U.S. Personal Income Declines While Spending Growth Moderates During October
Personal income declined 0.7% during October (+5.5% y/y) following a 0.7% September rise, revised from 0.9%. A 0.1% dip had been expected in the Action Economics Forecast Survey. Government payments for unemployment compensation fell sharply for the fourth straight month, off 14.1%. (The Federal government unemployment compensation add-on in the CARES Act expired in August and has not been renewed). Employee wages & salaries rose 0.7% (2.1% y/y) after rising 0.9% in September as employment increased. (…) Disposable personal income fell 0.8% (+6.2% y/y) last month and reversed September’s 0.7% increase. Adjusted for price inflation, real disposable income fell 0.8% (+5.0% y/y) after rising 0.6%.
Personal consumption expenditures increased 0.5% during October (-0.6% y/y) after two consecutive months of 1.2% increase. This was the smallest of six consecutive monthly increases after the sharp declines in March and April. A 0.4% rise had been expected. Adjusted for inflation, real spending increased 0.5% (-1.8% y/y) in October. The rise in spending reflected a 0.6% increase (-6.3 y/y) in services outlays. Recreation services spending strengthened 2.6% (-27.2% y/y) while foods services & hotel outlays eased 0.4% (-17.9% y/y). Health care outlays rose 0.5% (-4.0% y/y) while housing & utilities spending rose 0.3% (1.4% y/y).
Real spending on goods increased 0.2% (8.5% y/y) as spending on durable goods increased 0.8% (14.7% y/y). Recreational goods & vehicles outlays surged 1.5% (25.4% y/y). Nondurable goods outlays were little changed (+5.2% y/y) as clothing spending fell 0.8% (2.2% y/y).
Last month’s rise in spending relative to income lowered the personal saving rate to 13.6% from 14.6% in September, revised from 14.3%. The rate reached a record high 33.6% in April. The level of personal saving fell 7.8% (+101.4% y/y).
The PCE chain price index held steady (1.2% y/y) in October following an unrevised 0.2% September increase. The price index excluding food and energy was little changed (1.4% y/y) after an unrevised 0.2% increase in September. (…)
Consumer expenditures continue to pace with labor income although spending on goods, reflected in retail sales, has benefitted from the CARES Act rescue money.
The big question remains on “excess savings”, currently totalling $1T more than last February, or $3,000 per capita. Glass half full or half empty? Buying power ready to be unleashed or lasting margin of safety? At their average decline rate of the past 4 months, those “excess savings” will be exhausted by February 2021.
Meanwhile, payroll income was down 0.9% YoY in October, -2.1% in real terms.
In the last 4 months, spending growth was .89% of payroll growth; it was 0.86% in the last 2 months.
U.S. Initial Jobless Claims Rise for a Second Week
Initial claims for regular state unemployment insurance rose again this past week ending November 21 to 778,000 from 748,000 the week before; the earlier week was revised slightly from 742,000. The Action Economics Forecast Survey had estimated 721,000. (…)
The not seasonally adjusted data, which are comparable across all periods for initial claims, rose to 827,710 in the week ending November 21 from a slightly revised 749,338 (was 743,460). Haver Analytics has calculated methodologically-consistent seasonally adjusted data which matches the Department of Labor seasonally adjusted data since the late-August break.
Claims for the federal Pandemic Unemployment Assistance (PUA) program, which covers individuals such as the self-employed who are not included in regular state unemployment insurance, declined slightly in the week ended November 21, to 311,675 from 319,694. (…) Numbers for this and other federal programs are not seasonally adjusted.
Seasonally adjusted continuing claims for regular state unemployment insurance programs fell by 299,000 in the November 14 week to 6.071 million from 6.370 million the prior week. Haver Analytics methodologically consistent seasonally adjusted continuing claims showed the same readings for those weeks. Not seasonally adjusted continuing claims dropped to 5,912 million from 6.080 million. In that November 14 week, both seasonally adjusted and not seasonally adjusted series were yet again the lowest since March 21.
Continuing PUA claims, which are lagged an additional week and not seasonally adjusted, turned higher in the November 7 week, reaching 9,148 million from 8,682 million the prior week. Pandemic Emergency Unemployment Compensation (PEUC) claims continued to increase to another new high, 4.509 million in the week ending November 7. This program covers people who were unemployed before COVID but exhausted their state benefits and are now eligible to receive an additional 13 weeks of unemployment insurance, up to a total of 39 weeks. (…)
The race is on between the virus, employment, savings normalization, potential further fiscal help and widespread inoculation. Good luck forecasting that.
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Walt Disney Plans Further Layoffs as Covid-19 Weighs on Business Walt Disney said it would lay off about 32,000 employees, primarily at its theme parks, as the coronavirus pandemic continues to drag on its businesses.
U.S. Durable Goods Orders Rise Further in October
Manufacturers’ orders for durable goods increased 1.3% m/m (-0.3% y/y) in October on top of an upwardly revised 2.1% m/m rise in September (initially +1.9%). A 0.9% m/m gain had been expected by the Action Economics Forecast Survey. New orders have risen 43.7% since their recession low in April, but are still 2.2% below their pre-COVID February level.
Orders for nondefense capital goods excluding aircraft, a reliable leading indicator of business capital spending, also rose further, increasing 0.7% m/m (+6.2% y/y) in October with upward revisions to both September (+1.9% m/m) and August (+2.4% m/m). This was the sixth consecutive monthly increase. From their April low, nondefense capital goods orders excluding aircraft have risen 14.2% and are 4.5% above their pre-COVID January level.
Shipments of core capital goods, a reliable coincident indicator of business spending on equipment, jumped up 2.3% m/m (4.7% y/y) in October after upwardly revised gains in September and August. The October figure was the highest level of core capital goods shipments on record, dating back to 1992. The October level of core shipments was 3.3% above the Q3 average, providing a great starting point for capex in Q4.
Orders for transportation equipment rose 1.2% m/m (-8.4% y/y), down from a 3.3% m/m jump in September (revised down from +4.1% m/m). Orders for motor vehicles and parts fell 3.2% m/m, their second monthly decline in the past three months, following a 1.1% monthly gain in September. Aircraft orders jumped up 57.5% m/m, reflecting meaningful gains in both nondefense and defense orders. Computer and electronic product orders rose 3.1% m/m (9.8% y/y).
Total shipments increased 1.3% m/m (+1.1% y/y) in October following an upwardly revised 0.5% m/m gain in September. Shipments of transportation products slipped 0.2% m/m (-2.2% y/y). Shipments excluding transportation rose a solid 2.0% y/y (+2.8% y/y) after an upwardly revised 0.5% gain in September. Apart from the monthly decline in transportation shipments, all other major categories experienced increases in October.
Unfilled orders for durable goods slipped 0.3% m/m (-6.6% y/y). Excluding transportation, they rose 0.5% m/m (1.6% y/y).
Inventories of durable goods rose 0.3% m/m (0.5% y/y), the same monthly increase as in September. The September/October increases followed three consecutive monthly declines. Excluding transportation, inventories rose 0.2% (-2.7% y/y), the same rise as in September, after haven fallen for five consecutive months.
The first chart below shows that total new orders for Durable Goods remain in a downtrend (the tip of each arrow lands on the average since March) while orders for core goods are almost level with their pre-pandemic trend. Note that Core Goods are but 30% of total Durable Goods.
This next chart indexes 4 series to February 2020. New Orders and Shipments have climbed back to their February level but production and employment are 4-5% below February’s levels. Since manufacturers’ inventories are flat with their pre-pandemic level, orders need to keep rising for production and employment to recover their previous peaks.
Investors Bet on More Dollar Weakness The U.S. dollar hit its lowest levels against a basket of currencies in more than two years this week. Investors and analysts think it has further to fall.
The consensus view of a falling dollar is based on a big assumption: Covid-19 will be more or less conquered in the months ahead. Vaccines will allow economies around the world to return to normal within the next year, encouraging investors to step back from the relative safety of U.S. assets and invest in stocks, bonds and currencies outside the U.S. (…)
A weak dollar can help stocks with big overseas operations since it makes earnings in foreign currencies worth more in dollar terms. (…)
It is down more than 10.5% since its March peak.
A commentary from market strategists at Citigroup recently predicted the dollar could see another 20% drop in 2021, as foreign investors move to protect themselves from currency fluctuations in their existing U.S. holdings.
Other forecasts for the dollar vary, but mainly in terms of how far it will fall. Goldman Sachs analysts, for example, predict a 6% decline over the next 12 months; ING analysts forecast up to a 10% drop.
“The dollar appears meaningfully overvalued and investors are overweight U.S. assets,” according to Christian Mueller-Glissmann, multi-asset strategist at Goldman Sachs. High valuations for U.S. stocks, interest rates that don’t keep up with inflation and a recovery of global growth should all weigh on the dollar, he said. (…)
“FX forecasting is a specialist form of financial-market astrology that I remain wary of,” said David Riley, chief investment strategist at BlueBay Asset Management. (…)
Investors are still heavily invested in the U.S., a situation that could reverse if growth elsewhere bounces back. Money managers have kept a high proportion of their funds in U.S. assets, according to investor surveys from Bank of America Merrill Lynch and Reuters. (..)
Foreign investors built up huge holdings of U.S. bonds since late 2016, without taking offsetting bets to protect from currency fluctuations, according to a Citi measure known as a “hedge ratio.”
The ratio, which measures outstanding currency derivatives against foreign holdings of U.S. bonds, is at roughly half its recent peak from summer 2016. (…)
“If investors have the incentive to FX hedge next year, the outflow pressure from hedging will overwhelm by magnitudes any new flows buying U.S. fixed income at higher yields,” said Calvin Tse, FX strategist at Citi. (…)
Henry McVey, KKR’s Head of Global Macro and Asset Allocation says that the recent Fed policy pivot
means monetary policy in the United States will remain significantly accommodative for quite some time. As part of this worldview, we think that U.S. dollar assets will depreciate more so on a relative basis than they have during the past 5-10 years. In particular, such negative U.S. real rates are supportive for the euro to increase to at least 1.25 relative to the dollar. We also see the potential for many emerging market currencies to gain ground versus the dollar as well. To this end, my colleague Frances Lim has done some interesting work to show that, despite significant debt loads in China, U.S. debt loads have increased even more. All told, the U.S. has spent 44% of its GDP to try to temper the adverse effects of the coronavirus. Against this backdrop, we believe that the Chinese renminbi seems well poised to appreciate against the U.S. dollar, which could bring a major change in the attitude of global investors.
McVey also argues that as China
continues its transition from a fixed investment economy to a services and consumption based one, China will almost inevitably run a current account deficit. If it does, it will need to fund that ‘hole’ in its current account with
positive flows into its capital account. To do this, it must either attract
foreign direct investment and/or portfolio flows. Our ‘gut’ instinct is
that China will do both. (…)China’s bond market is now just 114% of GDP, compared to 193% in the United States, 252% in Japan, and 92% in Germany. In our view, herein lies the opportunity, we believe, particularly given China has so much higher real and nominal rates. If we are right, China will work hard to ensure that its bond market, which can be supported by more foreign capital, can replace its bank lending market as a primary source of funding growth and pricing risk. The key, of course, will be assuring investors that their capital will not get stuck in China, an issue of concern for many global investors with whom we speak.
On the equity side of the Chinese capital markets, we are also optimistic
about China’s ability to import foreign capital. Already, since 2019, China’s A-share representation in the MSCI Emerging Markets Index has quadrupled from five percent to 20%. Yet, even with this sizeable increase, the size of China’s capital markets is still comparatively much smaller than its peers. All told, its stock market capitalization stands at 59% of GDP, which is much lower than that of the U.S. at 148% of GDP, Japan at 122% of GDP, and Australia at 107% of GDP. (…)
Exxon Documents Reveal More Pessimistic Outlook for Oil Prices The Texas oil giant has lowered its outlook on oil prices, suggesting it expects the fallout from the coronavirus pandemic to linger for much of the next decade.
(…) In 2019, Exxon had internally forecast that Brent oil prices, the global benchmark, would average around $62 a barrel for the next five years before increasing to $72 a barrel in 2026 and 2027, the documents state.
This summer, the company lowered that forecast to between $50 and $55 a barrel for the next five years, before eventually topping out at $60 a barrel in 2026 and 2027, according to the documents, which were dated September. (…)
The company cut $10 billion from its capital expenditures after the pandemic took hold and has said it could lay off as much as 15% of its global workforce, which would total about 14,000 jobs including contract employees. Exxon also said it would reduce its capital budget to between $16 billion and $19 billion next year.
Even with those cuts, Exxon would need oil prices to be between $55 and $65 a barrel in 2021 to cover its capital expenses and dividend, various analysts estimate.
Shell publicly lowered its price forecasts in June, predicting Brent oil would reach $50 a barrel in 2022 before reaching a long-term price of $60. (…)
(…) The unscheduled gathering comes just two days before a full OPEC ministerial meeting on Nov. 30, which will be followed by OPEC+ talks on Dec. 1. The JMMC met online as recently as Nov. 17, but that ended without any kind of recommendation about delaying the January supply increase.
A clear majority of OPEC+ watchers expect the group to maintain their supply curbs at current levels for a few months longer due to lingering uncertainty about the strength of demand. However, the decision is by no means certain amid public complaints from Iraq and Nigeria, and private discord with the United Arab Emirates. (…)
Euro-Area Economic Confidence Slumps Amid New Virus Restrictions
A European Commission sentiment index dropped to 87.6 from 91.1 the previous month, with retailers, services providers and consumers particularly pessimistic. An indicator for employment expectations declined for a second month. (…) According to the survey, retailers’ expectations “nosedived,” reflecting growing concerns among households about their future financial situation and the economic outlook. Services were most worried about expected demand, while industry and construction only registered “comparatively mild” slips in sentiment. (…)
Fathom Consulting:
Internationally, the dynamics of the virus remain similar to those observed in the first wave: new cases and deaths rise first in Europe, then the US follows suit and then selected EMs become a hotbed of contagion. Seen through this lens, we are just approaching the second innings of the second wave, with conditions likely to get worse in the US and outside Europe before they get better.
- The spread of the virus continues to show little sign of being contained in the U.S., with California’s positive-test rate hitting 6.1%, the highest in six months and New York hospitalizations rising to their level since June (Bloomberg)
It looks like the Midwest has finally peaked out but all other regions are well above their spring peaks:
Hospitalizations are currently 50% higher than in April and July and death numbers are following…
And this is with NY state hospitalizations well below April’s, for now…
The Midwest is improving…but the rest of the country is trending badly.
Midwestern Governors Seek More Federal Covid-19 Aid for Businesses The governors, contending with their own budget problems, say they are unable to provide additional funds to small businesses.
(…) Nationwide, states face the biggest cash crisis since the Great Depression, with total budget shortfalls potentially reaching $434 billion from 2020 to 2022, as the economic slowdown from the pandemic cuts into state revenues. (…)
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New York’s Budgetary Waiting Game Continues The state faces a projected $8.7 billion deficit in the new fiscal year and is hoping for federal relief.
Profits cycles hint 2021 is the reckoning year (Richard Bernstein Advisors)
(…) Historically, growth tends to outperform value when profits cycles decelerate. Earnings growth becomes increasingly scarce as the cycle deteriorates, and investors flock to the smaller and smaller universe of companies that can maintain growth in an increasingly adverse environment. The pandemic has accentuated the traditional “Darwinistic” (survival of the fittest) narrow leadership, and today we have the “Fab 5” stocks.
However, history also suggests value tends to outperform growth when profits cycles accelerate. Investors can increasingly comparison shop for growth as an increasing number of companies start to significantly grow. Comparison shopping is effectively value investing, i.e., investors won’t pay 30 times earnings for 30% growth when many companies are selling at 15 times earnings for 50% growth.
The concept of the Earnings Expectations Life Cycle might seem simply cute to some investors, but 2021 could be the year during which very significant rotations from growth to value, from large to small, and from secular growers to cyclical growers occur because it is highly likely the profits cycle will rebound in 2021.
2020 earnings have been dramatically depressed by the pandemic’s effect on the global economy. If one assumes the pandemic begins to subside as 2021 progresses, then it seems highly likely 2021’s earnings growth will be higher than 2020’s, the profits cycle will trough, and a significant rotation within equity markets will occur.
Value managers have already suffered in 2020 by prematurely anticipating a turn in the profits cycle. Will growth managers have the nerve to be contrarians and sell the global equity markets’ hottest stocks when the cycle troughs in 2021?
SENTIMENT WATCH
Yardeni.com
Shorts Getting Squeezed
If the performance of Refinitiv’s U.S. Most Shorted Stocks Index is any indication, the shorts have been caught off guard since the market has accelerated higher over the last two months. Most of the move began subsequent to the U.S. election. As the below chart shows the Most Shorted Index is up over 30% while the S&P 500 Index is up 7.9%. Investors likely are not surprised by some of the performance contributors over the last month like, Nordstrom (JWN) up 91%, Plug Power (PLUG) up 74%, Macy’s (M) up 52%, Carnival (CCL) up 34%, just to name a few of the companies in the Short Index.
The move higher in these most shorted stocks coincides with investors rotating into underperforming sectors and asset classes. The above chart shows small cap stocks, as represented by the Russell 2000 Index, up 22.4% since the end of August. Midcap and international stock performance has overtaken U.S. large cap in the near term as well.
The move higher in these underperforming market segments is also showing up on a sector basis. The below chart shows the performance of the S&P 500 Index sectors since the end of September. The energy sector is far outpacing all the other S&P 500 sectors. Still though, the energy sector is down nearly 35% on a year to date basis. The next best performing sector is financials and this sector remains down 7.2% year to date.
The broadening of the market’s performance into these underperforming sectors and asset classes is a positive for potentially sustaining the move higher in stocks. The S&P 500 Index’s 62% recovery since the March low has been nothing short of astounding and the double digit return so far in November would suggest some consolidation of these recent gains should not be unexpected.
With Slack, Salesforce Would Put Heat on Microsoft The battle to be the go-to business-software provider is intensifying, as Salesforce looks to acquire Slack Technologies.
China Escalates Australia Trade Dispute With Wine Tariffs China imposed anti-dumping tariffs on Australian wine, escalating a monthslong trade dispute and forcing local vintners to seek other markets for millions of bottles during a pandemic.
(…) Mr. Birmingham said the wine tariffs continue a campaign of economic pressure this year that has included restrictions on imports of Australian beef, barley and coal. Australia drew China’s anger in April when it sought support from European leaders to investigate whether Beijing’s early response to the coronavirus contributed to the pandemic.
This pressure on an important U.S. ally has brought a response from senior officials in the Trump administration. They are seeking new hard-line measures against Beijing, including the creation of an informal alliance of Western nations to jointly retaliate when China uses its trading power to coerce countries, administration officials say.
For Australia’s wine industry, already hit this year by drought and wildfires, the tariffs are a major blow. By value, China buys more than 42% of Australia’s annual wine exports, leading the world. (…)