Stimulus 2.0 and a Quiet Fed

While we get November CPI this week, and are left to ponder the jobs report from last week, the market will be focused on developments surrounding the $908 billion stimulus bill that made some headway last week. With more PPP funds, $300/week of unemployment money, and funds for state and local governments the market has just about priced in that a deal gets done. If not, expect Treasuries to rally and stocks to fall.  The emphasis on the bill is driven also because this is the week before the final FOMC meeting in 2020; thus, the Fed is on radio silence until the meeting. If the stimulus measure is passed before the meeting expect the Fed to punt again until the January run-offs are decided. Then they will have a clearer indication of the extent of help that may come from the fiscal side in the new year. The first meeting in 2021 will be held on January 27. Away from D.C. developments, November CPI will headline the reports this week, although as we mentioned, the market will probably give it just a passing glance. Long bond yields and breakeven rates have risen in anticipation that additional stimulus and effective vaccines will stoke some inflation but don’t expect to see it in what is expected to be another docile inflation read for November.


Treasuries
Treasury Curve Today Week Change
3 Month 0.08% Unch
6 Month 0.09% Unch
1 Year 0.10% Unch
2 Year 0.15% Unch
3 Year 0.20% Unch
5 Year 0.40% +0.03%
10 Year 0.95% +0.10%
30 Year 1.71% +0.13%

 

Short-Term Rates
Fed Funds 0.25%
Prime Rate 3.25%
3 Mo LIBOR 0.23%
6 Mo LIBOR 0.26%
12 Mo LIBOR 0.34%
Swap Rates
3 Year 0.278%
5 Year 0.469%
10 Year 0.952%

 

Economic Calendar
Date Statistic For Briefing Forecast Market Expects Prior
Dec 7 Consumer Credit Oct $16.100b $15.500b $16.214b
Dec 8 NFIB Small Business Optimism Nov 102.5 102.5 104.0
Dec 8 Nonfarm Productivity 3Q F 4.9% 4.9% 4.9%
Dec 9 JOLTS Job Openings Oct 6.325m 6.300m 6.436m
Dec 10 CPI MoM Nov 0.1% 0.1% 0.0%
Dec 10 CPI YoY Nov 1.1% 1.1% 1.2%
Dec 10 Core CPI YoY Nov 1.6% 1.6% 1.6%
Dec 10 Monthly Budget Statement Nov -$199.0b -$199.0b -$284.1b
Dec 11 U. of Mich. Consumer Sentiment Dec P 76.0 76.0 76.9

calendar icon Top 5 Events for the Week

Dec. 7 — 11, 2020

1. Stimulus Developments and a Quiet Fed — All Week
2. November CPI Report — Thursday
3. October JOLTS Job Openings — Wednesday
4. November NFIB Small Business Optimism — Tuesday
5. December U. of Mich. Consumer Sentiment — Friday

 

1.  Stimulus Developments and a Quiet Fed — All Week

While we get November CPI this week, and are left to ponder the jobs report from last week, the market will be focused more on developments surrounding the $908 billion stimulus bill that made some headway last week. With more PPP funds, $300/week of unemployment money and funds for state and local governments the market has just about priced in a deal gets done. If not, expect Treasuries to rally and stocks to fall.  The emphasis for the bill is driven also because this is the week before the final FOMC meeting in 2020; thus, the Fed is on radio silence until next week. When that Fed met in November it came just after the presidential election and much was still uncertain and they punted on any long-range decision. Enter December and the Fed still has plenty of uncertainties. Namely, the fate of the Senate still hangs in the balance until the January 5 Georgia run-offs  and the fate of the aforementioned stimulus bill. If the stimulus measure is passed before the meeting expect the Fed to punt again until the January run-offs are decided. Then they will have a clearer indication of the extent of help that may come from the fiscal side in the new year. The first meeting in 2021 will be held on January 27.

 

2.  November CPI Report — Thursday

Inflation had been mentioned as a latent threat given the stimulus initially provided to the economy and another stimulus bill pending. Combined with vaccines poised to be unleased on the populace bond market indicators like long-term yields and breakeven rates have started to rise on the expected increase in inflation. Color us skeptical that inflation gains any real foothold in 2021.  For November, overall CPI is expected to increase  0.1% versus the unchanged rate in October. The core rate (ex-food and energy) is also expected to increase 0.1% versus unchanged in October.  YoY CPI is expected to be 1.1% after last month’s 1.2% result. Core CPI YoY is expected to remain at 1.6% for a second straight month. Thus, with docile monthly and YoY numbers, inflation may be something to expect at some point but that’s a late 2021 story, if at all.

Monthly CPI YoY

 

3.  October JOLTS Job Openings — Wednesday

The slide in monthly job gains will get investors and Fed officials concerned so the Job Openings and Labor Turnover Report for October will get additional relevance for that reason. While the report is a month behind the jobs report it does provide some additional labor market information that will be of interest to policy makers and investors. Expectations are for 6.300 million openings versus 6.436 million in the prior month. Much like the monthly BLS report, the JOLTS report is slipping a bit and that will concern policymakers as still more that 10 million people remain unemployed from the pandemic. It does help build the case for passing the proposed stimulus bill.

 

4.  November NFIB Small Business Optimism — Tuesday

In the field of confidence readings the Conference Board’s Consumer Confidence Report and the University of Michigan Consumer Sentiment Survey are the two biggies, but in the field of small business confidence the NFIB report carries the day. The report is expected to post a 102.5 reading for November, slightly off the 104.0 reading in October. It got as high as 108.8 back in August 2018 and dipped to 90.9 in April. The average over the past two years is 101.8 so sentiment has stayed above that two-year average mark.  A drop in optimism from October is not unusual as this typically Republican-leaning group reacts to the election results.

 

5.  December U. of Michigan Consumer Sentiment — Friday

With the consumer playing such a pivotal part in the economy, gauging their sentiment is crucial to determining how likely they are to continue shopping as virus cases continue to spike. For December, the Bloomberg consensus is for sentiment to be 76.0 down slightly from November’s 76.9 reading while consumer expectations edge lower to 69.0 versus 70.5 in November. The sentiment index peaked at 101 back in February and bottomed at 68.0 in April. So while there has been some improvement off the lows, sentiment appears to be stalling and moving lower given the increased virus cases and that is a fairly logical read on the situation.

 

 


bar graph icon  Yield Universe

Yield/Duration Relationship

 

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Published: 12/07/20 Author: Thomas R. Fitzgerald