60.7 December print (which will be revised a bit by new seasonal factors in this report).  Consensus looks for a dip to 60.0.  Most other surveys rose in January, but some of their increases could have been catch-up to the December Mfg ISM.  In any case, the January print should be high and consistent with other evidence indicating a strong manufacturing sector.     

Consensus looks for January Nonfarm Payrolls to stay soft at +20k m/m  after -140k in December.  The Claims data point to an even weaker print than December's.  But, there is a possibility that seasonal factors exacerbated December's drop and will boost January Payrolls sharply.  The seasonals may have looked to offset holiday-related hiring in December that did not occur.  And, they may attempt to offset post-holiday firings in January that did not occur either.  

The Claims data suggest little change in the January Unemployment Rate from December's 6.7%.  So, the consensus estimate of 6.8% can't be ruled out.  But, neither can a small decline.  The Unemployment Rate for the Leisure and Hospitality sector could be important.  Fed Chair Powell singled out the very high Rate for this sector in his post-FOMC news conference.  The Rate was 16.7% (nsa) in December.  

While consensus looks for a moderate +0.3% m/m for January Average Hourly Earnings, the risk is that it could be depressed sharply by a shift in composition -- a reversal of what happened in December that resulted in +0.8% for AHE.