Archive for date: November 30th, 2015

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.