February 05, 2021 | 13:17
Super Bull XXI
One of my all-time favourite quotes about the markets comes courtesy of the legendary Dennis Gartman, who often noted that “a market that doesn’t react bearishly to bearish news isn’t bearish”. So simple, so clear, so wise. And this week saw the equity markets more than reverse last week’s hiccup, plowing through good news and bad, and using better-than-expected earnings results as leverage to scale yet new record highs with gains in each session. The World MSCI had its biggest weekly gain since the U.S. election three months ago. Commodity prices mostly moved in sync, with oil hitting one-year highs, lifting inflation expectations and, in turn, pulling bond yields up as well close to key thresholds. One notable outlier from the broad upswing in risk assets was in the currency space, as the U.S. dollar edged higher, in part reflecting a view that the U.S. economy may outperform in relative terms.
A common element behind the market moves this week was the growing prospects for a meaty U.S. fiscal stimulus package. The Senate voted (51-50) to open the way for the reconciliation process, potentially leading to something close to Biden’s initial $1.9 trillion proposal. While some moderate Democrats may yet push to water it down somewhat, it appears that the President is willing to put bi-partisanship aside on this early pledge, and “act big”. Our forecast for this year had built in something around half the size of Biden’s ask, but it seems that Congress is aiming at something significantly larger.
Such a heavy dose of fiscal support would only add to an improving economic backdrop. While there were some serious grumblings about the January payroll employment report, the fact is that the U.S. did manage to add 49,000 jobs just as the second wave was cresting. And, the household report was even healthier (up 201,000), helping chop the unemployment rate four ticks to 6.3%. With initial jobless claims since tumbling in more recent weeks, and some restrictions lightening, jobs growth is likely to gather momentum in the coming months.
The mixed employment report was a mild downer after a week of generally high-side surprises for the U.S. economy. Of note, auto sales hit a pandemic high of 16.6 million units last month, tantalizingly close to year-ago levels (of around 17 million). Both ISM surveys stayed solid in January at 58.7, with factories fading just a tad, while services actually perked up to hit that level. (The strength in the latter stands in staggering contrast to locked-down Europe, where the services PMIs were 45.4 in the Euro Area and just 39.5 in the U.K.) Rounding out a week of sturdy reports, both construction activity and factory orders rose at least 1% in December. Suffice it to say that even with a so-so jobs report, there is clear upside risk to our call of 1.5% GDP growth in Q1, and even to our 5% view for all of 2021.
Sadly, that sunny economic story did not shine on Canada this week. (The upside is that the groundhogs didn’t see their shadow, so an early spring is on its way. Perhaps someone can give the memo to Mother Nature… soon.) In fact, the January jobs report was an absolute clunker, with employment plunging 212,800. In perspective, that represents a drop of 1.2%, which would mark the third worst monthly move in the past 60 years—and only last March and April were worse. The major mitigating factor was that the losses were entirely in part-time jobs, in Ontario and Quebec, and in industries that were locked down by restrictions. And these could return relatively quickly as conditions (eventually) lighten. Curiously, total hours worked managed to rise 0.9% m/m, and are headed for a Q1 increase, suggesting the GDP hit won’t be nearly as severe as the headline jobs result. Still, auto sales were very weak in the month—again, in stark contrast to the U.S.—and production is being waylaid by a chip shortage.
Despite that clear struggle by the Canadian economy to start the year, the TSX rode the coattails of a rebounding S&P 500 and the ongoing comeback in crude to push back above 18,000. WTI hit the $57 level on Friday, up 9% for the week, and now all the way back to its average level in 2019 (i.e., pre-pandemic). In turn, Brent is nearing $60, WCS is keeping pace, and natural gas has flared close to $3 (at least something likes this cold weather). Yet even with this broad-based strength in energy, the Canadian dollar was spectacularly stable this week, barely budging on net from just above 78 cents. And we can’t pin the lack of enthusiasm on the dismal jobs data, as the loonie actually strengthened on Friday. The much bigger weight on the currency was the firming U.S. dollar, and the growing perception that the growth divergence between the U.S. and others could persist. Canada’s lacklustre and now near-stalled vaccine roll-out suggests that the economic rebound could lag the U.S. by roughly a quarter.
The bond market also forged through the bad domestic economic news, driven more by rising oil prices and rising prospects for fiscal spending. The Canadian 10-year yield touched the 1% level on Friday for the first time since last March, and a long way from last summer’s record low of 44 bps. Critically, yields even rose on Friday, despite the cannonading job loss; turning Gartman’s maxim on its head, a market that doesn’t react bullishly to bullish news isn’t bullish. Long-term yields have made an even bigger move, as steepening has been the dominant theme in 2021. The 30-year GoC rose more than 10 bps this week alone to almost 1.6%, compared with barely above 1.2% at the start of the year. The upward lurch in long-term borrowing costs is a reminder to all policymakers that there is no free fiscal lunch—an important message as the finishing touches are now being put on this year’s round of budgets.
The major focus in the coming week, in a relatively light economic calendar, will fall on Wednesday’s U.S. CPI report for January, and Jay Powell’s remarks that same day. With the bond market steadily building in higher inflation expectations—the 10-year breakeven rate is now close to 2.2%—any high-side surprise in CPI would simply push on an opening door. We are expecting a moderate 0.3% m/m rise, which would keep the headline rate stuck below 2%. However, if recent oil price gains stick (or even build momentum), headline inflation is headed for a temporary run well above 3% in the spring, when prices will be compared with the extreme conditions during last year’s shutdowns. As we asserted at length in last week’s Focus, we expect that spike to be temporary, and for inflation to eventually settle closer to 2%. Still, a building wave of fiscal spending could ramp up the high-side risks.
It’s that time of the year again for forecasters everywhere: Head says Chiefs, by 14 points, heart says Bucs. (And, outside of metro Tampa, that may be the only heart pulling for the Bucs, apparently.) But forget that minor issue; the real interesting forecast for next week is whether a certain heavily-shorted bricks and mortar retailer will be up or down 90%. Wild guess… up. Traditional disclaimer, that is most definitely not meant as investment advice.