The week ahead is so jam-packed for markets that it could determine whether there will be a smooth glide path for a Santa rally into the end of the year.
First, Congress looks set to fight down to the wire about a pandemic stimulus package, and chances are good it could again disappoint. The Fed also holds its final meeting of the year, and market pros are split on whether it will tweak its bond buying program when it issues its statement Wednesday. Since there’s a divided view, there’s room for market reaction either way.
Then there is lots of really meaty data, including November retail sales Wednesday, the Markit Purchase Manager Indexes and regional Fed surveys.
Tom Block, Washington policy analyst at Fundstrat, said he sees a 50/50 chance for a deal by the end of the week. If there is no agreement, federal unemployment benefits for millions and an eviction moratorium would expire at the end of the month.
Block said that even if Congress fails to immediately approve a bill to prevent a government shutdown, he expects lawmakers to reach an accord and keep the government running. But the stimulus is unclear, and much of it is a relief package.
“There’s a solution staring them in the face, and the record food lines are in red states and blue states,” he said. “Both sides seem to be unwilling to come to a deal on what they commonly agree on.”
Tesla revving up the S&P
Tesla’s entry into the S&P 500 is a much-anticipated event that traders expect to add some volatility to the market, as investors in the S&P index shift holdings. Tesla joins the S&P 500 on Dec. 21, at Friday’s closing price, and Friday has the potential to be a wild day .
Tesla is the biggest company to join the S&P 500, and the rebalance Friday will be the largest ever. Tesla will be the seventh-largest stock in the S&P.
Index fund managers will have to buy upwards of an estimated $70 billion of Tesla, and that means selling the other S&P 500 stocks to make room. There will also be trading based on weighting adjustments in the index.
Fed ahead
The Fed meeting will also be important, and it has been a hot topic of speculation, particularly in the bond market. Some market pros expect the Fed could make changes to its bond program. The Fed is currently buying at least $80 billion a month of Treasurys, and Fed officials have discussed what they could do to change that program at their last meeting.
There is now speculation that the Fed will hold the purchases at $80 billion a month, but change the type of securities it is buying, with more focus on longer-dated notes and bonds. That would theoretically hold rates down at the long end, but only about half of market participants expect the Fed to take action at this meeting.
The Fed also is buying at least $40 billion a month in mortgage-backed securities.
“It means at least half the market is going to be disappointed with whatever the Fed does or doesn’t do,” said Patrick Leary, chief market strategist and senior trader at Incapital. “That has the potential to cause some volatility, especially in the rates market, and potentially in risk markets.”
Window on the economy
There’s a busy economic calendar in the week ahead. Weekly claims Thursday are expected to be closely watched after a surprise jump in people seeking new benefits for the week ending Dec. 5.
November Markit PMIs for the manufacturing and services sectors are released Wednesday, as is the November retail sales report.
Boockvar said he is watching to see how much the services sector is being impacted by the spreading pandemic and related shutdowns.
“I think the economic data is being overlooked for better or worse because it’s pre-vaccine,” he said.
Economists expect the economy is slowing and the labor market has been weakening, particularly since the virus spread has continued to accelerate. Some expect the first quarter to be weaker than the fourth quarter, but activity should pick up in the second quarter as the vaccine is distributed.
Week ahead calendar
Monday
Electoral college votes cast for presidential candidates
Tuesday
FOMC begins two-day meeting
8:30 a.m. Import prices
8:30 a.m. Empire state manufacturing
9:15 a.m. Industrial production
4:00 p.m. TIC data
Wednesday
8:30 a.m. Retail sales
8:30 a.m. Business leaders’ survey
9:45 a.m. Manufacturing PMI
9:45 a.m. Services PMI
10:00 a.m. Business inventories
10:00 a.m. NAHB survey
2:00 p.m. Fed decision
2:30 p.m. Fed Chairman Jerome Powell press briefing
Thursday
8:30 a.m. Initial jobless claims
8:30 a.m. Housing starts
8:30 a.m. Philadelphia Fed manufacturing
Friday
8:30 a.m. Current account
Reference: CNBC
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