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Markets Get Cold Feet as Economy Heats Up

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Friday, February 26, 2021

Market futures are inverted ahead of the bell on the final trading day of the week: the Nasdaq is up 100 points while the Dow is down marginally. The S&P 500 has recently ticked into the green, following the single-worst trading day in February yesterday, where all 11 industries tracked on the index were down.

A slew of new economic prints have hit the tape this morning, helping flesh out the narrative we’ve seen emerge over the past couple weeks. Personal Income bounced back strongly in January, up 10.0% from an expected +9.5% — and way ahead of December’s unrevised +0.6%. As we still see a sluggish labor market, it’s hard to attribute this solely to increased wages; more likely, low-income jobs continue to be shed as re-opening delays continued in the month.

Consumer Spending for January, on the other hand, ticked down 10 basis points from estimates to +2.4%, though still a big boost up from the downwardly revised -0.4% from the previous quarter. This adds to the longer-term understanding that savings rates have been climbing during the pandemic era, with households not only at a loss for places to go and things to do, but also feeling less than secure about their longer-term job situation.

Meanwhile, Core Inflation, also for January, stayed consistent at +0.3% from December. While a tick higher than consensus estimates, this would suggest that inflation is within a manageable range — or at least it was for the month preceding the one about to end. Which is another way of saying this is “old news.” Any inflation creep in the general economy will likely be more apparent when February reads come out next month. But we’ll have to wait and see, for sure.

Advance Trade in Goods for the month of January went lower again, to -$83.7 billion from -$83.2 billion in December. These are still off the worst-ever levels for advance trade deficit, which hit its all-time low in November 2020: -$86.11 billion. Way, way back to late 2019/early 2020, during the U.S. trade war with China, we saw some improvements in advance trade deficits, but we haven’t seen this figure sub-$40 billion since we climbed out of the Great Recession, more than a decade ago.

Imports overall grew 1.1% for the month, led by a strong rise in Consumer Goods, up 5.4%. Industrial Supplies were up 1.8%. Vehicle sales, however, were down 4.7% on the imports side, while exports of vehicles was even worse: -5%. Elsewhere in Exports, which gained 1.4% for the month, were led by 5.5% growth in Industrial Supplies and +3.5% in capital goods (basic materials, etc.). Foods, feeds and beverages also fell 4.5% last month.

So while we’re seeing an increase in household income, consumer confidence (by way of spending) is growing at a slower clip. This may be translating into greater savings rates, with more stimulus — $1.9 trillion reported, most of which will go to backstop those regions of the economy hardest hit by the last year of pandemic-induced suffering — on the way next month. This spells a heating up of the overall economy on the horizon, while market traders are experiencing a bit of cold feet.

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