Shot out of a cannon!

Any sense of caution that might have accompanied the new year as a result of our dramatic trade higher into year-end was seemingly nowhere to be found last week as themes that had fueled a rather remarkable run in 2020 remained in play. For the week, The Russell 2000 added 116.80 points or a staggering 5.91%. The Nasdaq composite added 313.69 points or 2.43%. The S&P 500 rose 1.83% and the Dow Industrials followed up the rear adding a relatively tame 491.49 points or 1.61%. Clearly, the takeaway from the first full week of equity trading in 2021 is that investor appetite for growth, and as a result risk, remains intact as we open up 2021.

An uptick in volume across the board underpinned our long-running “Confirmed Uptrend” in the first full week of trading, last week.

On Friday however, the robust nature of our new year opening lost a degree of luster – and volume. NYSE volume on Friday slipped 7.51% while on the NASDAQ the volume rose 7.01% as markets attempted to overcome a disappointing December Employment Report.

What was behind last week’s punch higher in equity prices that we have not covered extensively in this note in recent weeks and months? Not much. However, there are subtle shifts in focus that institutional investors are paying a great deal of attention to. It all boils down to one word “Stimulus.” Increasingly, it appears as though the incoming Biden Administration is committed to stimulus on a level that will be historic. Wall Street is betting that federal spending on that level will not only sure-up the U.S. economy but propel it forward.

Crude oil’s resurrection

Though I tend to focus my energy on equities in this weekly note, I do occasionally pick up on threads that tend to impact equities. A great case in point has been the move in crude oil prices in recent months. Last Friday Brent crude closed just shy of $56/bbl., at $55.99, after adding more than 8% on the week. West Texas Intermediate (WTI) closed at its highest price since February, at $52.20/bbl. WTI rose over 7% on the week.
Not unexpectedly, the driving force behind these rising prices is production cuts. To keep OPEC members in tow in terms of production targets, Saudi Arabia last week pledged production cuts of 1 million barrels a day in coming months while other members of OPEC have committed to keeping production unchanged.
Rising crude prices directly impact the number of rigs in production. A great case in point can be found in the North America Baker Hughes Rig Count totals. For the week ending 1/8/2021, 477 North American rigs were in production. In the previous week, there were 410 rigs in production.

Last week’s economic calendar highlights:

On Tuesday morning we received the ISM Manufacturing Index reading for December. To nearly every strategist and economist’s surprise, the reading came in well above Econoday consensus and even well above the high range of consensus at 60.7. The range for the reading had been 56.0-57.5. November’s reading was also above consensus coming in at 57.5 versus 56.5. This reading, provided monthly by the Institute for Supply Management, is comprehensive in that it calculates the survey of purchasing managers at nearly 300 manufacturing firms across the nation. The comprehensive nature of the reading makes it not only economically significant but also potentially a market-moving data point.

On Wednesday we received the FOMC Minutes for the meeting that was held on December 15-16, 2020. In a nutshell, the minutes can best be summed up in the following quote “Uncertainty surrounding the economic outlook.” To no one’s surprise, the Federal Reserve continues to emphasize the uncertainty that has become an interictal part of the Fed’s outlook as the COVID-19 pandemic continues to provide not only uncertainty but also inconsistent outcomes across the nation.

On Thursday, we received the monthly release of International Trade in Goods and Services data. Not unlike the previous week’s disappointing expansion of the balance deficit in the trade in goods deficit, this combined reading (Goods and Services) reflected further deficit expansion. The reading for November was $-68.1 B. October’s monthly reading was $-66.8 B. Weekly Jobless Claims for the week ending 1/2/2021 were also released on Thursday morning. At 787 K, they matched the previous week’s results. Initial Claims slipped by a scant 3 k. The 4-week moving average stands at 818.75 K.

Finally, on Friday we received the most important data point of the week – the Monthly Employment Report for December. Nonfarm payrolls M/M came in at -140,000. The Unemployment Rate remained steady at 6.7%. Private Payrolls M/M were -95,000. Manufacturing Payrolls M/M were 38,000. The Labor Force Participation Rate (LFPR) remained at 61.5%. No question about it, this report was both sobering and disappointing for investors. It was the first monthly drop in payrolls in 8 months.

This week’s economic Calendar highlights:

On Wednesday we will receive the Consumer Price Index (CPI) from the Bureau of Labor Statistics for December. On a M/M basis, the reading is expected to come in at 0.4% according to Econoday – which would be welcome news and double the results from November. Y/Y the Econoday consensus reading is 1.3%. Frankly, the fact that this reading has remained positive at all is a bit of a mystery.

Weekly Jobless Claims for the week ending 1/9 are released Thursday morning. Initial Claims are expected to remain relatively unchanged from the previous week’s reading, 788 K versus 787 K. The 4-week moving average is not expected to deviate from the previous week’s reading for obvious reasons.

On Friday morning the Producer Price Index -Final Demand (PPI-FD) reading for December is due out. Econoday consensus for the M/M reading is 0.3% versus November’s 0.1%. The Y/Y reading for December is expected to remain unchanged from November’s at 0.8%. Retail Sales for December, also due out Friday, are expected to improve to -0.1% from November’s sobering -1.1%. Interestingly, the control group of the release is expected to come in at 0.2% for the month. It is the only Econoday consensus number not expected to be negative in the report. December’s Industrial Production figures, due out Friday at 9:15, are not expected to reflect much change in the manufacturing landscape. Econoday consensus is 0.4% on a M/M basis – matching November’s results. Manufacturing Output (M/M) is expected to slip to 0.3% from the previous reading of 0.8%. Econoday consensus for Capacity Utilization on a M/M basis is 73.5% versus November’s 73.3%.

Flickr photo: by Babette Plana

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