Investors are trimming equities in favor of fixed income during low-volume trading today as the year ends. Like last week’s holiday-shortened days, market participants are considering the risks associated with 2025’s political shift. Folks are looking ahead to the incoming Trump Administration, which may bring significant governmental reforms, trade conflicts, and adversarial posturing that may not support extended equity valuations. Against this backdrop, the stateside economic calendar featured a continued recovery in the residential real estate sector but a deeper contraction in Midwestern manufacturing. Meanwhile, a tragic plane crash in South Korea weighed on Boeing shares while the Asian nation’s industrial production data underwhelmed.
Contracts Signings Maintain Streak
A psychological acceptance of higher-for-longer mortgage rates is slowly shifting the residential real estate market in favor of buyers, with contract signings rising to the greatest level since early 2023. Sellers, meanwhile, are incrementally acquiescing to monthly payment constraints to close transactions, with November pending home sales rising for the fourth month in a row. Contract signings rose 2.2% month over month (m/m), exceeding the 0.8% consensus estimate and October’s 1.8%. The South, West, and Midwest led with increases of 5.2%, 0.5%, and 0.4%, while the Northeast experienced a 1.3% decline. The report is a leading indicator of home closings, as agreements are acknowledged roughly 30 days before keys are turned over.
Midwest Manufacturing Sinks Further
The state of Midwestern manufacturing worsened this month at a deeper degree than in November, according to the Chicago Purchasing Managers Index (PMI). December’s score of 36.9 was worse than the 42.5 anticipated and the 40.2 from the preceding month. A score below 50 indicates contraction. Weak new orders weighed on production activity and pricing power, but the sluggishness was modestly countered by gains in employment, supplier deliveries and backlogs.
Japan Factories Just Shy of Expansion
Manufacturing conditions appear to be stabilizing in Japan; however, December’s final PMI reading improved from its flash reading released earlier this month, and it is approaching the contraction-expansion threshold of 50. The PMI was revised to 49.6 from 49, compared to a reading of 49 in November. The weakness in new orders was less severe than initially reported, while employment and confidence contributed positively. However, cost pressures jumped to a four-month high on the back of loftier materials expenses, as well as a weaker yen.
Canada Business Sentiment Weakens
The Canadian Federation of Independent Business gauge of expectations for the next 12 months dropped from a more than two-year high of 59.8 in November to 56.4 this month. The retail and hospitality groups’ results of 52 and 51.7, respectively, were a drag on the headline number while the information, arts and creation sector, and the financial services category strength continued with scores of 67.7 and 66.3, respectively.
South Korea’s Retail Sales Climb
South Korea’s retail sales swung from a decline to a 0.4% m/m increase last month, but industrial production faltered. The retail result increased significantly from the 0.8% and 0.3% contractions in October and September. The November gain, however, was attributed primarily to semidurable items, with all other categories sinking. While duty-free stores recorded a 6.5% increase, sales at supermarkets fell 0.1%. On a year-over-year (y/y) basis, overall retail sales plunged 4.7%. Meanwhile, November industrial production dipped 0.7% m/m compared to the 0.4% decline anticipated by analysts and the preceding month’s flat result. The y/y growth rate of 0.1% also fell short of analysts’ outlook of 0.4% and October’s 6.3% gain.
Hong Kong’s Trade Deficit Grows
Hong Kong experienced a H$43.4 billion trade deficit in November, compared to the H$31 billion shortfall in the preceding month. On a y/y basis, exports climbed 2.1%, growing slower than the 3.5% rate in October. Imports jumped 5.7% faster than October’s 4.5% increase.
Investors Seize Profits
Stocks are selling off as investors book profits and lock in the yields of the day while the greenback strengthens as a result. All major domestic equity benchmarks are trading much lower, with the Nasdaq 100, Russell 2000, S&P 500, and Dow Jones Industrial indices losing 1.4%, 1.2%, 1.2%, and 1.1%. Sectoral breadth is deeply negative, with all segments taking losses. Consumer discretionary, materials and technology are leading the way down; they’re sinking 1.6%, 1.4%, and 1.4%. However, Treasurys are catching a bid with the 2- and 10-year Treasury maturities changing hands at 4.26% and 4.56%, with 7 basis points (bps) lighter on the session across both fronts. The greenback’s gauge is higher by 31 bps, with the US dollar appreciating against the euro, pound sterling, franc, yuan, and Aussie dollar. The US currency is depreciating relative to the Canadian tender and yen, however. Commodities are tilted bearishly, with silver, lumber, copper, and gold down 1.8%, 1.3%, 1%, and 0.9%, but crude oil is bucking the trend, up 1.2%.
Uncertainty Sustains Trump Bump
President Trump’s pro-business policies will support corporate fundamentals overall, but market participants don’t like uncertainty. The arrival of the GOP’s majority in Washington brings a much different dynamic than what we’re used to with the Biden Administration, which didn’t offer much bumpiness. Indeed, the Democrats operated under a predictable framework, but the Republicans most definitely have a distinct mindset. Furthermore, stretched equity valuations alongside political turbulence pave the way for Trump bumps, despite the economy and earnings expected to continue growing. Finally, a recession is on no one’s mind, considering Trump’s stimulative agenda, which includes lighter taxation, milder regulations and a push to propel the nation’s share of global manufacturing incrementally.
Jimmy Carter’s Legacy
Lastly, we acknowledge the life of Jimmy Carter, who passed away on Sunday. He was 100. During his presidency from 1977 to 1981, Carter appointed inflation hawk Paul Volcker as head of the Federal Reserve, pushed through deregulation, supported civil rights, forged the Camp David Accord with warring Middle East countries, and signed an agreement with the Soviet Union to limit nuclear weapons. However, he was also criticized for a failed attempt to rescue hostages from Iran, runaway inflation, and a massive energy crisis involving a shortage of gasoline. After his presidency, the decorated former submarine officer won the Nobel Peace Prize for his work to promote and expand human rights. He is also well-known for being a key figure at Habitat for Humanity.
Author: José Torres, Senior Economist at Interactive Brokers LLC
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