Economic Week Ahead: China GDP, U.S. Housing, Central Banks

Monday: Yesterday, China reported that its economy expanded by 2.3% in 2020, roaring back from an historic contraction in the early months of 2020 to become the only major world economy to grow in what was a pandemic-ravaged year. China’s economy finished the year on a high note with the country’s gross domestic product (GDP) rising 6.5% in the fourth quarter from a year earlier. The results topped economists’ expectations of 6% growth in the fourth quarter and an expansion of 2.2% for the full year 2020.

Wednesday: U.S. President elect Joe Biden is scheduled to be sworn in as president. Mr. Biden last week called for a US$1.9 trillion COVID-19 relief plan to help Americans weather the economic shock of the pandemic and pump more money into testing and vaccine distribution.

Thursday: The Bank of Japan (BOJ) is expected to stand pat on policy at a two-day meeting ending Thursday. Officials will also release a quarterly outlook report on the economy and prices, with the bank likely to downgrade growth forecasts after the government announced its second state of emergency earlier this month.

The European Central Bank expanded its stimulus program last month in an effort to help boost the region’s ailing economy. Economists are expecting policy makers to take stock of their latest efforts but hold off on any new measures at this week’s policy meeting.

U.S. jobless claims have moved higher in recent weeks, an indication that companies are laying off more workers while COVID-19 cases rise and the economic recovery falters. Figures for the week ending January 16 will show whether the labor market is starting to stabilise or is deteriorating further.

U.S. housing starts are expected to pick up again in December. Single-family home construction rose to its highest level in more than 13 years in November, underscoring strong demand for more space during the pandemic.

Friday: Surveys of purchasing managers are expected to show that Europe’s economies continued to falter as 2021 began, with their dominant services sectors contracting as a result of high infection rates and government restrictions. By contrast, economists expect surveys for the U.S. to show continued growth, even in the services sector.
U.S. existing-home sales for December are expected to fall for the second consecutive month as rising prices and limited inventories constrain the market.

Last week’s economic data and what does it mean?

Gasoline pushes U.S. consumer prices higher in December

U.S. consumer prices increased solidly in December amid a surge in the cost of gasoline, though underlying inflation remained tame as the economy battled a raging COVID-19 pandemic, which has weighed on the labor market and the services industry.

The U.S. Labor Department said the consumer price index (CPI) increased 0.4% last month after gaining 0.2% in November. An 8.4% jump in gasoline prices accounted for more than 60% of the rise in the CPI. In the 12 months through December the CPI advanced 1.4% after increasing 1.2% in November.

Last month’s CPI readings were in line with economists’ expectations. The CPI rose 1.4% in 2020. That was the smallest yearly gain since 2015 and was a deceleration from 2.3% in 2019.

U.S. jobless claims surge to highest weekly total since August

U.S. first-time claims for unemployment insurance jumped to 965,000 last week amid signs of a slowdown in hiring due to the pandemic restrictions. The total was worse than the market’s estimates of 800,000 and above the previous week’s total of 784,000. In December, nonfarm payrolls declined for the first time during the recovery from COVID-19 market lows, falling by 140,000 while the unemployment rate held at 6.7%.

U.S. manufacturing output rises unexpectedly

U.S. manufacturing output rose unexpectedly in December as a drop in motor vehicle output was outpaced by increases in production of other durable goods, food and beverages, and other products.

The U.S. Federal Reserve said that manufacturing production rose 0.2% last month after a downwardly revised 1.0% increase in November. The U.S. manufacturing sector, which makes up about 11% of the U.S. economy, has been weakened by an 18-month long trade war between the United States and China. However there has been some good news recently with both countries having signed a preliminary trade deal.

In conclusion

U.S. equity markets closed last week registering its first losing week for 2021. While the overall decline was minimal, the weakness was recorded despite the news that President-elect Joe Biden unveiled the details of a US$1.9 trillion coronavirus rescue package and also a positive start to the reporting season.

The current epic equity market rally now faces a key test in coming weeks as investors learn what executives expect for profits and revenues in coming periods.

The U.S. fourth-quarter earnings season kicked off in earnest Friday with better-than-expected profits from three of the nation’s largest banks. Interestingly, despite a record result from one bank and solid results from the other two, all three banks shed more than 6% on the session.

The market reaction highlights the stakes as large firms begin sharing quarterly results and, more importantly, their outlook for coming quarters. Investors have raised the bar significantly and expect a sharp rebound this year in corporate performances. Those companies whose profit projections fall short will most likely be punished severely.
The S&P 500 Q4 earnings per share (EPS) consensus forecast is for a fall 8.9% year on year, a sharp improvement from the second quarter’s 31% collapse but not the kind of performance that typically inspires equity market records. Many investors say the market has advanced despite the damage of 2020 because of a widely held belief that vaccines will help put the pandemic in the past, allowing businesses to recover. It is now becoming obvious that investors are looking beyond the pandemic.

Meanwhile, troubling signs continue to linger about how the pandemic has recently weighed on the economy. Employers in the U.S. cut 140,000 jobs last month, ending seven months of job growth, while U.S. retail sales fell in December for the third consecutive month.

The next two quarters will no doubt be significant for U.S equities, especially given the high expectations that exist, which many feel may be already priced into the market.

Authored by Kevin McKay – Research Associate at Bell Potter Securities, 19 January 2021
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