• Activity readings were broadly constructive
  • The biggest initial market reaction was to a dubious drop in claims
  • The Fed’s preferred inflation readings followed CPI higher to a lesser degree

So where are we left on balance after the morning’s data dump and ahead of the FOMC minutes at 2pmET? With a somewhat flatter Treasury yield curve as the two-year yield increased partly due to Fed comments (San Fran’s Daly remarking she’s open to considering a faster taper) and a questionable drop in initial weekly jobless claims.

The broad tone of the releases indicated generally solid activity readings while inflation followed CPI higher, just less so as per expectations. Brief comments on each release follow.

US weekly jobless claims, initial Nov 20th / continuing Nov 13th, 000s SA:
Actual: 199 / 2049
Scotia: 270 / 2110
Consensus: 260 / 2032
Prior: 270 / 2109 (revised from 268 / 2080)

US weekly initial jobless claims fell to their lowest level since 1969 but were likely distorted and hence the reaction to push Treasury yields higher should likely be faded. The Bureau of Labor Statistics advised that initial claims increased by 18.2k in seasonally unadjusted terms when a normal seasonal gain would have been 88.6k. Seasonal adjustment factors therefore likely overcompensated. Furthermore, there is the issue of the reliability of claims figures around holidays that can shift around somewhat from year to year—like Thanksgiving—given that it has appeared anywhere between the 22nd and 28th of the month since the 1980s and hence the exact week it falls in can vary. Last, with Americans chomping at the bit to get back to travelling for Thanksgiving, it’s possible that last Friday’s highest air travel volumes in the pandemic to date came at the expense of trips to filing offices.

US PCE inflation, m/m % //y/y %, SA, October:
Actual: 0.6 / 5.0
Scotia: 0.7 / 5.1
Consensus: 0.7 / 5.1
Prior: 0.4 / 4.4 (revised from 0.3 / 4.4)

US core PCE inflation, m/m % //y/y %, SA, October:
Actual: 0.4 / 4.1
Scotia: 0.4 / 4.1
Consensus: 0.4 / 4.1
Prior: 0.2 / 3.7 (revised from 0.2 / 3.6)

The Fed’s preferred inflation figures broadly met the expectation that they would follow the previously released CPI figures higher but to a lesser degree given methodological challenges (chart 2). US headline inflation was a touch weaker than expected but core inflation landed on the screws which is more important. Core PCE inflation has 2.8% q/q SAAR baked in so far after a gain of 6.1% in Q2, 4.5% in Q3 and 2.8% in Q4 thus far. For now, we're coming off the reopening impulses, but as previously argued, "transitory" to me remains defined in a full cycle sense, not six months. 2022 should bring reduced but ongoing supply side pressures as spare capacity is being eliminated and soon pushes into excess aggregate demand with wage gains hanging in the balance.

US consumer spending / incomes, m/m % change, SA, October:
Actual: 1.3 / 0.5
Scotia: 1.3 / 0.4
Consensus: 1.0 / 0.2
Prior: 0.6 / -1.0

US consumer spending and incomes both grew at a somewhat faster pace than consensus expected and in line with my estimates.

Incomes were up 0.5% m/m due to a gain of 0.8% m/m in wages and salaries which is encouraging. We've been getting ~1% m/m gains in this category through much of 2021. Personal current transfer receipts (that include unemployment benefits) fell 0.5% m/m after the prior 6.9% drop due to the end of the extra $300/week of CARES Act payments but now also as workers are being re-absorbed. This is key (see chart 3 for the break down of income sources). Recall the debate over whether ending job supports would result in workers being able to replace the income. Well, they are. In the US. In the UK so far after the furloughs program. In Canada so far. Labour market data in all 3 countries is supporting the moves to get off supports.

Q4 has US real consumption growth of 4.5% q/q SAAR baked in so far. This is very encouraging. Q2 was up 12% q/q SAAR in the aftermath of stimulus cheques that were flying, Q3 was up 1.7% in a pulled forward sense, and now Q3 is tracking 4.5% which is strong consumption growth.

The saving rate (chart 4) has now normalized back to 7.3% which is about where it was in late 2019. So further consumption gains will have to come from a) income gains, b) liquidity redeployment, c) wealth effects. Think we'll get that in a powerful 2022.

US durable goods orders, m/m %, headline / ex-trans/ ex-air&defence, October, SA:
Actual: -0.5 / 0.5 / 0.6
Scotia: 0.2 / 0.4 / n/a
Consensus: 0.2 / 0.5 / 0.6
Prior: -0.4 / 0.7 / 1.3 (revised from -0.3 / 0.5 / 0.8)

While headline durable goods orders unexpectedly fell, that was due to volatile transportation sector orders (nondefense aircraft –14.5% m/m) and the more important consideration was another monthly gain in core orders excluding lumpy aircraft and defense orders (chart 5). This core measure serves as a proxy for underlying investment in business equipment. It has now risen for eight consecutive months and 18 of the past 19 months. The supply side is responding through investment. Vehicle orders were also up smartly (+4.5%) and reversed two consecutive monthly declines.

US advance merchandise trade balance, US$ billions, October, SA:
Actual: -82.9
Scotia: n/a
Consensus: -95
Prior: -96.3

The merchandise-only trade deficit narrowed more than expected (chart 6). This was the biggest single-month improvement in the US merchandise trade deficit since 2008. It should be treated with care. Exports were up by an eye-popping 10.7% m/m and imports were little changed (+0.5% m/m). I don’t have confidence in understanding what drove the improvement with candidates including out of inventories, a sudden transitory improvement in bottlenecks that affected outgoing goods, accounting issues etc. For now it looks good on the surface but we can’t pop the hood to take a closer look.

US Q3 GDP-r, q/q % SAAR:
Actual: 2.1
Scotia: 2.1
Consensus: 2.2
Prior Q2: 6.7

GDP growth was revised up a smidge to 2.1% for Q3. That met my expectation and fell a tick shy of consensus, neither of which matters in any material sense. The main driver of the upward revision was an extra tick added onto consumption growth in Q3 that is now pegged at 1.7%. That, in turn, was driven by a smaller drag from goods consumption (-2.1% weighted contribution instead of -2.3) as an offset to a milder lift from higher services consumption (3.3% weighted contribution from 3.4%). The prior quarter of Q2 was left unchanged at 6.7% q/q growth at a seasonally adjusted and annualized rate.

US new home sales, 000s, October, SA:
Actual: 745
Scotia: 808
Consensus: 800
Prior: 742 (revised down from 800)

Whoops. Dang revisions. New home sales disappointed expectations on negative revisions and weaker than expected figures for October. Months’ supply edged up a bit to 6.3. Median prices were up 17.5% y/y and 0.7% m/m. 


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