Archive for date: November 2nd, 2015

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.