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- Major U.S. indexes down modestly; NYFANG green, transports red
- Materials biggest loser among S&P 500 sectors; real estate up most
- Dollar up; crude, gold, bitcoin down
- U.S. 10-Year Treasury yield ~1.65%
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SECOND HELPINGS: CONSUMER SPENDING/SENTIMENT, INFLATION, NEW HOME SALES, ETC., (1230 EST/1730 GMT)
The economic data parade continues, with mostly lofty reports wafting by like Macy's balloons.
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So reload your plates and forget about leaving room for pie.
American consumers opened their wallets last month, if somewhat begrudgingly (see University of Michigan, below) as their incomes crept higher.
Consumer spending (USGPCS=ECI) increased by 1.3% in October according to the Commerce Department's personal consumption expenditures report (PCE), beating the 1% consensus and building on the previous month's 0.6% gain. read more
Meanwhile, personal income (USGPY=ECI) also beat expectations, increasing by a less robust 0.5%.
"As we look forward to Thanksgiving, there is much to be thankful for in this fiscally-stimulated recovery," writes Gregory Daco, chief U.S. economist at Oxford Economics (OE). "Real consumer spending is now 4.2% above its pre-Covid level while real disposable income is 2.4% higher."
Taken together, the saving rate edged down to 7.3% of disposable income, returning to pre-COVID levels.
While the saving rate is often seen as a barometer of consumer expectations - Americans tend to stuff their piggy banks in times of economic uncertainty - the dipping rate could be partly due to expiring emergency benefits and rising inflation.
"All wasn’t rosy for US households as they had to contend with higher inflation, reduced product availability and diminished fiscal support," Daco adds. "Adjusted for inflation, real consumer outlays rose a more modest, but still robust 0.7% with spending on services up 0.5%."
As long as we're on the subject, elsewhere in the PCE report, the core price index, which strikes out volatile food and energy prices nailed expectations on the head, rising 0.4% month-over-month.
Year-over-year, PCE growth (USPCE2=ECI) also hit a consensus bulls eye with its 4.1% print.
Core PCE is the U.S. Federal Reserve's preferred inflation yardstick and the number is closely watched as a potential harbinger of the central bank's rate hike timeline.
The graphic below shows core PCE along with other major indicators, all of which continue to soar well above Powell & Co's average annual 2% inflation target:
Sales of newly constructed U.S. homes (USHNS=ECI) increased by 0.4% in October to according to data from the Commerce Department.
The gain builds on the previous month's downwardly revised 7.1% growth, resulting in a lower-than-expected 745,000 units at a seasonally adjusted annualized rate (SAAR). read more
Still, the increase jibes well with recent reports showing rebounds in building permits and homebuilder sentiment, and fleshes out the narrative that the housing sector is finding a sturdier foundation after pandemic-driven demand spikes and supply scarcity pushed prices beyond the realm of affordability.
"Prices remain high but gradually rising inventories should limit further acceleration," says Rubeela Farooqi, chief U.S. economist at High Frequency Economics. "Fears of higher mortgage rates as the Fed tapers should bring at least some buyers into the market."
Speaking of the devil, demand for home loans managed to increase last week despite an uptick in mortgage rates, according to the Mortgage Bankers Association (MBA).
Applications for loans to buy homes (USMGPI=ECI) and refinance existing loans (USMGR=ECI) both crept higher, by 4.7% and 0.4%, respectively, despite the average 30-year fixed contract rate (USMG=ECI) gaining 4 basis points to 3.24%.
"We expect home sales to continue to be constrained by limited inventory and the last year’s spike in prices, which has eroded affordability for many prospective home buyers," says Nancy Vanden Houten, lead economist at Oxford Economics. "The recent rise in mortgage rates, which are up more than 25 basis points since the summer, has also taken a toll on affordability at the margin."
Remember the University of Michigan?
Its final take on November sentiment (USUMSF=ECI) confirmed that the mood of consumers has soured, dropping 4.3 points to 67.4, only slightly rosier than the advance take released earlier this month.
But as OE's Daco reminds us "watch what consumers buy, not what they say."
And the frustratingly un-transitional inflation wave is largely to blame.
"Consumers expressed less optimism in the November 2021 survey than any other time in the past decade about prospects for their own finances as well as for the overall economy," writes Richard Curtin, chief economist of UMich's Surveys of Consumers. "The decline was due to a combination of rapidly escalating inflation combined with the absence of federal policies that would effectively redress the inflationary damage to household budgets."
As seen in the graphic below, consumer inflation expectations continue to run hot, and the spiking year-over-year PCE price index - the Fed's pet inflation gauge - is confirming those fears:
Wall Street is taking its time to digest the data feast.
However, as stands, the three major indexes are modestly red.
THE TURKEY INDICATOR: THANKSGIVING 2021 IS GOBBLING UP MORE GREEN (1134 EST/1634 GMT)
As U.S. consumers prep for the annual eatathon otherwise known as Thanksgiving dinner, they're likely seeing notable differences compared with last year's.
In some cases they may be lucky enough to see more guests around the table, since around 196 million Americans have been vaccinated for COVID-19 by now.
But with all this talk of inflation swirling, Live Markets got curious about the price of laying on this year's feast.
And it turns out that Thanksgiving revelers will need to pay 14% more than last year, with an even higher price increase for the center piece of the meal, according to the American Farm Bureau Federation.
While prices around the country will obviously vary hugely, the national advocate for farmers and ranchers 36th annual survey, using 218 price surveys from all 50 states and Puerto Rico, gives some indication of the direction.
And this year's survey represents the biggest price increase the Bureau has seen in all 36 surveys, with the next highest increase for the entire basket of food standing at 11% in 2011.
This year's shopping bill includes a $23.99 price tag for a 16-pound turkey, or $1.50/lb, which is up an eye popping 24% from 2020.
Their estimated total bill of $53.31, for 10 people, also includes stuffing, up 19%; sweet potatoes, up 4%; rolls, up 15%; frozen peas, up 6%; cranberries, up 11%; and a vegetable tray, coffee with milk and whipped cream-adorned pumpkin pie.
Adding other popular items like ham, Russet potatoes and frozen green beans would bump the price up to $68.72, also 14% higher than 2020, the Farm Bureau says.
To be sure, prices have come down since the Bureau ran its price checks between Oct. 26 to Nov. 8, which was about 2 weeks before grocery chains started discounting with the price dropping to $1.07/lb Nov. 5-11 and $0.88/lb Nov. 12-18. But according to the Bureau the discounts came later this year.
Meanwhile at Wholefoodsmarket.com, they were selling a $139.99 oven-ready turkey meal for 8 people. At Walmart, the Butterball frozen turkey cost about $0.98/lb.
Interestingly enough, regardless of whatever investors hope to eat Thursday, they do seem to have less appetite for shares in turkey vendors in at least some cases.
Shares in Hormel Foods (HRL.N), which sells turkeys as well as other foods, last traded at $43.03 compared with its closing price of $46.87 on the day before Thanksgiving 2020, Nov. 25. However, another turkey vendor, Seaboard Corp (SEB.A) last traded at $3,947.50 compared with its Nov. 25, 2020, price of $3,294.34. Now that's some fancy gravy!
(Sinéad Carew, Terence Gabriel)
DATA FEAST, PART 1: JOBLESS CLAIMS, DURABLE GOODS, GDP, ET AL (1100 EST/1600 GMT)
Market participants were treated to a veritable buffet of indicators on Thursday, as economic reports caused a traffic jam on their way out of town in advance of the Thanksgiving holiday.
So bountiful is this economic cornucopia, this post has been carved in two. So dig in.
Consensus called for a much more modest drop to 260,000.
Of potential concern, initial claims are now actually a hair below the range typically associated with healthy labor market churn and is likely evidence of the ongoing labor drought, as employers grow increasingly reticent to hand out pink slips.
"Workers remain in high demand in a labor market where payrolls and the civilian labor force remain well below pre-pandemic levels," writes Rubeela Farooqi, chief U.S. economist at High Frequency Economics. "Developments on the health front remain a risk that may weigh on labor supply, but we expect workers to gradually return to the labor market, as the cushion from savings diminishes, supporting job growth over coming months."
Ongoing claims (USJOBN=ECI), reported on a one-week lag, failed to meet analyst forecasts, dipping to a still-elevated 2.049 million.
For context, the number of Americans on unemployment for two weeks or longer could fill the city of Austin Texas twice over.
Data on long-lasting, U.S.-made merchandise (USDGN=ECI) for the month of October disappointed.
New orders for durable goods - which include everything from toasters to fighter jets - unexpectedly dropped by 0.5% last month, defying the modest 0.2% growth projected by economists.
Digging deeper into the Commerce Department's report, a 20.1% plunge in defense goods and a 14.5% drop in commercial aircraft pulled the headline number into negative territory, while a 4.8% gain in autos/parts and a 7.9% jump in communications equipment helped mitigate the decline.
Core capital goods (USNDXA=ECI) - which excludes aircraft and defense items and is considered a reliable proxy for U.S. business spending intentions - rose 0.6%, edging higher than consensus and building on September's upwardly revised 1.3% growth. read more
"The ongoing surge in core capital goods orders, which are some 20% above their pre-Covid trend, and still rising rapidly - is a strong indication of faster productivity growth, which will help offset rapid wage gains and thereby constrain inflation, once the near-term Covid-driven surge abates," says Ian Shepherdson, chief economist at Pantheon Macroeconomics.
An advance reading on U.S. goods trade and wholesale inventories for the month of October was also release by the Commerce Department.
The gap between the value of goods imported to the U.S. and domestic goods exported overseas (USGBAL=ECI) contracted $87.9 billion as rebounding foreign demand prompted a surge in exports.
"The goods deficit contracted sharply in October on a historic month for exports," writes Mahir Rasheed, U.S. economist at Oxford Economics (OE). "While the latest data may signal a turning point as import growth moderated, risks from the pandemic will continue to dictate trade flows heading into 2022."
Meanwhile, the value of goods stored in the warehouses of U.S. wholesalers (USAWIN=ECI) increased by 2.2% last month, building on September's 1.4% growth.
This bodes well for the broader economy, as private inventories had been a drag on GDP for four straight quarters until its modest contribution in Q3.
Speaking of the devil, the very busy Commerce Department also released its second stab at third-quarter GDP (USGDPP=ECI), revising it slightly higher to a 2.1% quarterly annualized rated, coming in a hair below the 2.2% economist forecast.
The print confirmed an expected slowdown in economic recovery from the shortest and steepest contraction on record.
"After experiencing one of the most severe economic shocks of the past century in 2020, the US economy has displayed one of the most rapid recoveries in modern history in 2021," says Gregory Daco, Chief U.S. economist at OE. "Still, it's not time to pop the Champagne!"
"The next stage of the recovery will be trickier to navigate with an unresolved health situation and less fiscal support," Daco adds.
Crucially, the consumer spending component - which does the heavy lifting, accounting for about 70% of the economy - was upwardly revised to 1.7% from 1.6%.
But as seen in the graphic below, that gain was entirely thanks to spending on services, with a decline in spending on durable goods echoing the monthly data.
Wall Street appeared to be saving its risk appetite.
All three major U.S. indexes were lower in morning trading, with tech (.SPLRCT) weighing heaviest on the benchmark S&P 500.
WALL STREET FALLS WITH DISCRETIONARY WEAKNESS (1010 EST/1510 GMT)
U.S. stocks are lower in early Wednesday trading, with consumer discretionary leading sector declines in the S&P 500 following some disappointing results from retailers including Gap (GPS.N)
Gap shares are down more than 22% in early trading, while Nordstrom (JWN.N) is down more than 27%, also following quarterly results. The discretionary index is off about 0.6% early.
Nordstrom said labor costs pinched its quarterly profit and warned of product shortages at its off-price stores heading into the holiday season.
BOFA SETS 4,600 TARGET FOR S&P 500, DRAWS PARALLEL TO 2000 (0911 EST/1411 GMT)
BofA Global Research set a 4,600 target for the S&P 500 at year-end 2022 and compared this year's market exuberance shown in retail trading mania and frenzied IPO activity to the market activity in 2000 in its U.S. equity outlook note.
"There are too many similarities between today and 1999/2000 to ignore," wrote a group of strategists led by Savita Subramanian, further noting that one out of four of the IPOs of 1999 are today's blue chips.
The PT implies around 2% downside to S&P 500's (.SPX) last closing price of 4,690.70 as strategists said rising wage growth is one of the biggest headwinds for companies heading into the new year.
They add that the 'TINA' (there is no alternative) argument for equities would be less compelling if cash yields rival the current S&P 500 dividend yield of 1.3%, and if the 10-year U.S. Treasury yield rises to 2% by 2022-end, as BofA rates strategists have predicted.
Strategists prefer to stick with small caps and expect the group to outperform large caps at least in H1 2022.
Among S&P sectors, BofA is overweight energy (.SPNY) and financials (.SPSY) that offer inflation-protected yield as well as healthcare (.SPXHC), and underweight communication services (.SPLRCL.), consumer staples (.SPLRCS) and consumer discretionary (.SPLRCD).
Here's a look at some of the top Wall Street analysts' outlook for U.S. stocks in 2022. read more
NASDAQ COMPOSITE: CAN'T CATCH ITS "BREADTH" (0900 EST/1400 GMT)
For example, the Nasdaq daily advance/decline (A/D) line topped on Feb. 9 of this year, before ultimately collapsing to a 9-month low in mid-August:
Despite, IXIC new highs since then, including just late last week, this closely watched breadth measure remains well shy of its 2021 highs. Earlier this month, it failed to reclaim its 200-day moving average.
So far this year, there have been 39 negative breadth days. That is, the Composite closed higher, but the A/D line fell that day. Of note, around 15% of those days have occurred in just the past 30 days or so, suggesting recent internal tension.
Also, of those 39 negative breadth days, 16 of them occurred with the composite registering a record close. Three of them have occurred in November, with the last such day Nov. 19, or what is now the Composite's 16,057.44 record close.
Just looking back to early 2020, periods of A/D-line divergence vs the Composite, as well as nearby clusters of Nasdaq record-high closes/negative breadth days, did precede varying degrees of IXIC instability.
Additionally, the A/D line has now fallen seven-straight days and is threatening its August trough. A break below this level will put it at a more than one-year low.
Therefore, unless the Nasdaq can quickly catch its "breadth," risk remains for a much deeper decline from the recent peak. read more
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