• Prospects for fiscal stimulus drove volatility in equity markets this week. Policymakers are reportedly closing in on a much-needed relief package following several months of gridlock.
  • Economic data released this week were less cheerful. Jobless claims rose to levels last seen in early September, while retail sales declined by 1.1% in November. Housing starts were the exception, increasing by 1.2% last month.
  • The Fed reaffirmed its pledge to support the economy. It maintained its current policy stance this week, keeping the fed funds rate near zero and committing to more asset purchases.

Financial News- Markets Drop Amid Stimulus Gridlock



Holiday Shopping Blues

Financial News- Residential Constructions Continues to Surprise

It was a busy week for economic data. Financial markets, however, devoted their attention to the brightening prospects for a new stimulus bill. Indeed, following several months of gridlock, this week saw considerable progress on that front. News broke that lawmakers are racing to finalize a deal before next week’s recess, which helped lift market sentiment. At the time of writing, the S&P 500 was on track to end the week 1% higher.

By contrast, economic data released this week was decidedly less cheerful. Outside of a positive surprise coming from housing starts, the data continued to paint the picture of a faltering recovery. As discussed in our Quarterly Economic Forecast, a slowdown has been expected, given the surge in new coronavirus cases and the growing number of restrictions being implemented across the country. On the bright side, rollouts have officially begun for Pfizer’s vaccine. Meanwhile, Moderna’s is expected to receive approval very soon and could be made available as early as this weekend.

Back to the data, the strength in residential construction continues to impress. Housing starts rose by 1.2% in November, their seventh consecutive month of increases (Chart 1). Overall, starts have now rebounded within 1.3% of their healthy February-level. Unlike previous months, multi-family starts powered the gains last month, jumping 4% from October. As we discuss in a recent report, this segment of the market continues to face challenges due to shifting housing preferences toward bigger homes and more outdoor space. Nonetheless, single-family starts saw a more muted increase last month (+0.4%).

Despite its resilience, the construction sector’s outlook is softened by deteriorating affordability. In fact, construction costs have risen at the same time as inventories remained low. These factors could weigh on housing demand in 2021.

Financial News- Retail Sales Pull Back in November Less encouraging was the continued rise in initial jobless claims, suggesting that layoffs are picking up. Claims, which increased to 885,000 last week, were at their highest since early September. The November retail sales report was similarly disappointing. Sales fell by 1.1% last month (Chart 2), following a downwardly revised October reading (-0.1%).

By all accounts, the third wave of COVID-19 infections is weighing on this year’s holiday shopping season. Sales declined the most at clothing stores, alongside food services and drinking places which are most susceptible to be impacted by restrictions. By contrast, food and beverage stores, as well as building material retailers recorded positive sales growth last month.

The fragility of the economic recovery was acknowledged during this week’s Federal Reserve Open Market Committee (FOMC) policy announcement. Members unanimously voted to maintain the current policy stance, keeping the fed funds rate at its effective lower bound and committing to more asset purchases. The Fed reaffirmed its pledge to use the full array of policy tools at its disposal to support the economy until the recovery is complete. The missing piece of the puzzle is additional fiscal support. But, with that likely on the way, coupled with vaccines, the light at the end of the tunnel is finally looking a little brighter.

Johary Razafindratsita, Economist | 416-430-7126

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