US
- The Markit flash composite PMI came in at 57.9 in November (56.3 in October), signaling the broadest improvement in private-sector activity since March 2015. The degree of optimism towards future output sprang to its highest point since May 2014, with survey respondents citing improved hopes of a COVID-19 vaccine and an end to election uncertainty as confidence boosters.
- The manufacturing sub-index climbed from 53.4 to a 74-month high of 56.7. Factory output expanded at its fastest pace in years while new orders benefited from strong domestic demand. New export orders, meanwhile, were up only marginally. Also noteworthy, input cost inflation at firms operating in the manufacturing sector was the most pronounced in over two years “with supplier delays more widespread than at any other time in the survey’s 11-year history”. Higher input prices seemed to have been at least partially passed on to clients, as evidenced by Markit’s report of the sharpest rise in charges in two years.
- The services sub-index, meanwhile, improved from 56.9 to a 68-month high of 57.7. New business accumulated at a faster pace, while employment expanded the most since data collection began in October 2009. Input and output costs rose at a record pace in the month.
- Durable goods orders continued to recover in October as the economic re-opening was expanded. Total orders advanced 1.3%, overshooting the +0.8% target set by consensus. Although this was the sixth consecutive gain for this indicator, total orders were still down 2.2% from their February level. Orders for transportation equipment (+1.2%) were propped up in October by the non-defence (+38.8%) and defence (+79.1%) aircraft categories. Orders for motor vehicles and parts, meanwhile, fell 3.2%.Excluding transportation, orders advanced a consensus-topping 1.3% on gains for computers/electronics (+3.1%), fabricated metals (+2.3%), electrical equipment (+1.0%), and primary metals (+0.4%).The report also showed that shipments of non-defence capital goods excluding aircraft, a proxy for business investment spending, rose 2.3% in October, marking a sixth consecutive improvement. As a result, core shipments stood 4.9% above their pre-pandemic level. Core orders (+0.7%), which are indicative of future capital spending, also moved further past their pre-recession peak in the month.
- Nominal personal income shrank 0.7% in October, erasing the prior month’s gains (+0.7%). As the labour market continued to recover, the wage/salary component of income progressed 0.7% but disposable income nonetheless dropped 0.8% as “federal economic recovery payments slowed” and “pandemic-related assistance programs continued to wind down”. Indeed, income derived from government transfers retraced 6.2% in the month on a 14.1% plunge in the unemployment insurance segment.
- Nominal personal spending, for its part, rose 0.5% in October but remained 1.6% below its February level. While goods consumption stood 7.8% above its pre-crisis mark, services consumption was still 5.8% below its peak. The latter, which typically holds up better in times of recession, was hit harder during lockdowns and is recovering more laboriously because of physical distancing rules imposed to limit the spread of the virus.
- After increasing from 86.3 to 101.4 from August to October, the Conference Board Consumer Confidence Index fell 5.3 points in November to 96.1. The deterioration stemmed almost entirely from an 8.7-point decline in the expectations sub-index, which tracks consumer sentiment for the coming six months. This indicator slid from 98.2 to 89.5 as a smaller portion of respondents expected to see improvements in business conditions (from 36.0% to 27.4%) and employment (from 32.0% to 25.9%). However, purchasing intentions remained elevated for homes (from 6.1% to 7.2%), automobiles (from 9.6% to 11.6%), and major appliances (from 43.3% to 43.9%).
- After increasing no less than 75.8% from April to September, sales of newly built homes edged down 0.3% in October to 999K (seasonally adjusted and annualized). This was above the 975K print expected by consensus and significantly above the pre-pandemic peak (774K in January). The slight decrease in sales, combined with an unchanged number of homes on the market (278K), meant the inventory-to-sales ratio stayed put at an all-time low of 3.3, a figure indicative of extremely tight supply. Also worth noting, the number of properties sold but not yet built totaled 385K in October, the highest in data going back to 2014.
- According to the S&P Core Logic Case-Shiller 20-City Index, home prices rose a seasonally adjusted 1.27% month-on-month in September after climbing 1.35% in August. This marked the steepest two-month progression since May 2013. All of the 20 cities covered by the index saw higher prices in September, led by Seattle (+2.3%), San Diego (+2.2%), and Phoenix (+2.0%). On a 12-month basis, the index was up 6.6%, up from 5.3% the prior month and the most in two and a half years. The rapid rise in home prices in recent months is consistent with increased demand on the resale market (in October existing-home sales reached a 15-year high of 6,850K in seasonally adjusted and annualized terms).Aside from the resurgence in sales, lack of supply also contributed to boost prices.
- Initial jobless claims totaled 778K in the week ended November 21, up from 748K the week before. This increase, the second in a row, was undoubtedly linked to the significant jump in the number of COVID-19 cases in the country. Continuing claims, meanwhile, dropped from 6370K to a post-crisis low of 6071K in the week to November 14. The continued decrease in the number of people who have claimed benefits for two weeks or more does not necessarily mean that the situation is improving fast in the labour market. It need be borne in mind that the length of time workers can receive unemployment benefits varies across states.
- The second estimate of Q3 GDP growth pegged in at +33.1% in annualized terms, unchanged from the preliminary estimate and the biggest quarterly gain since data collection began in the late 1940s. The details of the report showed a slight downgrade to both consumption and government spending, the latter perfectly offset by upward revisions to business and residential investment. Trade’s contribution to growth remained roughly unaltered.
- The Federal Reserve published the minutes from its 4 November policy meeting. It seems that a change in forward guidance on bond buying may come shortly (possibly at the December meeting). The consensus seemed to be for a qualitative outcome-based guidance that would link the horizon over which the Committee anticipates to be conducting asset purchases to economic conditions. As for a change in the size and duration of the QE program, it did not seem to be in the FOMC’s immediate plans. The committee appeared largely comfortable with the degree of monetary accommodation being provided at the moment.
- A new round of vaccine optimism and diminishing political uncertainty helped stocks build on recent gains for the holiday-shortened week. Most of the major benchmarks hit record highs, with the narrowly focused Dow Jones Industrial Average gaining the most attention by crossing the 30000 threshold for the first time. Reopening hopes boosted cyclical shares, particularly energy stocks, while health care, utilities, consumer staples, and real estate shares lagged. The market was closed Thursday for the Thanksgiving holiday, but weekly trading volumes remained unusually elevated.
- The most important piece of news will be November’s non-farm payrolls. Hiring should have continued apace in the month judging from a decline in continuing claims between the October and November reference periods, a development that may have translated into an 350K increase in payrolls.
- The household survey is expected to show a similar progression in employment which would be consistent with a 0.1% increase in the unemployment rate to 7.0%, assuming the participation rate rose two ticks in the month. If the indices published by regional Federal Reserve banks are any guide, the ISM manufacturing index could have eased slightly in November but continued to signal a sharp amelioration in operating conditions during the month.
- Several indicators for October will be published including factory orders, pending home sales, construction spending and the trade balance.
- The Federal Reserve will publish the latest edition of the Beige Book which could show evidence of a deceleration in the country’s recovery process. Several Fed officials are scheduled to give speeches, notably Mary Daly (Tuesday), Charles Evans (Tuesday) and John Williams (Wednesday). Finally, Fed Chairman Jerome Powell is scheduled to testify before the Senate Banking Committee on Tuesday and before the House Finance Panel on Wednesday.
UK
- Chancellor of the Exchequer Rishi Sunak unveiled the government’s plans for spending next year and the latest economic forecasts, which showed much higher debt levels (underlying debt will rise to 91.9% of gross domestic product), a sharp rise in unemployment to 7.5%, and severe pressure on public finances until at least 2024. The economy was forecast to shrink 11.3% this year and then bounce back strongly for two years, but output is not expected to return to pre-crisis levels until the end of 2022. He also announced a pay freeze for 1.3 million public sector workers, although health workers and the low paid will see a rise; a sharp cut in the foreign aid budget; and extra funds for infrastructure in the north.
- The proportion of British workers on furlough has jumped to its highest level since late June following the introduction of a temporary four-week lockdown across England to reverse a second wave of COVID-19 cases, official figures showed on Thursday. Businesses reported that 15.0% of staff on average were on furlough between 2 and 15 November, up from 9.0% in the previous survey which covered the second half of October, the Office for National Statistics said. Britain’s government placed England under a four-week lockdown which started on 5 November which closed restaurants, pubs, non-essential retailers and most other businesses open to the public. Finance minister Rishi Sunak had intended to terminate the furlough programme at the end of October, but the second wave of COVID-19 cases forced him to extend it until the end of March.
- British car production slumped by an annual 18.2% in October as the coronavirus pandemic and lockdown measures continue to hit demand. A total of 110179 cars rolled off assembly lines last month leaving output in the first 10 months of the year down a third at 743003 vehicles, according to the Society of Motor Manufacturers and Traders (SMMT). Britain’s automotive sector is also awaiting clarity on the trading terms it will have with its biggest export market, the European Union, and faces a ban on the sale of new petrol and diesel cars from 2030.
- Mixed news last week suggests that a Brexit deal breakthrough is still not imminent. While it was important, a deal may not be finalised until next week. The base case remains a deal. The EU summit on 10 December seems like the last meeting where EU leaders can approve a deal, so both the EU and the UK have only very limited time to make up their minds.
EU
- In Germany, Chancellor Angela Merkel announced in Parliament that current coronavirus restrictions would be tightened and extended until 20 December, warning they may be extended again until the end of January. The UK outlined a stricter tier system to replace the month-long lockdown ending on 2 December. Most of northern England will be placed on tier three, while London and the southeast will be on tier two. Conservative MPs said the government would face a rebellion when Parliament votes on the new regime next week. Portugal imposed a state of emergency for 15 days.
- The Markit Eurozone’s Flash Composite PMI sank back into contraction territory, sliding from 50.0 in October to a six-month low of 45.1 in November. The report continued to exhibit divergent trends by sector. The manufacturing sub-index, on the one hand, slipped from 54.8 to 53.6 but continued to signal a healthy rate of expansion. The output and new orders gauges stayed well above the 50-point threshold separating expansion from contraction. Input prices, for their part, rose at their fastest pace since January 2019, as strong demand exacerbated shortages of some key raw materials.
- Alternatively, services-producing businesses suffered from a sharp increase in the number of COVID-19 cases and the reintroduction of social distancing measures to prevent further spread of the virus across the region. The associated sub-index slipped from 46.9 to 41.3. Incoming new business in the services sector shrank for a fourth month in a row, with the pace of contraction accelerating since October.
- The European Commission’s Economic Sentiment Index fell for the first time in 8 months in November, sinking 3.5 points to 87.6. Confidence deteriorated in all five sectors surveyed: retail (-12.7 vs. -6.9 the prior month), services (-17.3 vs. -12.1), consumers (-17.6 vs. -15.5), construction (-9.3 vs. -8.3) and manufacturing (-10.1 vs. -9.2). At the national level, sentiment cooled in Italy (81.5 vs. 90.2 the prior month), France (86.9 vs. 91.7), Germany (94.2 vs. 97.0) and Spain (87.5 vs. 89.5).
- Eurozone banks will be allowed to pay dividends again next year if they convince supervisors that their balance sheets are strong enough to survive the fallout from the coronavirus pandemic, Yves Mersch, vice chairman of the ECB’s supervisory board, told the Financial Times that it would be difficult to continue the ban, which started in March, citing legal uncertainty over its enforceability and expectations that other countries may allow banks to restart payouts.
- The most post important release this week are October’s retail sales, unemployment rate and consumer price index.
China
- Some state-owned enterprises (SOEs) whose bonds have been under pressure experienced a sell-off in their shares. For example, shares of China Hongqiao, parent of an aluminum producer, fell 8.0% when the company said it would raise HKD 1.9 billion via a share placement with institutional investors at a roughly 14.0% discount to the previous day’s close. A domestic ratings agency downgraded the onshore bonds guaranteed by Hongqiao, raising worries for other bond issuers with maturities in the coming 12 months.
- Chinese stocks rose for the week as solid economic data outweighed concerns about rising defaults among domestic bond issuers. The blue chip CSI 300 Index added 0.8% while the Shanghai Composite Index gained 0.9% for the week, according to Reuters. In fixed income markets, the yield on the sovereign 10-year bond ended the week roughly unchanged. In currency trading, the yuan ended broadly flat against the US dollar. A recent uptick in defaults in China’s high yield bond market has raised expectations that Beijing will focus on corporate sector deleveraging in the near term, as opposed to further stimulating the economy.
- In China, the official PMIs will be released on Monday and the private measure on Tuesday with both measures expected to be holding up quite well despite early signs of withdrawal of monetary easing.
Sources: T. Rowe Price, Reuters, MFS Investment Management, National Bank of Canada, Danske Bank, M. Cassar Derjavets.
