Forget About Short Squeezes and Earnings. The Economy Could Be the Big Story This Week

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Covid Comeback: CBO, Fed's Bostic Optimistic About Economy in 2021

The economic picture continues to improve as coronavirus comes under control, housing booms and energy rallies.

The Congressional Budget Office estimated real gross domestic product (GDP) will return to pre-pandemic levels by the middle of this year. That’s much more optimistic than its report in June, which saw the economy struggling through 2030. The agency also predicted GDP will grow 3.7 percent in 2021 and unemployment will dip to 5.3 percent from December’s 6.7 percent.

Separately, Atlanta Federal Reserve President Raphael Bostic told CNBC that “a lot of the recent developments have been positive … we should be open to the possibility that things might happen more strongly than they would otherwise.”

While Bostic didn’t give more details, here are some things he might be watching:

  • The housing market seems to be strong and getting stronger. December’s housing starts and building permits rose more than expected to their highest levels since 2006. Case-Shiller’s home-price index climbed in November at the fasted pace in over six years. Other readings like pending home sales demonstrate inventories are extremely low. Low supply and rising prices spells more construction, which means more jobs.
  • The Institute for Supply Management’s Manufacturing index for January showed another strong expansion. Factory executives continue to say customer inventories are too low as order backlogs increase. That balance also points to more hiring down the road.
  • Rail traffic, an up-to-date gauge of business activity, just grew at the fastest pace in almost three years.

Interestingly, CBO and Bostic both excluded government stimulus from their thinking.

Crude oil futures (@CL), daily chart.

Oil Breaks $54

These other developments point toward an improving backdrop.

First, crude oil futures (@CL) pushed above $54 last night for the first time since crashing in early March. Bloomberg reported on Sunday that OPEC’s production cuts have almost total compliance by participating states. Higher prices are bringing U.S. drillers back on line, which generates significant investment in machinery and metal goods. The result? More GDP and more jobs.

Second, the Centers for Disease Control and Prevention reported 112,772 new coronavirus cases on Sunday. It was the lowest total since mid-November, and is down about 50 percent in the last two weeks. Even with vaccine delays, continued declines in infections bodes well for the economy reopening. That would be another positive for jobs — especially in hotels and restaurants (still the hardest hit).

Third, the stock market’s mix of industry performance seems to reflect confidence in the global recovery. Small caps and emerging markets, both sensitive to recessions, have risen at least 10 times more than the S&P 500 this year. Other economically sensitive sectors like energy and consumer discretionaries have also led. Meanwhile safe-haven consumer staples have lagged.

In conclusion, we’ll get key employment data from ADP tomorrow and the Labor Department on Friday. (Both are expected to increase by a small 50,000.) Regardless of what they show, there seems to be a growing evidence that the crisis is nearing an end — even if it takes a few more months to fully play out.

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David Russell is VP of Market Intelligence at TradeStation Group. Drawing on nearly two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them appraised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.