The Pulse – What’s happening in the Economy and the Capital Markets: 12/7/20 – 12/11/20


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The Pulse – What’s happening in the Economy and the Capital Markets: 12/7/20 – 12/11/20

Executive Summary

The current boom in tech IPOs is triggering memories for many of the dot-com bubble of the 1990s. The markets saw a lack of progress in Washington and used the stagnancy to move out of broad market indexes and into higher risk opportunities. The real-time data continues to show slowing economic improvement. Inflation is our focus of the week – though not heating up too quickly, the markets anticipate inflation to increase from the stall of the last several months.

The Markets

Global stock markets lacked consistency last week, but December started positively domestically and internationally.

Investors sought higher risk investments as small company, emerging market, oil and high yield bonds all increased. Safer opportunities – the broader S&P 500, Dow Jones, Nasdaq and developed market indices – declined.

Continued positive news on COVID-19 vaccines, including the first administered dosages in the U.K., had investors betting on a global economic rebound. On the other end of the spectrum, broader markets sold off as the momentum behind a stimulus package from Washington waned.

The Markets chart 12.14.2020

The big news of the week in the U.S. were the IPO pops for technology companies DoorDash, AirBnB and Their stock prices increased 86%, 113% and 140%, respectively, on their first days due to strong demand from investors and a limited supply of shares.

DoorDash debuted at a value of $56 billion and AirBnB at approximately $100 billion. AirBnB is now worth 20% more than the combined market value of Marriott, Hilton and Hyatt.

The Economic News

The real-time economic news worsened as more of the high frequency data that we track declined, with much more red than green in our weekly table. Consumer-related real time economic data continued to fall off:

  • Key lodging metric Hotel Revenue per Available Room (RevPAR) declined 58% compared to the same week last year on lower corporate travel.
  • Restaurant traffic declined, now down 65% compared to 39% in early October.
  • Retail Sales in this critical holiday shopping season have seen only about half the growth last year saw

Frequency Data Chart 12.14.2020

Employment data worsened:

  • Initial jobless claims jumped 20% compared to last week and are at early October levels.
  • Continuing jobless claims increased week over week.
  • ASA Staffing index saw first month-over-month decline since May.

Focus of the Week – Inflation

As central banks across the globe increased the availability of money to spur economic activity to deal with the COVID-19-driven recessions, concerns about inflation remain paramount. There are several ways to monitor potential inflation with most countries not showing significant signs yet, though one indicator is pointing to a pick-up in commodity prices.

The Federal Reserve has said that it would want to see average inflation rates above its target range (around 2.25% – 2.50%) before increasing interest rates.

  • Consumer Price Index (CPI) ex-Food & Energy – +1.2% year over year versus 1.1% expectations and 1.2% in October.

CPI chart - 12-14-20 updated

  • Producer Price Index (PPI) ex-Food & Energy – +1.4% year over year versus 1.5% expectations and 1.1% in October.

PPI chart - 12-14-20 updated

Inflation typically shows up in commodity prices first. Copper prices have jumped since the COVID-19 vaccine announcement.

  • The ratio of the price of copper to the price of gold can be a harbinger in the direction of future interest rates and inflation as copper is used globally in a variety of industrial products.
  • Since early November, the ratio has increased ~30% due to the rebound in Asian economies.

Copper Gold ratio chart- 12-14-20-sw

5-year Inflation rates implied in government bonds (the difference between the yields on Treasury Inflation Protection Securities (TIPS) and that in the traditional treasury bonds of the same length of time) shows a similar jump from early November. The market is signaling 5-year inflation rates of about 1.8% per year. 

Inflation breakeven ratio chart - 12-14-20

A Few Stories that Caught My Eye


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