Saturday, February 6, 2021

Economic Reports: Week Ending Feb. 5, 2021

January manufacturing remains solidly in expansion, but price pressures continue to ramp up

The January Institute for Supply Management (ISM) Manufacturing Index showed manufacturing growth (a reading above 50) decelerated more than anticipated. The index declined to 58.7 from December's downwardly revised 60.5 level, and versus the Bloomberg consensus estimate of a dip to 60.0. This index came off the highest level since early 2018 as new orders and production growth declined but both figures remained north of 60, and employment moved modestly further into expansion territory. Prices remained elevated, rising 4.5 points to 82.1, a level not seen since April 2011, indicating continued supplier pricing power.

The ISM said, "The manufacturing economy continued its recovery in January. Survey committee members reported that their companies and suppliers continue to operate in reconfigured factories, but absenteeism, short-term shutdowns to sanitize facilities and difficulties in returning and hiring workers are continuing to cause strains that limit manufacturing growth potential. However, panel sentiment remains optimistic (three positive comments for every cautious comment), similar to December levels."

The final January Markit U.S. Manufacturing PMI Index was unexpectedly revised higher to 59.2 from the preliminary level of 59.1, where is was forecasted to remain, and above December's 57.1 level. A reading above 50 denotes expansion and this was the highest on record pushed up by accelerated expansions in output and new orders. However, the report did note that cost pressures intensified amid raw material shortages, but firms were able to partially pass on higher costs, with selling prices rising at the fastest pace since July 2008. The release is independent and differs from the Institute for Supply Management's (ISM) report, as it has less historic value and Markit weights its index components differently, while it surveys a wider range of companies.

Construction spending rose 1.0% month-over-month (m/m) in December, versus projections of a 0.9% gain, and following November's upwardly revised 1.1% increase. Residential spending rose 3.1% m/m but non-residential spending declined 0.8%.

Homeownership rate normalizes 

The homeownership rate fell 1.7 percentage points in Q4 to 65.6%, its lowest level in three quarters. The data moved toward normalization following a spike in Q2 that reflected a temporary moratorium on evictions and lenience on foreclosures during the pandemic. But the homeownership rate is still higher than a year ago, and it is above its historical average, as record low mortgage rates and fiscal stimulus have spurred housing demand. 

The homeowner vacancy rate edged up slightly to 1.0%, but this is still close to its lowest level since 1978. The rental vacancy rate, at 6.5%, is also low by historical standards. These statistics reflect the ongoing housing shortage in the country, which we estimate at about 2.3 million units at the end of 2020. Tight housing inventory should continue to bid up home prices in 2021. 

NYC services activity moderates 

The ISM New York Current Conditions Index dropped 10.1 points in January to 51.2, as services activity in the region moderated significantly at the start of the year. The Outlook Index sank 17.4 points, the most in six months, to 53.3, as optimism about near-term growth prospects evaporated. This may partly reflect the hiccups in the vaccine rollout and a realization that the recovery may be slower than initially anticipated. 

Service providers cut their purchases at the quickest rate since last May. Employment grew at a slower pace. Cost inflation accelerated. Revenues went back into contraction territory, although forward guidance held up. 

ADP private sector employment report tops forecasts

The ADP Employment Change Report showed private sector payrolls rose by 174,000 jobs in January, versus the Bloomberg forecast calling for a 70,000 gain. December's decline of 123,000 jobs was revised to a 78,000 decrease. Today's ADP data, which does not include government hiring and firing, comes ahead of Friday's broader January nonfarm payroll report, expected to show headline employment grew by 70,000 jobs and private sector jobs rose by 105,000 after both figures declined in December (economic calendar). The unemployment rate is forecasted to remain at 6.7% and average hourly earnings are projected to rise 0.3% month-over-month (m/m) and be up 5.0% y/y.

Mortgage applications on the rise

The MBA Mortgage Application Index rose by 8.1% last week, following the prior week's 4.1% decrease. The solid rise came as the Refinance Index jumped 11.4%, while the Purchase Index was little changed, ticking 0.1% higher. The average 30-year mortgage rate decreased 3 basis points (bps) to 2.92%.

Jobless claims better than expected

Weekly initial jobless claims came in at a level of 779,000 for the week ended January 30, below of the Bloomberg estimate of 830,000, and compared to the prior week's downwardly revised 812,000 level. The four-week moving average dipped by 1,250 to 848,250, and continuing claims for the week ended January 23 fell by 193,000 to 4,592,000, south of estimates of 4,700,000. The four-week moving average of continuing claims declined by 120,000 to 4,881,750.

The report comes ahead of tomorrow's key January nonfarm payroll report, where we are closely watching the labor force participation rate as it is the key to recovery in bringing people back into the labor market who have been forced out and can't make their way back. Schwab's Chief Investment Strategist Liz Ann Sonders discusses in her article, Scar Tissue: Weak Jobs Report Emphasizes COVID's Scars, how small business trends bear watching—notably hiring plans as well as most significant constraints on hiring.

Preliminary Q4 nonfarm productivity falls

Preliminary Q4 nonfarm productivity fell by 4.8% on an annualized basis, versus expectations of a 3.0% decline, and following the upwardly revised 5.1% increase seen in Q3. Labor productivity, or output per hour, is calculated by dividing real output by hours worked by all persons, including employees, proprietors, and unpaid family workers, and is a major contributor to the economy's long-term health and prosperity. Unit labor costs rose by 6.8%, versus the forecast calling for an 4.0% gain. Unit labor costs were revised lower to a drop of 7.0% in Q3.

Factory orders beat forecasts

Factory orders rose 1.1% month-over-month (m/m) in December, versus estimates of a 0.7% gain, and compared to November's upwardly revised 1.3% gain. This was the eighth-straight monthly rebound from the historic 13.5% tumble in April which followed the 11.0% fall in March. Durable goods orders—preliminarily reported last week—were revised higher to a 0.5% gain for December, and excluding transportation, orders were adjusted higher to a 1.1% increase. Finally, nondefense capital goods orders excluding aircraft—considered a proxy for capital spending—were revised higher to a 0.7% gain.

January jobs report misses

Nonfarm payrolls (chart) rose by 49,000 jobs month-over-month (m/m) in January, compared to the Bloomberg consensus estimate of a 105,000 rise, and following December's downwardly adjusted decline of 227,000. Excluding government hiring and firing, private sector payrolls increased by 6,000, versus the forecasted rise of 163,000 after falling by a negatively revised 204,000 in December. The labor force participation rate dipped to 61.4% from December's 61.5% rate, where it was expected to remain.

The unemployment rate dropped to 6.3% from December's 6.7% rate, where it was expected to remain. The underemployment rate—including total unemployed and those employed part time for economic reasons, along with people who are marginally attached to the labor force—declined to 11.1% from the prior month's 11.7% rate. The number of permanent job losers, at 3.5 million, changed little but is 2.2 million higher than the pre-pandemic level in February 2020. The number of long-term unemployed—those jobless for 27 weeks or more—at 4.0 million, was about unchanged and accounted for 39.5% of the total unemployed. However, the number of persons on temporary layoff decreased by 2.7 million, down noticeably from the recent high of 18.0 million in April 2020 but is 2.0 million higher than its February level.

Average hourly earnings gained 0.2% m/m, compared to projections of a 0.3% gain, and December's upwardly revised 1.0% increase. Y/Y, wages were 5.4% higher, well above estimates of a 5.0% increase. Finally, average weekly hours increased to 35.0 from December's unrevised 34.7 rate, where it was forecasted to remain.

The Department of Labor said notable job gains in professional and business services and in both public and private education were offset by losses in leisure and hospitality, in retail trade, in health care, and in transportation and warehousing. Manufacturing employment snapped a string of 8 months of growth, dipping 10,000 which was a bit of a surprise given the positive employment components of January regional and national PMI reads on the industry.

Wednesday, February 3, 2021

Regulation and stock trading

Yellen calls the regulators

(Seeking Alpha) Although the "meme stock" trade continues to unwind, discussions over market volatility continue to ensue. Treasury Secretary Janet Yellen has called a meeting with the SEC, the Federal Reserve Board, the Federal Reserve Bank of New York and the Commodity Futures Trading Commission to address the recent market frenzy involving GameStop (NYSE:GME) and Robinhood. This comes after the SEC said it was investigating "manipulative trading activity," as well as actions taken to "unduly inhibit the ability to trade certain securities."

Fine print: Yellen has requested an ethics waiver to hold the meeting after receiving more than $700,000 in speaking fees from Citadel Advisors, the financial empire run by Ken Griffin. Griffin also runs a hedge fund and controls Citadel Securities, a market maker that executes trades for Robinhood.

What could happen? Likely nothing, but if the SEC were to act, it could pursue a series of rules, ranging from short interest caps to taxing short-term bets, according to BofA analyst Michael Carrier. The commission may also move to review payment for order flows (PFOF) and pursue social media oversight to ward off potential market manipulation. Jefferies analyst Daniel Fannon meanwhile thinks the SEC could explore greater investor education around derivatives and risk management or increase costs for leverage services.

This is all taking place while the SEC operates under temporary leadership. The eventual confirmation of Gary Gensler, President Biden's pick for the agency, is a virtual certainty, but it could take weeks or months for the Senate to approve him. Right now, the chamber is focusing on Biden's cabinet-level nominations, coronavirus relief and a possible impeachment trial for President Trump. 

Deeper dive into how trades are settled

A topic that has gotten lots of attention on Wall Street over the last few days is a requirement that stocks be physically deposited in an account within two days of making a transaction - a process known as "T+2." During that time, brokers have to post collateral to the Depository Trust & Clearing Corp. because equity prices can fluctuate over those 48 hours, and the lag can make sure everything turns out alright. Some buyers are also using margin and sellers can be tapping borrowed shares, so the requirement could help prevent brokers from getting burned before the transactions settle.

Backdrop: For many years, markets operated on a "T+5" settlement cycle, when security transactions were done manually. In the 1990s, the SEC shortened the settlement cycle to three business days, which reduced the amount of money that needed to be collected at any given time. It was only in 2017 that the commission moved to T+2, calling the previous standard an outdated "settlement cycle" due to improvements in technology, emerging new products and growing trading volumes.

Latest argument: Given our current lightning-fast systems, many market participants say two days is too long to settle trades. "Moving the industry closer to T+1 settlement is good for everyone because the less risk we maintain in the system, the better off everyone is," said Shane Swanson, former director of equity market structure at Citadel Securities. Some are even calling for instant settlement, like Robinhood (RBNHD) CEO Vlad Tenev, who had to put up some big funds this week to cover the trading frenzy on his platform.

"There is no reason why the greatest financial system the world has ever seen cannot settle trades in real time. Doing so would greatly mitigate the risk that such processing poses," Tenev wrote in a blog post. "Technology is the answer, not the oft-cited impediment. We believe it is important for all relevant stakeholders to convene in the near term to discuss the urgency and necessity of this issue."

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