Weekly Economic Cheat Sheet 10/26/15

Last Week

Global markets got a badly needed boost of confidence last week from economic data, as reports gave further proof that the Chinese economy is stabilizing and that turmoil from the emerging markets is not dragging European and US economies downward. That, combined with more global central bank easing (the PBOC cut rates Friday and the ECB plans on doing more QE in December), pushed stocks to two-month highs.

The most important data and activity last week came from China. Early last week Q3 Chinese GDP slightly beat estimates at 6.9% vs. (E ) 6.8% while September Retail Sales also beat expectations. The data wasn’t universally positive, as September Fixed Asset Investment and industrial Production slightly missed estimates, but those numbers, combined with August data and September manufacturing PMIs, does imply the Chinese economy is stabilizing.

That helped markets broadly to start last week, and a very active PBOC helped support markets throughout the week. Last Wednesday, the PBOC made targeted liquidity injections into 11 financial institutions to promote lending, and on Friday the PBOC did a (somewhat) surprise 25-basis-point interest rate cut and 50-basis-point reserve requirement cut.

Bottom line on China last week was economic data continued to get better, and while data is still far from “good” on an absolute basis, it is stabilizing, and Chinese authorities continue to actively support the economy.

Looking more globally, the October flash PMIs were better than expected in Japan, Europe and the US (54.0 vs. (E) 53.0 in the USA). This is important because these PMIs refute the growing idea that the emerging market turmoil and global market volatility in August/September was pulling developed market economies back toward recession.

The event that effected the markets the most was a very dovish ECB meeting and rate announcement. ECB President Draghi basically told markets that the ECB would be doing more QE in December in reaction to declining economic growth and inflation. Much like the PBOC, the fact that the ECB is going to more QE isn’t a shock, but the fact that Draghi was so explicit about it was a surprise. That dovish ECB meeting was the major positive stock market catalyst last Thursday.

Finally, looking at some hard domestic economic data, September housing continues to come in “fine” with both Existing Home Sales and Housing Starts both beating expectations, and implying a still-healthy housing market while jobless claims continue to refute the soft August and September monthly data. Jobless claims beat estimates at 259k vs. (E ) 265k, and remain near 42-year lows, implying the jobs market remains strong.

Bottom line, last week was a good week from a macro standpoint as we were 1) Reminded that the biggest global central banks remain active and committed to propping up stock prices and being ultra-accommodative, and 2) That actual economic data (especially in China) is stable, and so far the fear that China would drag down the developed economies is not coming true.

This Week

The FOMC decision this Wednesday is obviously the highlight of this week. There is virtually zero chance the FOMC hikes this week (for multiple reasons). We will do our typical FOMC Preview in tomorrow’s Report, but the focus of this meeting will be on how much the FOMC acknowledges the improvement in Chinese economic data and the stabilization in US stocks (if both those developments are highlighted that will be “hawkish,” and increase chances of a December rate hike).

Away from the Fed there are several important domestic economic releases to watch. From an inflation standpoint, Friday we get the September Personal Income and Outlays Report (which includes the Fed’s preferred measure of inflation, the core PCE Price Index) and the quarterly Employment Cost Index, which is a closely followed measure of wage inflation (wage inflation is typically a precursor to broad inflation). Remember, core CPI was a touch more “firm” than expectations two weeks ago, so these inflation numbers will be watched closely.

After the inflation data most of the focus is on growth, with the highlight being the first look at Q3 GDP out Thursday. Durable Goods (tomorrow) will also be closely watched to see if business investment remains resilient.

 

Weekly Economic Cheat Sheet 10/19/15

Last Week

Data last week added to concerns that the US economy is losing positive momentum, as virtually every economic report, with the exception of jobless claims and consumer sentiment, missed estimates. While in a absolute sense US economic growth remains decent, the rate of change is what’s got people nervous.

No better number was representative of current sentiment towards the US economy last week than Retail Sales. September Retail Sales met headline estimates, but the details were a bit weaker, as the “control” group, which best measures discretionary spending, declined 0.10%. While that is an anecdotal negative on consumer spending, that decline is coming from a very high absolute level, so in aggregate consumer spending is still strong—it’s just a little less strong than before. But, in a nervous market, the incremental rate of change is all that matters, and that’s why people were sour on the consumer last week, despite data that really wasn’t that bad (and that goes for WMT guidance too—the macro commentary about retail spending was positive, but it was ignored by the Street).

Looking at the rest of last week’s data, it was generally disappointing. Empire and Philly Fed Indices, the first numbers from October, were easily the worst reports of the week. Both missed estimates (Empire -11.6 vs. (E) -7.0, Philly –4.5 vs. (E) -1.00) and New Orders (the leading indicators in the report) both declined. These regional indices are volatile and need to be taken with a grain of salt, but even so, it’s clear that the headwinds on manufacturing (courtesy of weak global demand and a stronger dollar) are not yet receding.

Turning to inflation, the September CPI report was a bit misleading, as “core” CPI rose 0.02% vs. (E) 0.01% and 1.9% yoy, up from the 1.8% in August. But, that seemingly “hot” inflation report isn’t going to have any effect on the Fed because much of the core increase came from housing metrics (tenants rent and owners equivalent rent), and that’s a bit of a statistical Frankenstein. Bottom line, despite the uptick in core inflation pressures, inflation remains tame from a Fed standpoint.

Looking at the good news, weekly jobless claims fell to a multi-decade low at 255k and are still contradicting the soft monthly jobs reports, while University of Michigan consumer sentiment beat estimates, implying the recent stock market turmoil hasn’t been too damaging to consumers’ psyches.

Finally, from a Fed standpoint both the data and commentary last week was dovish, and expectations for a rate hike now are firmly centered on March at the earliest (and they are starting to move beyond that). Comments from Fed officials Dudley, Brainard and Tarullo all seemed to continue to hedge against a December hike.

Bottom line, the data last week wasn’t particularly “bad” but this market is nervous about the potential for the US to be dragged down by the slow growth in the rest of the world. And while the numbers last week don’t confirm that’s happening fully, they certainly can be viewed that way. This market needs an economic confidence boost, and fast.

This Week

This week is book ended by important reports about the state of global growth. We already got the latest Chinese data, and on Thursday night/Friday morning we’ll get the October global flash PMIs. Again, these are crucially important because the market needs proof the global economy is stable. Japan and China data gets released Thursday night, while US and Europe numbers come Friday morning.

Outside of the global PMIs the next most important event this week is the ECB meeting Thursday. Obviously following the Nowotny comments last week (which were dovish) expectations have risen about the ECB eventually doing more QE. No one expects any decisions at this meeting (December is the earliest anyone thinks they could extend QE), but the commentary around “doing more” will be closely watched, and the Draghi Press Conference following the decision Thursday will be an important event—especially for the euro and EU stocks (HEDJ).

Domestically, its another quiet week of data. The September housing numbers start to hit with Housing Starts Tuesday and Existing Home Sales Thursday. Jobless claims remain important, and they need to continue to stay low and offer a contradiction to the soft monthly jobs report.

Bottom line this week, it’s all about global growth, and with the China data out of the way the focus will turn to the global PMIs Friday. Any hint of stabilization of global growth will be welcomed.

Weekly Economic Cheat Sheet 10/12/15

Last Week

Economic data last week generally confirmed what we already knew: There appears to be some loss of positive momentum in the US economy; global growth remains sluggish, and the Fed is dovish. Nothing last week materially changed anyone’s outlook for US or global economic growth.

The FOMC minutes were the highlight of last week, and they largely met dovish expectations. During the September meeting the Fed had lengthy discussions about risks from China and emerging markets, and between that and recent stock market turmoil it was clear there wasn’t even a real debate about hiking rates last month.

If there was one dovish surprise from the minutes it was that some FOMC members expressed doubts about being able to achieve their stated 2% inflation target. If those doubts grow to the rest of the FOMC, that will be a incremental dovish factor on the Fed, and likely delay any expected rate hike well into 2016.

The media said markets rallied on the dovish comments, but we know that isn’t true. March 2016 is the consensus expectation for a rate hike, the minutes only further confirmed that point.

Turning to economic data, ISM Non-Manufacturing (or service sector) PMI (out last Monday) was slightly underwhelming at 56.9 vs. (E ) 58.0. But looking past the dip, the PMI remains at a very healthy absolute level and the service sector of the economy still remains very strong.

Perhaps the best number of the week was the weekly jobless claims, which dropped back to 263k vs. (E ) 271k. This is important because claims are not confirming the soft monthly jobs report. It’s very strange to see the monthly jobs reports come off without some uptick in weekly jobless claims. And, that means we’ll likely see either 1) Claims trend higher over the coming weeks or 2) The monthly jobs reports revised higher (history says it’ll be the latter). Point being, other data on jobs remains healthy and the labor market remains as strong as it’s been in years.

Finally, looking internationally there were some notable developments. First, we got another good number from China last week as currency reserves declined less than expected, which implies that sentiment towards that country’s economy is stabilizing. And, that’s positive because concerns about Chinese growth remain a major headwind on stocks.

This Week

This is a critical week for the markets because we will get significantly more color as to the whether 1) The Chinese economy is stabilizing, and 2) Whether the US economy is being pulled lower by sluggish global growth and market turmoil. With stocks at multi-week highs, this week could very well determine whether markets break out, or break down.

The most important economic data this week will come from China, with Trade Balance out tomorrow morning, CPI & PPI coming Wednesday, and most importantly, Industrial Production, Retail Sales, Fixed Asset Investment and GDP out one week from today.

With the Fed clearly on hold till at least December, and earnings just ramping up, China remains the #1 influence on stocks. If the data over the next six days can reinforce the “green shoots” of stabilization we’ve seen lately, that could be a material positive on stock prices. Conversely, if the data does not stabilize then this market remains vulnerable to a China-inspired decline.

Turning to the US, September Retail Sales (out Wednesday) is the highlight of the week. Recently, evidence has appeared that the turmoil in markets and overseas has hit consumer confidence and further weighed on manufacturing. If we see that retail sales dipped as well in September that will further imply that the international drag is pulling the US economy down with it, and that will not be positive for markets.

Beyond retail sales, Thursday will be a busy day as we get the first look at October data via Philly Fed and Empire Manufacturing Surveys. Both dropped sharply in September, and another weak reading will only further concerns about the manufacturing sector.

Also Thursday September CPI and the latest jobless claims data are released. CPI will almost certainly show continued subdued inflation while jobless claims will be watched to see if they move higher and confirm the week monthly jobs reports.