Markets Jan 03

Markets this week: December PMIs, FOMC minutes

Wall Street rebound reflects optimism about 2021 but also underscores a 'disconnect between the stock market’s wild success and struggling American households'

Markets this week: December PMIs, FOMC minutes 
Wall Street ended 2020 at all-time highs with the Dow Jones Industrial Average and the S&P 500 posting new peaks following the Nasdaq’s record earlier in the week. File photo by Getty Images via AFP.

(ATF) Economic events

Investors will return to the trading floor in the New Year trying to square market optimism with economic reality amid the spread of a new, highly infectious Covid-19 variant as the vaccine rollout is conflicted with logistics and other hurdles in many countries with the efficacy also unproven.

Wall Street ended 2020 at all-time highs with the Dow Jones Industrial Average and the S&P 500 posting new peaks following the Nasdaq’s record earlier in the week. This happened in a year of a deadly pandemic that killed almost 350,000 Americans and left millions jobless.

In 2020, the S&P 500 gained 16.3%, the Dow 7.2% and the Nasdaq 43.6%, the highest annual gain for the benchmark since 2009. Since the US stock market bottomed on March 23, the S&P 500 has risen 68%.

“The rebound reflects Wall Street’s optimism about 2021, but it also underscores the disconnect between the stock market’s wild success and struggling American households,” said David Kotok, founder of Cumberland Advisors.

“The markets are dominated by the folks who are in the upper echelons," he added. "They don’t feel any pain. They read about it, but they don’t experience it. What they do experience is the flip side: We have had very substantial productivity gains with Zoom and other daily life efficiencies.”

On the political front, Wall Street is focused on the two U.S. Senate races in Georgia that will determine control of the chamber and influence Democratic President-elect Joe Biden’s ability to enact his agenda.

On the economic front purchasing managers’ indexes (PMIs) from a host of countries will give us an indication their year end economic conditions.

China's Caixin PMI will be watched after data from the National Bureau of Statistics (NBS) showed the manufacturing sector eased slightly in December after hitting a 12-month high a month earlier.

Last week’s NBS release showed PMI was down by 0.2 points from 52.1 in November, but was still at the third highest level this year. December was the 10th consecutive month in which the PMI reading has been above 50, which indicates an expansion.

The Caixin survey focuses more on small and export-oriented firms while China's official survey published by the NBS largely tracks large companies and state-owned enterprises.

Investors are also will track the US Federal Open Market Committee meeting minutes which will be released on Thursday, to get insights into the panel members' rates outlook. In a near-zero rate environment, bond investors will spend 2021 trying to determine the eventual start date and magnitude of the next tightening cycle. 

“At present, the overnight index swap curve is priced for a single 25 basis point rate hike in mid-2023 and only one more by mid-2024,” said Ryan Swift, US bond strategist at BCA Research.

“We see a good chance that the Fed’s three liftoff criteria are met before then, a view that forms the basis of our below-benchmark portfolio duration recommendation for 2021.”

Swift added there was further evidence that bond yields have room to rise if it looks like the Fed’s three liftoff criteria will be met in 2022 or the first half of 2023.

The week tops off with the US non-farm payroll report on Friday. A Bloomberg poll showed economists forecast a gain of about 70,000 jobs, the fewest since April when payrolls declined. Several analysts forecast that head-counts shrank.

Fund flow

Emerging market equity funds posted their third largest weekly inflow of the year for the period ended December 23, as they extended their longest inflow streak since an 18-week run ended in mid-1Q19, according to data provider EPFR.

Frontier Markets Equity Funds also recorded their biggest inflow since mid-January.

This contrasted with developed market equity funds as outflows from Europe and US Equity Funds hit eight and 13-week highs respectively, amid fading hopes for another US stimulus package and swift containment of the COVID-19 pandemic.

“New and more transmissible strains of Covid-19 surfacing in Europe, Trump’s threat to veto the latest stimulus package and trade negotiations between the UK and European Union going to the latest wire kept markets on edge and crimped flows to a number of EPFR-tracked fund groups,” said Cameron Brandt, EPFR’s research director.

Bond fund inflows also gained traction as all the major regional groups except Europe Bond Funds recorded inflows ahead of the Christmas holiday.

“Emerging Markets Bond Funds with local currency mandates took in four times as much new money as their hard currency counterparts, helped by the continuing appetite for Chinese domestic debt,” Brandt said.

Economic data calendar

LAST WEEK’S RATING CHANGES

Wall Street Fed markets Covid-19 emerging markets