Weekly Economic Cheat Sheet 11/30/15

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Last Week

There was a lot of economic data last week despite the holiday, and the general takeaway is that the data reinforced the expectation that the Fed was on track to hike rates in December.

Durable Goods was the positive surprise last week as not only did the headline beat, but the key “Non Defense Capital Goods ex-Aircraft” sub-index rose 1.3%, it’s best uptick in months. That’s important because the revised Q3 GDP Report out last week showed better-than-expected business spending (called Non-Residential Fixed Investment) and if business spending can continue to accelerate that will be a unanticipated tailwind on the US economy.

Other than Durable Goods, most of last week’s numbers actually mildly disappointed, but as we stated last week none of them were bad enough to dissuade any Fed member who is in favor of a rate hike.

November flash manufacturing PMI declined more than expected to 52.6 vs. (E ) 54.5, the lowest reading in well over a year. But, that just brings the flash reading in line with most other manufacturing indices, so it’s not an incremental negative (the flash reading had stayed stubbornly high).

It wasn’t the best week for the consumer either as October Consumer Spending slightly missed estimates (up 0.1% vs. (E ) 0.3%) and Q3 consumer spending was reduced in last week’s revised Q3 GDP report (Personal Consumption Expenditures was revised to 3% from the initial 3.2%). But, both numbers remain overall healthy, and while slight disappointments, they aren’t materially shifting anyone’s outlook on the US consumer.

Finally, the housing numbers also missed as both October Existing Home Sales and New Home Sales printed below estimates, but that was mostly due to low supply (low inventory reducing sales as opposed to low demand). The housing data from Sept./Oct. hasn’t been great, but again, it’s not nearly bad enough to make anyone think the housing recovery is about to stall.

Finally, looking at inflation, the Core PCE Price Index contained in last week’s Personal Income and Outlays report was slightly weaker than estimates (flat vs. an expected increase of 0.2%) and the year-over-year measure was unchanged at 1.3%, well below the Fed’s 2.0% target. But, the wage data contained in the report was strong as wages and salaries grew 0.6%, a very strong reading. That confirms what we’ve seen in the recent jobs reports, and since wage inflation often leads broad inflation that prevents this report from being dovish.

Bottom line, last week reinforced that US economic growth isn’t great (we remain stuck in 2.5% – 3.5% annual growth) but that’s still enough to get the Fed to likely move off 0% rates in December.

This Week

This week will likely determine not only whether the Fed hikes rates in December, but also how the remainder of the year will play out for markets (meaning it could remove the chances of a late, end-of-year pullback if the data is positive).

The calendar is very busy but there are five key market moving economic releases/events to focus on (in order of importance): November Jobs Report (out Friday), Dual Yellen Speeches (Wed/Thurs), ECB Meeting (Thurs), Global November Manufacturing PMIs (tonight/tomorrow) and Global November Composite PMIs (Thursday).

First, it’s “jobs week” so we get ADP Wednesday, claims Thursday and the government report Friday. We will do our “Goldilocks” preview later this week, but bottom line is this number will have to be pretty bad to delay a rate hike in December. And importantly, if it’s strong it could make a rate hike in December go from “expected” to “certain,” and how the market will react to that is an unknown.

Second, Yellen makes two speeches Wednesday/Thursday that could further cement the expectation for a rate hike. Fed officials have been coy about being too committal to a hike, but the FOMC also doesn’t want to surprise markets, so now would be the time to drop more hints.

Third, the ECB meeting Thursday is the most anticipated since the bank announced QE back in January, and expectations for how the ECB will increase QE are all over the place (we will do a preview later in the week). This is important because if the ECB dovishly surprises, then the euro could plunge and the dollar could rally, and that may weigh on stocks and the Fed should the gains be too much, too soon (the Fed is afraid of a “too strong” dollar).

Finally, global growth remains very much in focus, especially in China. The PMIs out tonight are important because they need to show further stabilization, and if the Chinese government manufacturing PMI can move towards 50 and above, that will be a positive. In the US and Europe there shouldn’t be any major surprises contained in the PMIs, but there’s a chance the US ISM Manufacturing PMI could fall below 50 (remember it was 50.1 in October) and if it does, that will negatively surprise markets. Global Composite PMIs Thursday will also be important to reinforce the fledgling notion that global economic growth has stabilized and is starting to turn very slightly higher.

Weekly Economic Cheat Sheet 11/23/15

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Last Week

Economic data last week largely met expectations and the key takeaway was that the data further reinforced the expectation by the market that a rate hike is coming in December.

Starting with the manufacturing sector, there were three notable releases: Two from November (Empire Manufacturing Survey and Philly Fed Survey) and one from October (Industrial Production). And, they all said the same thing: While the absolute state of manufacturing activity in the US remains sluggish due to a strong dollar and slack international demand, manufacturing activity in the US isn’t getting any worse and is showing some signs of stabilization, which is a relative positive.

Empire and Philly Manufacturing Surveys were mixed as Empire missed estimates (-10.7 vs. (E) -5.0) while Philly slightly beat estimates (1.9 vs. (E) 0.0). Positively, both results were improvements over October and the details of each were encouraging (New Orders, the leading indicator for each survey, remained negative but increased from October levels). So, there were signs within these surveys that again point to stabilization in the manufacturing sector.

October Industrial Production slightly missed the headlined (up 0.1% vs. (E) 0.2%) but that was misleading as the weakness was due to utility and mining production. The manufacturing sub-index rose a healthy 0.4% (meeting expectations) and importantly the August manufacturing sub-index was revised higher from –0.4% to –0.2%, again implying stabilization. Bottom line, the manufacturing data, while not great in an absolute sense, won’t make the Fed re-think a rate hike in December.

Other economic data from last week was largely in line with expectations. October CPI met estimates and the core year-over-year metric was unchanged from October at 1.9%. But, non-commodity-related inflation continues to show signs of bottoming and an upside surprise in inflation may finally be in the cards for Q1 2016. Notably, service sector inflation rose 0.3% in October, which is a pretty hot pace.

Looking at the Fed, the highlight was the FOMC minutes released last Wednesday, but there was again a small army of Fed speakers throughout last week. The market liked the FOMC minutes because while it further solidified the expectation for a December rate hike, the minutes also highlighted the desire of the FOMC to raise rates very gradually, reflecting the “one-and-done” policy that stock investors are craving (and as a result is was spun as dovish). Whether the FOMC can be that gradual will depend on inflation (which they have a bad history of forecasting) but last week the FOMC minutes were taken as incrementally dovish over the longer term.

This Week

This will be a holiday-shortened week but there’s going to be a fair amount of important data crammed in between now and Wednesday. The two highlights will be the flash November manufacturing PMIs out later this morning, and then the Core PCE Price Index contained in the October Personal Income and Outlays Report out Wednesday morning.

Those are important because they are the only ones that have the potential to shift the Fed’s opinion on a rate hike in December. But, to be fair, both readings will have to be awful to make the Fed reconsider December (something like a flash PMI well below 50 and y-o-y Core PCE Price Index well below 1.3%).

Beyond those two numbers, the next most important report is the revised Q3 GDP out tomorrow (there are no major revisions expected and the key detail in this report will be the PCE data, i.e. consumer spending).

October housing reports continue this week with Existing Home Sales reported later this morning and New Home Sales released Wednesday. Housing showed some signs of losing momentum in September, so these reports will carry a bit more weight than usual, although again they would have to be horrid to make the Fed reconsider December.

 

Weekly Economic Cheat Sheet 11/16/15

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Last Week

The major takeaway from the data last week was that a rate hike from December remains expected, but not certain. Internationally, European data was again lackluster, but with more QE on the way the data is being generally ignored. The October economic reports from China reinforced that growth there is stable, and China as a macro risk has been moved to the back burner near term.

The big report of the week in the US was Friday’s October Retail Sales report. It missed the headline expectation (0.1% vs. (E) 0.3%) but the details were a bit better than the headline implied. We watch the “control” retail sales, which is retail sales less autos, gasoline and building materials, and that metric rose 0.2%. Importantly, the September control retail sales was revised from –0.1% to 0.1%. Bottom line, the “spin” on retail sales last week between the horrid M and JWN earnings and the “miss” on retail sales was negative, but that’s a bit misleading. Consumer spending appears to be holding up well (the retail earnings issues are corporate issues, not macro issues) and nothing in those reports will make the Fed more dovish.

Staying in the US, jobless claims ticked a bit higher but still remain comfortably below 300k (276k) while November preliminary Consumer Confidence rose more than expected, jumping to 93.1, better than 92.0. That jump in confidence will be noted by the hawks at the December meeting, assuming it isn’t undone between now and the end of the month.

The bottom line with US data last week was that despite the negative tone, Fed Fund futures probability for a December rate hike remained at 70%, and nothing in last week’s data implies the US economy is slowing.

Turning to the international landscape, data from China was mixed. October imports and exports missed expectations, as did industrial production (down –5.8% vs. (E) -5.6%), but retail sales beat estimates (up 11% vs. (E) 10.8) and overall the data didn’t contain any major surprises. As we said Thursday, China is now on the back burner as a macro threat given the prospects of a hard landing economically have been reduced, and between now and the end of the year another surprise yuan devaluation is the only wild card to watch for.

This Week

This week will be another relatively quiet one, although the undisputed highlight will be the FOMC minutes on Wednesday afternoon.

We’ll do a more in-depth preview in tomorrow’s issue, but really what markets will be looking for is how much conviction the FOMC showed to hiking in 2015. A rate hike in December likely won’t be explicitly discussed in the minutes, but instead the important thing will be the length of discussion about a rate hike in 2015 and how many members voiced their support for a hike. Keep in mind this meeting came before the blow out jobs report, so if the minutes are a touch hawkish that will move markets.

Outside of the minutes, markets will get their first look at November manufacturing data via the Empire State Manufacturing Index (today) and the Philly Fed Manufacturing Index. Both of these indices were solidly negative in October but showed signs of stabilization (they weren’t as bad as September), so any continuation of that trend will be a mild positive.

Beyond that November data, Housing Starts come Wednesday, and they will be watched a bit more closely than the last few months (remember the housing numbers from September were a bit disappointing, and an ongoing housing recovery is an important tailwind on the US economy).

Finally, October Industrial Production (tomorrow) and Weekly Jobless Claims (Thursday) will also be important indicators to watch (every major economic indicator is important now given the possibility of a December hike).

Bottom line, the minutes are the key release this week and unless the November data (Empire and Philly) is horrid, it shouldn’t move markets too much.

Weekly Economic Cheat Sheet 11/9/15

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Last Week

Last week’s economic data was strong, and that was punctuated by Friday’s blowout jobs report—and the net result of the data was that a rate hike is now expected in December.

Starting with the jobs report, it was very clearly in our “Too Hot” scenario. Headline job adds were very strong at 271k vs. (E) 190k, U-6 Unemployment (which also measures the under employed) dropped to 9.8%, the lowest level since May 2008, monthly wage increases rose sharply at 0.4% m/m vs. (E) 0.2% and year-over-year wage increases rose to 2.5%, the highest since July 2009, and well above the Fed’s 2.2% target.

In addition to the jobs report, the ISM Non-Manufacturing (or service sector) PMI was very strong at 59.1 vs. (E ) 56.7, and the employment sub index rose to 59.2, the best level in nearly 20 years.

That reading was anecdotally confirmed in the jobs report, as service sector job growth was very strong. And, that’s an important economic positive because for all the focus on manufacturing indices in the financial media, the US economy is a service-based/consumption-driven economy, so strength in that sector is more important than anything going on in manufacturing.

Looking at manufacturing, October Manufacturing PMIs remained soft on an absolute sense, but at the same time slightly beat expectations at 50.1 vs. (E ) 50.0. Manufacturing remains sluggish generally, and that likely will continue with a surging dollar—but again that, by itself, won’t offset the strength in the service sector and consumer spending.

Looking internationally, manufacturing data from China continued to show stabilization, which is positive for the global markets. Data from Europe was mixed, as EMU manufacturing and composite October PMIs were good, but German Manufacturers Orders and Industrial Production were both soft, reflecting the specific issue Germany is having due to sluggish global demand. But, with the ECB poised to do more QE and the euro falling towards parity with the dollar, the European recovery is ongoing and we remain bullish Europe via HEDJ.

Bottom line, if strong economic growth and the Fed hiking rates is the key to materially higher stock prices, then last week was a good week for the bulls longer term. Now it just needs to continue.

This Week

It will be a quiet week domestically other than the Retail Sales report coming this Friday. That is the next critical report for whether the Fed hikes rates in December, but given a lot of the other data from October it would be a big surprise if retail sales was a disappointment.

Outside of retail sales, jobless claims is the only other notable report and people will be watching to see if last week’s pop higher in claims is reversed.

Internationally focus will be on China. The currency reserves were positive while October Trade Balance missed estimates, basically offsetting one another but still implying stabilization. Tomorrow we get retail sales and industrial production. What’s really important for this Chinese data is that it continues to show stabilization, because as long as fears of a Chinese “Hard Landing” continue to recede, global stocks can rally (helped, of course, by the greatest global monetary accommodation in history).

Finally, Europe releases Q3 flash GDP on Friday, but again with the prospect of ECB QE looming in December, the data really isn’t that important any more, because it almost certainty won’t be strong enough to make the ECB rethink QE, and even if it’s weak, it’ll just encourage more QE. Europe remains in that sweet spot where virtually all data is good, as long as it isn’t too strong. That’s why we remain Europe bulls.

Bottom line, barring any big, negative surprises from the China data or Friday’s retail sales, this week will be one of digestion and contemplation of the implications of a December rate hike.

Weekly Economic Cheat Sheet 11/2/15

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Last Week

Last week the key event was the FOMC being more hawkish than expected and putting a December rate hike back on the table. That hawkish statement coincided with a Q3 GDP that was stronger than expected, but other than that the September data was almost universally disappointing, so despite the optimism from the Fed the outlook for the US economy remains muddled.

The FOMC statement was more hawkish than expected as it 1) Explicitly pointed to the December meeting as the date of a potential hike, 2) Upgraded the commentary on economic growth, and 3) Downplayed international concerns, less than two months after citing international concerns as the reason not to hike in September.

Bottom line, the surprising statement was likely the result of the bond market pricing in a more dovish Fed than reality, and the October statement was the Fed’s effort to correct that, and get yields closer to a level that at least respects the possibility of a December hike.

Following the statement the 2-year yield rose and Fed Fund futures increased the chance of a rate hike to just over 50% (although the consensus of analysts is still March). Looking at the actual data last week, initial Q3 GDP was a bright spot. Despite the headline miss, the report implied the economy remains resilient as consumer spending and core economic activity didn’t fall back much from the strong pace of Q2.

The best measure of true GDP, Final Sales of Domestic Product (GDP less inventories) rose 3.0% vs. 3.9% in Q2 while two key measures of consumer spending, PCE and Final Sales to Domestic Purchasers, also held up well compared to Q2. Overall, the first look at Q3 data was a positive surprise and specifically was anecdotally positive for the US consumer and US consumer sectors. Unfortunately, initial Q3 GDP was about the only good report last week.

October Service Sector PMI; September Durable Goods; September Consumer Spending, and University of Michigan Consumer Confidence were all slightly disappointing. Also, housing data cooled off last week with both New Home Sales and Pending Home Sales missing expectations.

Finally, shifting to inflation, there were two key numbers out last Friday but neither offered any surprises. The Core PCE Price Index stayed steady at 1.3% yoy, and generally met expectations. Additionally, the quarterly Employment Cost Index rose 0.6% in Q3, meeting expectations. Neither number made a December hike any more likely.

Bottom line, the soft data last week reinforced that some momentum has been lost in the US economy. The jobs report and PMIs this week will give us a better picture of just how much, and that’s key to future stock gains and whether a December rate hike becomes likely.

This Week

This week is an important one for US and global economic growth, and the numbers this week need to meet or exceed expectations if the recent global rally in stocks is going to hold.

First and foremost, though, it’s “Jobs Week” with the ADP report kicking things off on Wednesday, Jobless Claims on Thursday and the all-important October government jobs number on Friday.

We will do our “Goldilocks” preview later this week, but with a rate hike clearly on the table for December this jobs report now is much more important than it was this time last week. After the jobs report, the focus will be on the global manufacturing and composite PMIs.

The global PMIs were “fine” this morning as the soft official Chinese data was offset by decent details (New Orders rose) while Europe’s data was good. The US data comes later this morning, and then global composite PMIs and US service sector PMIs come Wednesday. Again, the key here is that these numbers further imply the US and global economy is not being materially negatively effected by the August/September market turmoil and slowdown in emerging markets.

Looking at the Fed, Wednesday will be an important day, as the three key leadership members will speak: Yellen, Dudley and Fischer.

Fed Chair Yellen is testifying before the Senate Banking Committee, and while the topic is bank reforms there could easily be a discussion on policy. Dudley and Fischer (who speak on Wednesday afternoon, and evening, respectively) will make remarks on the economy.

Obviously with the hawkish Fed statement last week, any clues as to how close the Fed is to a December rate hike will potentially move markets.