Yellen for Treasury
Former Federal Reserve Chair Janet Yellen heads to Washington today to testify before the Senate Finance Committee. Yellen was tapped to join President-elect Joe Biden's cabinet as Treasury Secretary.
According to reports, the former head of the central bank is expected to call for "big" action after Biden unveiled a $1.9T economic stimulus plan last week. “Economists don't always agree, but I think there is a consensus now: Without further action, we risk a longer, more painful recession now - and long-term scarring of the economy later. Over the next few months, we are going to need more aid to distribute the vaccine; to reopen schools; to help states keep firefighters and teachers on the job," Yellen will say in her testimony. "Neither the President-elect, nor I, propose this relief package without an appreciation for the country’s debt burden. But right now, with interest rates at historic lows, the smartest thing we can do is act big."
Recall, on Thursday President-elect Biden unveiled his proposed sixth-round COVID relief bill, totaling $1.9T. Entitled the American Rescue Plan, Biden’s stimulus plan includes another round of direct payments at $1,400 per qualifying person, enhanced federal unemployment benefits of $400 per-week through the end of September, and an increase in the federal minimum wage to $15 per hour. The proposal also extends the eviction and foreclosure moratorium until the end of September, as well as provides $350 billion in state and local government aid, $170 billion for education, and $70 billion for COVID testing and vaccination. The proposal is furthermore said to be the first phase of a two-part strategy, with a broader program focused on infrastructure and climate change to be unveiled in the coming weeks.
No stranger to Wall Street, Yellen served as Vice Chair of the Federal Reserve from 2010 to 2014, navigating the country out of the great financial crisis. In 2014, Yellen then took over as Chair of the Federal Reserve, a position she held until 2018. Earlier, Yellen served as top White House economist in the 1990s and Fed Chairwoman in the 2010s, meaning a confirmation would make her the first person to achieve such a trifecta of economic leadership roles.
While equity markets appreciate a familiar face, investors are beginning to worry more broadly about bold spending measures and the longer-term policy implications of policies aimed at stemming the impact of the pandemic. National debt, for example, is already at an alarming 100.1%, the highest since World War II and is projected to rise to 107% by 2023. As far as financial regulation, Yellen has voiced opposition to “relaxing” oversight of big financial firms and has called for a "new Dodd-Frank." Yellen has also emphasized the need to create "equitable growth,” combat climate change and rebuild regulatory institutions like the Financial Stability Oversight Council.
Equity markets ended the week down 0.9%.
Yesterday, markets in the U.S. were closed for Martin Luther King Jr. Day.
This morning, equities are up 0.7%, currently trading at 30,931.00 as of 9:03am ET.
According to reports, on his first day in office, President-elect Joe Biden is expected to cancel the controversial $8B Keystone XL Pipeline. Environmentalists, Native American groups and farmers have opposed the project for decades over water contamination fears. The pipeline that restarted in 2019 under the Trump administration would carry oil nearly 1,200 miles from the Canadian province of Alberta down to Nebraska to join an existing pipeline.
In an effort to save the project, TC Energy has reportedly committed to spend $1.7B on solar, wind and battery power to operate the partially completed system. The cancelation of the project, meanwhile, would reportedly threaten 13,200 Canadian and American jobs and potentially undermine the U.S.-Canadian relationship.
Energy prices have fallen 17% since the start of pandemic. This morning, oil prices are up 0.13%, currently trading at $52.43 a barrel as of 8:57am ET.
In international news, China will reportedly be the only major economy to have grown in 2020. Despite dealing with the coronavirus pandemic and a 6.8% contraction in the first quarter of the year, Chinese GDP reportedly expanded by 2.3% in 2020. Meanwhile, elsewhere in the world, a significant contraction is expected as the coronavirus continues to wreak havoc on economic growth and activity.
On Friday, retail sales unexpectedly dropped 0.7% in December, marking the third consecutive month of decline. According to Bloomberg, sales were expected to be flat in the final month of 2020. Year-over-year, retail sales rose 2.9% in December, down from the 3.7% pace in November, and a five-month low.
Car sales rose 1.9% in December following a 1.5% decline the month prior, and gasoline stations sales popped 6.6%, following a 1.6% decrease the month prior. Excluding autos, retail sales fell 1.4% in December but gained 1.1% over the past 12 months. Excluding autos and gasoline, retail sales declined 2.1% but rose 2.6% year-over-year.
Bottom Line: A continued deterioration of consumer activity highlights a growing need to reopen the economy – safely. Of course, while the vaccination process underway is the best and fastest way to return to some semblance of normal, at least some long-term structural changes may be adopted going forward if there remains a lingering hesitancy to interact in the market or with large crowds even after it is declared “safe” to do so.
Also on Friday, the PPI rose 0.3% in December, a tenth of a percentage point less than expected, according to Bloomberg, albeit a two-month high. Year-over-year, producer prices increased 0.8% in December for the second consecutive month.
Food prices fell 0.1% following a 0.5% increase in November, while energy prices gained 5.5% at the end of 2020. Excluding food and energy costs, the core PPI rose 0.1%, less than the 0.2% gain expected. Year-over-year, the core PPI increased 1.2%, a two-month low.
Additionally, services costs fell 0.1%, thanks to a 0.8% drop in trade costs, and a 0.1% decline in transportation and warehousing costs. Other costs, however, rose 0.2%, following a similar increase the month prior.
Additionally on Friday, the Empire Manufacturing Index unexpectedly declined from 4.9 to a reading of 3.5 in January, a seven-month low. According to Bloomberg, the index was expected to rise to 6.0 at the start of 2021.
Also on Friday, industrial production rose 1.6% in December, surpassing the 0.5% gain expected, according to Bloomberg, and a five-month high.
Capacity utilization, meanwhile, increased from 73.4%, revised up from 73.3%, to 74.5% in December, a ten-month high. According to Bloomberg, capacity utilization was expected to rise to 73.6% at the end of 2020.
Finally on Friday, the University of Michigan Consumer Sentiment Index declined from 80.7 to 79.2 in January, a two-month low. In the details, consumers’ assessment of current conditions fell from 90.0 to 87.7, and consumers’ expectations declined from 74.6 to 73.8 in the final December report, still a two-month low.
This morning, the economic calendar is empty.
Later this week, on Wednesday, the NAHB Housing Market Index is expected to remain at a reading of 86 in January for the second consecutive month.
On Thursday, initial jobless claims are expected to decline from 965k to 925k in the week ending January 16, housing starts are expected to rise 0.8% in December from 1,547k to a 1,560k unit pace, and building permits are expected to decline 1.8% in December from 1,635k to a 1,605k unit pace.
Finally on Friday, existing home sales are expected to decline 2.1% in December from 6.69m to a 6.55m unit pace, a four-month low.
-Lindsey Piegza, Ph.D., Chief Economist