Virus Mutation Overwhelms Stimulus Bill

Stimulus 2.0 Passes While Virus Mutates

This holiday-shortened week opens with Congress finally reaching an agreement on a second stimulus bill and it should be voted on today with the president signing it into law soon thereafter.  The latest sticking point over ongoing funding for the Fed’s emergency lending programs was ironed out over the weekend.  Senator Pat Toomey R-PA was the architect of trying to limit the Fed’s ability to fund emergency programs and that brought a rare rebuke from former Fed Chair Ben Bernanke. The  compromise reportedly preserves Fed independence but new emergency programs would require congressional approval.  Also, while stimulus checks are part of the package, as are supplementary unemployment benefits, they are half the amount from the CARES Act and the unemployment benefit extension lasts only ten weeks, not enough time to bridge the gap to a post-vaccinated economy. In any event, the market can return focus to virus trends and news from the UK is not good with the discovery that a mutation of the spike protein is making the virus more contagious. It’s not entirely known yet if the new vaccines will be any less effective with the mutation and that has global markets in a risk-off mood today and it looks to be the case here as well.

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 Top 5 Events for the Week

Dec. 21 — 25, 2020

1. Stimulus and Virus Developments — All Week
2. December Consumer Confidence — Tuesday
3. November Existing Home Sales — Tuesday
4. November Durable Goods Orders — Wednesday
5. November Personal Income and Spending — Wednesday

 

1.  Stimulus and Virus Developments — All Week

In this holiday-shortened week Congress has finally come to an agreement on a second stimulus bill and it should be voted on today with the president signing it into law either today or tomorrow. While Senate Majority Leader McConnell stated early last week that there was no way forward in the negotiations there’s nothing like a deadline to focus the mind on the task at hand. The latest sticking point over ongoing funding for the Fed’s emergency lending programs was ironed out. Senator Pat Toomey from Pennsylvania was the architect of trying to limit the Fed’s ability to fund emergency lending programs and that brought a rare rebuke from former Fed Chair Ben Bernanke. Toomey was quoted as saying over the weekend that the compromise in the bill “will preserve Fed independence” but new programs would require congressional approval.  While stimulus checks are part of the package, as are supplementary unemployment benefits they are expected to be half the amount from the CARES Act and the unemployment benefit extension lasts only ten weeks, probably not enough time to bridge the gap to a post-vaccinated economy. In any event, the market can return focus to virus trends and news from the UK is not good with the discovery that a mutation of the spike protein is making the virus more contagious. It’s not known yet how effective the new vaccines will handle the new mutation and that has markets on the defensive this morning with a flight to safety trade into Treasuries.

 

2.  December Consumer Confidence — Tuesday

With two-thirds of the economy consumption-based it’s critical to look at the confidence of said consumer for tells on future spending and hence GDP. While there was a predictable dip at the early stages of the pandemic it never fell to levels of the Great Recession, perhaps due to the stimulus measures and furloughed workers hopes for a quick return to work. However, with virus cases trending up and renewed lockdowns in some states, and no renewed stimulus bill as of yet will confidence take a hit? For December, confidence is expected to trend slightly higher to 97.0 versus 96.1 in October.  Confidence levels are well off pre-pandemic highs in the  130’s and off the 102 print in September.

 

3.  November Existing Home Sales — Tuesday

On Tuesday we’ll get November existing home sales—accounting for 90% of the residential market—which are expected to be down slightly from a very strong October number shrinking –2.2% to 6.70 million houses from 6.85 sold on an annualized basis. The housing sector continues to benefit from record low mortgage rates and the November numbers should continue to show a housing market hitting on all cylinders.  The 6.85 million annualized figure in October was the largest since  November 2005 when sales peaked at 7.25 million during the housing bubble.

 

4.  November Durable Goods Orders — Wednesday

While the services side of the economy has taken the brunt of job losses and soft sales, the goods and manufacturing side has faired much better without having to contend with customer-facing COVID restrictions. We should see that again in the November durable goods orders which are expected to increase 0.6% versus a 1.3% gain in October. Orders less the volatile transportation sector are expected to be up 0.5% versus a 1.3% gain in September. Thus, while November is expected to be slightly off the pace in October, gains in orders are still likely showing once again the  goods side of the economy continues to do well despite the increase in virus cases in recent months.

 

5.  November Personal Income and Spending — Wednesday

Personal income has declined in two of the last three months and November is expected to be negative as well with a –0.2% month-over-month dip forecast versus a deeper –0.7% drop in October. Personal spending is also expected to dip  -0.2% versus a steeper drop of –0.7% in October. Meanwhile, core PCE, the Fed’s favorite inflation indicator, is expected to stay at 1.4% year-over-year, matching the October rate.  It hit a multi-year low of  0.91% in April but has been in rebound mode since then but has leveled off since August.  It’s still well below the Fed’s target of 2.0% and is another reason to expect the Fed to remain in ultra-accommodative mode for the next couple years.

 

 

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