Gold glistens, oil halts slide

Gold was the standout asset today, rising 0.5% to $2,013 per ounce (its peak was $2,050 earlier this year), while the slide in oil prices was halted at $75 per barrel. Bond and equity markets in quiet trading. This post-holiday week sees important data on inflation, consumer sentiment, and the publication of the Fed’s often persuasive Beige Book guide to economic conditions.

TODAY’S MAJOR NEWS

What price a soft landing?

Bond and equity markets are pricing in a soft landing, which may be too optimistic. They dismiss tell-tale signs of a downturn — longer-lasting unemployment, falling real personal income, slowing credit demand, weaker home sales (discussed below), an extended manufacturing downturn, firms reducing inventory to boost sales, and basement-level consumer sentiment.  The FOMC and Wall Street tend to recognize a downturn only several months after it began, and it is likely already underway. Data will take a while to corroborate this view, but when they do, markets could be in for a surprise.

A key determinant will be when the Fed starts cutting interest rates, which depends on the inflation rate. The Fed’s favorite inflation indicator, the Core Personal Consumer Expenditure (PCE) price index, excluding more volatile food and energy prices, out on Thursday, is forecast to drop to 3.5% from 3.7 last month and a peak of 5.3% in February. If realized, this would be good news.

Record holiday retail sales belies economic gloom

According to Adobe Analytics, US shoppers boosted Cyber Monday online sales by 8% to a record $12.4 billion-plus, while Black Friday store sales were up 7.5% to $9.8 billion. Unsurprisingly, credit card debt exceeds $1 trillion, and auto defaults are the highest since the financial crisis.  Since the Fed started raising rates in March 2022, default rates have gone from 1% to 5%+.  On the other hand, economic data due this week could tell a more somber story. Consumer Confidence, as measured by the Conference Board and due tomorrow, could deteriorate further given the survey’s focus on jobs and income. In the University of Michigan’s November sentiment survey, about 18% of consumers said unemployment will cause more severe hardships for the economy in the coming year than inflation, up from 15% in September. The loosening labor market and a slowdown in economic activity might be evident in October’s personal income and outlays report on Thursday. The decline in average weekly earnings likely suppressed personal income growth and weighed on consumer spending.

Beige book will provide valuable anecdotes for the Fed

The Fed’s Beige Book will be published Wednesday and is a valuable tool for assessing and understanding the impact of monetary tightening, given that the Fed increasingly turns to anecdotes to gauge the state of the economy. Regional officers regularly meet with executives in their districts to gather insights as to where the economy is heading.  The Fed will refer to this version of the Beige Book at the Dec. 12-13 FOMC meeting to see whether real economic data agree with the general take based on anecdotes. For example, some signs from the labor market point to continued strength, while others suggest significant cooling. Beige Book anecdotes could help clarify the direction and magnitude of recent economic developments.

New home sales fall sharply in October

According to revised data, new home sales today likely declined in October and September. Higher mortgage rates, hovering near 8% for a 30-year fixed loan, continued creating headwinds for home sales.  Home prices hit a new high in August for cities such as New York, Boston, Miami, and Atlanta, but that’s about to change. Prospective home buyers are stretched too thin for home prices to appreciate much from here, and the share of US home sellers dropping prices is at a record high, as reported in Fortune magazine. 

• Sales of new single-family homes fell more than expected in October, with buyers put offby higher mortgage rates and against the backdrop of low inventory
• New home sales in October dropped 5.6% to 679,000 units last month, worse than the 723,000 forecast, and September's sales were revised down to 719,000 units from the 759,000 units prior estimate
• New home sales nonetheless increased by 17.7% on a year-on-year in October

COVID mark-2?

A new pike in respiratory infections is creating a stir in China, with few answers from authorities. Infections appear to be impacting young people aged 5- to 14-year-old. The World Health Organization urged Beijing to provide more details about the outbreak last week, but data still needs to emerge. Clinics and hospitals in Beijing and other northern cities have been reported complete since October, with some parents waiting days to get their sick children in to see a doctor. The current infection rate remains much higher than expected for the seasonal flu, but China’s CDC says the new infections are not a product of a COVID-19 variant. While we lack evidence to suggest that this will develop into another national health emergency, it's nonetheless concerning.

TODAY’S MAJOR MARKETS

Equities start the week quietly

• US equities started the week quietly, with the Russell 2000 off 0.3%, Nasdaq up 0.2%, and the S&P 500 unchanged
• The FTSE 100, Dax and Nikkei 225 all fell 0.4%
• The VIX, Wall Street’s fear index, nudged up to 12.7 (its recent all-time low was 9.2 on the final day of 2017)

Bonds yields and Dollar dip

• 2- and 10-year yields fell to 4.89% and 4.41%, respectively
• The dollar index fell 0.2% to 103.2
• Versus the dollar, the Yen was up 0.5%, Sterling was up 0.2%, and the Euro was up 0.1%

Gold consolidates above 2K; oil halts recent decline

• Oil prices fell 0.3% to $75.3 per barrel as traders waited for OPEC+ to publish production targets
• Gold prices rose 0.5% to $2,013 per ounce, while Silver prices rose 1.4% to $24.7 per ounce
• Soybean prices bounced off support near the 200-day moving average amid mixed forecast signals for Center-West Brazil
• Corn and wheat prices continue to lack a story. December corn hit fresh 3-year lows when support gave way, as did Chicago wheat, with Kansas City and Minneapolis wheat close behind at 2-year-plus lows

Analysis by Arlan Suderman, Chief Commodities Economist: [email protected]

Market outlook by Paul Walton, Financial Writer: [email protected]