US
- The ISM Manufacturing Index fell 1.8 points to a still strong 57.5 in November. The ISM is a diffusion index and measures the breadth of strength or weakness in the factory sector rather than the magnitude. Any reading above 50 means more manufacturers see conditions at their business improving rather than weakening. The forward-looking indicators of the survey suggest that manufacturing activity should hold up well, even if the economy loses a bit of momentum over the next couple of months. While the new orders series fell slightly in November, it remains high at 65.1 and the backlog of unfilled orders continues to trend higher. Export orders are also improving and inventories of just about everything are low.
- In November, nonfarm payrolls rose 245K. This was well below the 460K print expected by consensus. The negative surprise was compounded by a 28K downward revision to the prior month’s results. The private sector added 344K jobs in November. Goods sector employment increased 55K on gains for manufacturing (+27K) and construction (+27K). Services producing industries in the private sector, meanwhile, increased payrolls by 289K thanks to healthy gains for transportation/warehousing (+145K), business services (+60K) and education/health (+54K), among others. Employment in the public sector, for its part, dropped 99K on declines for both federal (-86K) and state/local administrations (-21K). Average hourly earnings sprang 4.4% year-on-year, unchanged from the prior month.
- Home sales and single-family construction normally slow during the winter but are widely expected to slow less this year due to the shift in home buying in parts of the South and West where winter weather does not inhibit new construction. Mild fall weather also allowed for more construction than usual, leading to some strength in November construction payrolls. That said, pending home sales fell 1.1% in October, following a 2.0% drop the prior month. Part of that drop likely reflects incredibly thin for-sale inventories. Mortgage applications have also moderated on a sequential basis, hinting that the run-up in home sales and housing starts may be in for a pause.
- Released at the same time, the household survey suggested 74K jobs were lost in November. This small loss following a massive gain in the prior month, nonetheless translated into a 0.2% decline in the unemployment rate to 6.7%, as the participation rate decreased from 61.7% to 61.5% (the labour force contracted 400K). Full time employment jumped 752K while part-time positions contracted 779K. At first glance, the details of the report were not overly worrisome as employment gains remain relatively widespread and concentrated in the private sector. Still, the improvement in the unemployment rate was merely due to a decline in the participation rate as household survey data showed a job loss in the month.
- In October, construction spending rose 1.3% to US$1438.5 billion month-on-month (seasonally adjusted annual rate) and 3.7% year-on-year. Residential spending climbed 2.9% to a seasonally adjusted annual rate of US$637.1 billion while non-residential activity was down 0.7% to a seasonally adjusted annual rate of US$456.6 billion. Public expenditures were up 1.0% to US$344.8 billion.
- In October the goods and services trade deficit widened by US$1.0 billion to US$63.1 billion. Exports rose US$4.0 billion (2.2%) to US$182.0 billion and imports increased US$5.0 (2.1%) billion to US$245.1 billion. Imports of capital goods, which are considered a proxy for domestic investment by firm, climbed 2.5% to US$56.9 billion. According to the US Department of Commerce, the October increase in the goods and services deficit reflected an increase in the goods deficit of $0.6 billion to $81.4 billion and a decrease in the services surplus of $0.4 billion to $18.3 billion. US purchases of consumer goods from abroad rose 2.5% to US$57.2, reversing most of the previous month decline. In October, the goods trade deficit with China increased US$2.2 billion to US$26.5 billion with exports increasing by US$1.1 billion and imports by US$3.3 billion.
- Initial jobless claims fell 75K to 712K in the week ending November 28. However, this number may have been affected by the Thanksgiving holiday. Indeed, claims data tend to be volatile in weeks when holidays interfere with how states process claims. The advance number for seasonally adjusted insured unemployment during the week ending November 21 was 5520K, down 569K from the previous week’s revised level. However, as reported by the Wall Street Journal, the Government Accountability Office (GAO) warned earlier in the week that states had provided inconsistent data to the Department of Labor and incidents of fraud had distorted the numbers. Thus, estimates of the number of individuals receiving unemployment benefits during the pandemic may be flawed. At this stage, the Department of Labor did not plan to make any changes to its methodology but it was working to make changes to the weekly jobless claims report in order to clarify what the numbers represent.
- The US House of Representatives unanimously approved the Holding Foreign Companies Accountable Act this week. The measure will force a trading suspension of US-listed Chinese companies if US regulators are unable to inspect the companies’ audits for three consecutive years. US President Donald Trump is expected to sign the bill into law. Chinese authorities, claiming national security concerns, currently prohibit the inspection of domestic audits by foreign entities. If that situation is not resolved in the coming three years, it is likely that those listings will move offshore, probably to Hong Kong, a market noted for its ample liquidity, strong regulatory framework and commitment to the free movement of capital.
- Stocks reached further into record territory, with all of the major indexes touching new intraday highs by Friday. Energy shares bounced back after OPEC and other major oil producers reached an agreement to ease output cuts more gradually next year than previously planned, while utilities stocks lagged. On Monday, the Dow Jones Industrial Average closed out November with its best monthly performance since 1987, while the small-cap Russell 2000 Index registered its best monthly gain since its inception in 1978.
- The focus will be on the release of November’s consumer price index. While the economic recovery is losing steam, supply issues in the goods sector could have supported inflation in the month. Core prices are expected to have increased 0.2% month-on-month following a flat print in the prior month. With gasoline prices having stayed roughly flat on a seasonally adjusted basis, headline CPI may also have increased 0.2% month-on-month. Despite this gain, the 12-month rate of headline inflation might still drop one tick to 1.1% thanks to a negative base effect.
- In other news, November’s iteration of the NFIB Small Business Optimism Index will be published alongside October’s Job Openings and Labor Turnover Survey (JOLTS).
- The December iteration of the University of Michigan’s Consumer Sentiment Index will also be available.
UK
- Hopes that the UK and the EU would strike a post-Brexit trade deal by the weekend faded as disagreements persisted on fishing rights, state aid, and other contentious issues. Negotiators will now try to finalize a deal before the EU leaders’ summit next week, according to press reports. On Thursday, French minister for Europe, Clément Beaune, warned in a radio interview that France would veto a deal that did not align with French interests.
- The Bank of England can probably cut interest rates slightly below zero, and it should be ready to pump more stimulus into the economy quickly if needed to recover from the coronavirus crisis or a Brexit hit, BoE policymaker Michael Saunders said. “In my view, there may be some modest scope to cut Bank Rate further but, if we do, it may be preferable to move in relatively small steps,” Saunders said in a speech on Friday. The BoE is reviewing the feasibility of taking its benchmark rate negative from its current level of 0.1%. It has asked banks about whether that would hit their ability to lend. “My judgment at present is that the ELB (effective lower bound) for the UK is probably a little below zero, provided appropriate mitigations are in place,” Saunders said.
- Britain’s construction industry grew faster than expected last month, boosted by the strongest orders since 2014 amid a boom in house prices, a survey showed. The IHS Markit/CIPS construction Purchasing Managers’ Index (PMI) rose to 54.7 in November from 53.1 in October, its strongest since July and above all forecasts in a Reuters poll. An all-sector PMI released at the same time sank to 49.5 from 52.2, its first time below the 50 mark that separates growth from contraction, largely due to weakness in the services sector reported on Thursday. “UK construction output stayed on a recovery path in November and there were signs that the main growth driver has transitioned from catch-up work to new projects,” IHS Markit’s economics director, Tim Moore, said.
EU
- The European Commission (EC) is ready to exclude Poland and Hungary from the EUR 750 billion pandemic recovery fund and proceed without the two countries if they continue to block Europe’s proposed seven-year budget, EU budget commissioner Johannes Hahn said in an interview with the Financial Times newspaper. The EC’s lawyers have identified possible ways of circumventing Poland’s and Hungary’s objections to the EU linking spending to new rule-of-law requirements, he said. The disagreement is likely to dominate the leaders’ summit that will start on December 10.
- Bloomberg reported that buybacks in Europe are rebounding. After slumping 95.0% during the summer months, they were just 17.0% below year-ago levels in November.
- Shares in Europe paused after last month’s strong rally. In local currency terms, the pan-European STOXX Europe 600 Index ended the week with a modest 0.21% gain. Major European indexes were mixed: France’s CAC 40 ticked up 0.20%, Germany’s DAX Index fell 0.28%, and Italy’s FTSE MIB slipped 0.78%.
- The ECB is widely expected to announce a recalibration of its monetary policy instruments and the uncertainty is what tools it will use. Recent comments have focused on more Pandemic Emergency Purchase Programme (PEPP) and targeted longer term refinancing operations (TLTROs) as the main tools but ECB is expected to tweak its more technical parameters, such as tiering and collateral rules, as well. A material immediate market reaction to the recalibration is not expected.
China
- The US House of Representatives unanimously approved the Holding Foreign Companies Accountable Act this week. The measure will force a trading suspension of US-listed Chinese companies if US regulators are unable to inspect the companies’ audits for three consecutive years. US President Donald Trump is expected to sign the bill into law. Chinese authorities, claiming national security concerns, currently prohibit the inspection of domestic audits by foreign entities. If that situation is not resolved in the coming three years, it is likely that those listings will move offshore, probably to Hong Kong, a market noted for its ample liquidity, strong regulatory framework and commitment to the free movement of capital.
- On the economic front, China reported that its official manufacturing PMI rose to 52.1 in November from October’s 51.4, its ninth straight month of staying in expansionary territory and further evidence of a sustained recovery. Meanwhile, the private Caixin/Markit manufacturing PMI rose to a stronger-than-expected 54.9 in November from 53.6 the prior month, the seventh straight month of expansion and the highest gauge since 2010, according to the South China Morning Post. The Caixin services PMI rose to 57.8, its strongest reading since June.
- Investors appeared to largely shrug off new restrictions on Chinese companies by the Trump administration, which designated four more state-owned enterprises as having links to China’s military and, therefore, off limits to US investors. The latest additions to the list of Chinese military-linked entities included China National Offshore Oil Corporation, whose locally listed shares sank 14.0%.
Sources: T. Rowe Price, Reuters, MFS Investment Management, National Bank of Canada, Danske Bank, Wells Fargo, M. Cassar Derjavets.
