Stocks are rallying on news that President Trump and Chinese leader Xi Jinping had a productive telephone conversation earlier today. Both heads of state reported positive developments following the call, which is helping to subdue fears related to trade uncertainty, geopolitics and goods reinflation. Meanwhile, economic data from Washington and Beijing arrived strong, as US housing starts posted a 10-month high and China’s GDP and retail sales beat expectations. Furthermore, industrial production exceeded estimates on both sides of the Pacific.
Rental Demand Triggers Construction Uptick
A surge in rental unit construction led to the highest level of housing starts in almost a year last month. The elevated degree of groundbreaking wasn’t accompanied by gains in future plans though, with building permits simultaneously declining slightly. Indeed, it’s the second consecutive month in which these traditionally correlated figures have been bifurcated; that is, starts and permits moving in opposite directions.
The pace of housing starts rose to 1.499 million seasonally adjusted annualized units (SAAU) in December, a 15.8% month over month (m/m) increase, beating the 1.320 million estimate and the 1.294 million from November. The sharp upside was driven almost exclusively by groundbreaking for apartment buildings with the segment sporting a 58.9% m/m gain while the single-family component rose 3.3%. Most regions expanded with the Northeast, Midwest and South experiencing progress of 40.2%, 20%, and 17.7%, but in the West, activity dipped 0.7%.
Conversely, permitting action was sluggish, ladies and gentlemen. The pace of government filings for future construction dropped 0.7% m/m to 1.483 million SAAU, beating the anticipated 1.460 million but lighter than November’s 1.493 million. A 5.8% m/m drop in the apartment building category countered the 1.6% growth reported in the larger single-family segment. Similarly, the Northeast and South reported advances of 5% and 1%, which were offset by retreats of 6.6% and 1.4% in the West and Midwest.
Earnings Strengthen Despite Business Headwinds
Recent earnings reports highlight inflationary pressures, decreasing demand for logistics, geopolitical risks and the potential for oil inventories to tighten as illustrated by the following summaries:
- Schlumberger (SLB), an oil field services provider, posted earnings and revenue that beat expectations and said it believes customer demand will strengthen as a global oversupply of the commodity gradually eases. The Middle East and Asia contributed to the company’s international revenue growing 3% while North America sales jumped 7%. Schlumberger increased its quarterly dividend and ramped up its share repurchase program.
- State Street’s (STT) earnings and revenue topped expectations and the company provided guidance for proceeds from fees to grow as much as 5% this year, but added that it faces rising expenses, geopolitical tensions that may impact global markets, and trading volatility that could hurt investor sentiment during the short term. Additionally, CFO Eric Abouaf is leaving the firm. The company’s results benefited from the launch of 20 exchange traded funds.
- Truist Financial (TFC) also posted top- and bottom-line results that exceeded analyst estimates despite the company experiencing a 3.7% q/q boost in noninterest costs, primarily for risk management infrastructure and technology. Its commercial loan volume declined, a result of weakness in financing for industrial customers and commercial real estate. Conversely, residential mortgages and auto loans increased.
- In the logistics industry, JB Hunt (JBHT) posted a 5% year over year (y/y) fourth-quarter revenue decline, but the metric surpassed the analyst expectation. Earnings per share, nevertheless, missed estimates despite increasing from $1.47 to $1.53. Among other challenges, JB Hunt executives reported higher insurance premiums and labor wages, two trends that it expects to continue this year. In the meantime, it has reduced its workforce by 12% from its peak level.
China’s Growth Surprises to the Upside
China’s gross domestic product (GDP) growth met the country’s target for 2024, aided by a strong fourth quarter that exceeded analyst expectations. The results came after investors had been assessing the impact of the country’s multi-pronged fiscal stimulus and a handful of weak economic indicators. The world’s second-largest economy posted a fourth-quarter 5.4% y/y expansion, topping the expectation of 5% and the preceding period’s 4.6% pace. It brought the full-year growth pace to 5%, which matched the Chinese government’s goals. Against that backdrop, China’s real estate industry, which is struggling following a spurt of excess construction, continues to weaken with its House Price Index falling 5.3% y/y, according to the country’s National Bureau of Statistics. The decline occurred despite Beijing trimming mortgage rates and allowing local governments to buy idle units. Meanwhile, the country’s unemployment rate has expanded from 5% to 5.1% while no change was anticipated.
China’s Retail Spending and Industry Strengthens
China reported today that cash register transactions climbed 3.7% y/y in December, compared to the median forecast of 3.5% and November’s 3% gain. As part of its broader fiscal stimulus, China has worked to boost domestic spending with subsidies for large ticket items such as appliances. In another positive development, the country’s industrial capacity utilization and production growth rate increased from 75.1% and 5.4% to 76.2% and 6.2%. Analysts expected industrial production to climb 3.5%. Despite this growth, the pace of businesses planning for expansion moderated with fixed-income investment falling from 3.3% to 3.2% y/y. Analysts anticipated that the rate would remain unchanged.
UK Consumers Trim Outlays
Retail sales in the UK unexpectedly sank 0.3% m/m in December, surprising forecasters who called for a 0.4% expansion and weakening from the preceding month’s 0.1% gain. The downturn comes as Labour Party finance minister Rachel Reeves fends off criticism from the business community that her tax hikes, the biggest since 1992, will be a drag on economic growth. Reeves has defended the action, explaining that she plans to balance the country’s budget while shoring up social security and the nation’s infrastructure. Sales were even worse when excluding fuel purchases, with cash transactions dropping 0.6%. Economists expected a 0.1% increase, which would have matched November’s result. On a y/y basis, total retail sales and sales without fuel climbed 3.6% and 2.9% compared to projections of 4.2% and 3.6%, respectively, and the prior period’s flat rate and 0.5% decline.
Japan Lures Foreign Equity Investors
Foreign investors snatched up the equivalent of 313 billion yen in Japanese equities last week after being net sellers in the preceding seven-day timeframe. In some instances, investors may be seeking exposure to the country’s semiconductor industry, which is experiencing a resurgence after Japan invested heavily in the sector. Meanwhile, foreigners pumped 756 billion yen into Japanese bonds, a reversal from the net outflow in the prior week.
Equities Rally as Fixed Income Declines
Markets are quite buoyant overall, but bullish equity investors are being met with countering forces in fixed income and currencies. Stocks are soaring just as the greenback and yields catch a lift in the last trading day of the Biden Administration. All major domestic equity benchmarks are higher with the Nasdaq 100, S&P 500, Dow Jones Industrial and Russell 2000 climbing 1.9%, 1.3%, 1.1% and 0.5%. All 11 sectors are participating in the rally. Leading the upside charge are consumer discretionary, technology and communication services, which are up 1.8%, 1.7%, and 1.1%. Treasurys are slightly heavier, with the 2- and 10-year maturities changing hands at 4.27% and 4.61%, 4 and 1 basis point (bp) loftier on the session. The Dollar Index is up 22 bps partly in response to pricier borrowing costs, as the greenback appreciates relative to most of its major counterparts, including the euro, pound sterling, franc, yen and Aussie and Canadian tenders. Nevertheless, it is depreciating versus the yuan. Commodities are tilted bearishly with copper, silver and crude oil lower by 1.5%, 1.4% and 0.6% while gold and lumber are near their respective flatlines.
Short Week Ahead
As we head into a restful period for stateside traders and economists alike, don’t forget that markets are closed this Monday in memory of the late Dr. Martin Luther King, Jr. It’s also inauguration day on January 20 as President Trump begins his second term in the Oval Office and is looking to enact impactful legislation across a multitude of issues, including taxation, regulations, tariffs, immigration, etc. The key to Trump 2.0’s success will depend on non-inflationary growth, which was served with a gregarious assist this morning as a friendly phone call between leaders of the world’s two largest economies is a step in the right direction. We’ll gain further clues on whether the path of non-inflationary growth is narrowing or widening next week, as economic data features S&P Global flash PMIs for many of the world’s major economies as well as US existing home sales and Thursday unemployment claims, which may show an increase due to the tragic wildfires in Los Angeles County. Finally, market participants are increasingly expecting the Bank of Japan to hike rates next week, but the commentary associated with the move and the expected pace of the BoJ’s walk up the monetary policy stairs will be of critical importance.
