US stocks pushed higher after a mixed bag of data made investors focus on the resilience of the American consumer. Risk appetite made a return after retail sales posted a larger-than-expected increase. Earlier, an incremental update with Pfizer’s coronavirus vaccine boosted optimism that they could seek emergency use authorization sometime in November. Pfizer’s news really didn’t reveal anything new but was considered positive given the last couple of coronavirus updates announced pauses in clinical trials with J&J (vaccine) and Eli Lilly (treatment).
The US industrial production reading for September was a big miss and exemplifies concerns that the manufacturing recovery has hit a wall. Stocks held onto their gains given the greater importance the retail sector is compared to manufacturing.
The preliminary consumer sentiment reading from the University of Michigan was fairly positive after the headline index rose sharply and expectations index continued to rise. Current conditions dipped and the 12-month inflation expectations ticked higher to 2.7%, while the 5-to-10-year expectations dropped to 2.4%. Service spending continues to struggle due to the coronavirus but spending on goods remains robust and now above pre-COVID levels.
Equities should continue their painstaking consolidation until the election passes and the fiscal stimulus question gets answered. While COVID-19 continues to spread like wildfire across the US, investors are completely fixated on the fast recovery with GDP that will unfold at the end of the month. The second quarter contracting by 31.4% is expected to be countered by a 32.0% rebound in the third quarter.
No clear trend exists for oil prices. The steady rise in coronavirus cases across US and Europe will likely yield new restrictions that will disrupt the crude demand rebound story. OPEC+ seems to have comforted markets that they are leading the oil market to balance, but Libya’s oil production revival might complicate the supply side narrative.
The dollar’s rebound has weighed on oil prices but that seems like it will only be temporarily. The dollar’s fate is tied to the presidential election outcome and that should prevent commodities from completely breaking out. The base case appears to be a democratic blue wave which appears to be the worst-case scenario for the dollar and most supportive for crude prices.
Gold prices are off session highs after a strong retail sales report dampened whatever prospects remained for a fiscal stimulus breakthrough before the election. If the US consumer remains strong, the ultimate size of stimulus will likely be a lot smaller than what is currently being discussed. Gold’s trading range leading up to the presidential election seems poised to be between the $1850 and $1940 zone.
Gold’s longer-term bullish outlook remains very bullish, but an extended consolidation phase could see many investors tentatively abandon bullish bets. If the euro tanks as lockdowns return across Europe, a strong dollar could be a headwind for gold. A significant pullback for gold seems unlikely as the stimulus outlook for the US is massive, but likely to be delayed until 2021.
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