Weekly Economic Cheat Sheet 12.28.15

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Last Week

Data was sparse last week but the reports that did come were lack luster and while none of them are enough to increase concerns over the pace of the US economy, it is an undeniable point that data has underwhelmed lately, and that’s especially notable given the Fed just hiked rates.

The highlight last week was the Personal Income and Outlays Report (out last Wednesday), and the income and spending numbers largely met expectations, as did the really important metric in this report—Core PCE Price Index. The index rose 0.1% in November, meeting expectations while the year-over-year change remained unchanged at 1.3% (the same as October).

The Fed’s preferred measure of inflation once again didn’t follow November CPI higher, and between this and the durable goods number there was a slightly dovish takeaway from the data—although there’s so much time between now and the second hike (March at earliest, June most likely) that yesterday’s data won’t affect the decision in any way.

November Durable Goods was the next-most-important number last week, but it was by far the most disappointing. Headline durable goods were unchanged vs. (E ) -0.5%, but the beat was misleading. The flat monthly result was thanks to an uptick in defense spending, but the more important New Orders for “Non Defense Capital Goods Ex Aircraft” declined 0.4% in November, and the October gains were cut in half, from 1.3% to just 0.6%.

Business investment/spending was a bright spot in Q3, but it appears that is fading according to this latest report. This miss is another anecdotal negative in the manufacturing/capital goods segment of the economy. This likely will result in some small reduction of Q4 GDP estimates and reinforces the continued sluggishness in the broad manufacturing sector. This was not the number we would hope for following the first interest rate hike in nine years.

Finally, the November housing numbers continued to roll in last week and the results remain generally lackluster (meaning neither a headwind nor a tailwind on the broader economy).

The November Existing Home Sales number was a big miss vs. expectations (4.760M saar vs. (E) 5.320M saar) but the headline was misleading. In November the “Know Before You Owe” initiative began, which lengthens closing times for buyers. So, since Existing Home Sales are counted when the deal is closed, this caused an artificial delay that should be corrected in December.

Looking at some of the details, supply remains low at 2.04 million homes for sale vs. 2.11 million in October while prices remain firm (up 0.5% and 6.3% yoy). Price remains the key metric in this report, and overall it is healthy, so from an economic standpoint that’s mainly why these numbers aren’t a concern.

Bottom line, the details in the report imply the “real” Existing Home Sales number would have generally been “fine,” and while housing data lately has been a touch lackluster, the recovery remains firmly in place.

Again, bottom line, last week’s data wasn’t bad in an absolute sense and it certainly doesn’t imply the US economic recovery is losing momentum, but we would have liked to have seen better numbers given the Fed hiked rates two weeks ago. Again, data needs to turn better early in 2016, otherwise concerns about the pace of growth will start to rise.

This Week

This will be a very quiet week in the markets, given 1) The end of the year and 2) A very light economic calendar. There is virtually no foreign economic data throughout the week, and in the US there are only a few generally minor reports.

The most notable report will be the advanced Trade Balance out Tuesday, and that’s a bit more important than usual given the negative effect of the stronger US dollar on exports (and more broadly the manufacturing sector and corporate earnings). If exports are a big miss Tuesday morning that doesn’t bode well for manufacturing, so that’s why the market will care a bit more about this report than usual.

Looking past the trade balance there are two notable housing reports: Case-Shiller Home Price Index Tuesday and Pending Home Sales on Wednesday. As mentioned, price remains a critical factor in the housing market, so as long as Case-Shiller shows prices remain generally stable, then the outlook on housing won’t change. Pending Home Sales also remains important, but if it’s a “miss” for the right reasons—i.e., low supply—then that’s generally “ok” too, because the low supply will continue to support prices. Either way, unless one of these reports is a huge miss, the market should generally ignore them.

Bottom line, the advanced Trade Balance number is really the only potential wild card out there this week, and unless exports plunge it shouldn’t affect markets too much.

 

Weekly Economic Cheat Sheet 12.21.15

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Last Week

Last week was historic as the Fed hiked rates for the first time in nearly a decade, but it wasn’t fully the “Dovish hike” investors were hoping for. So, between new uncertainty surrounding the path of future rate hikes and worsening manufacturing indices, the economic outlook for the market did not materially improve.

Starting with the Fed decision, for a two-hour period it looked like the Fed perfectly threaded the needle between hiking rates for the first time in nearly 10 years, and providing enough dovish guidance to comfort markets that the next rate hike won’t come for a long time.

Unfortunately, once investors looked past the dovish tone, they focused on what we were all focused on—the “dots.” The fact that the Fed didn’t reduce the median dots for 2016 (which shows where the Fed thinks the Fed Funds rate will be at year end) was taken as modestly “hawkish,” and that was largely responsible for the dollar surge Thursday and the plunge in stocks.

The main takeaway from the Fed hike is that there remains a large and substantial gap between where the FOMC thinks rates will end 2016 (at 1.375%) and where the market (via Fed Fund futures) thinks rates finish 2016 (0.875%). Bottom line, there is a two-meeting discrepancy and that needs to be resolved. Whether the Fed needs to get more hawkish or the economy prevents another timely hike, either scenario is at least a temporary headwind on stocks. Going forward, the proper framework to view what the next Fed rate hike means for stocks is this: June=“Good,” March=“Bad”, After June=“Ugly.”

Looking at the rest of the data from last week, the December manufacturing PMIs were disappointing, and disconcertingly imply we are not yet seeing stabilization in the manufacturing sector, which continues to be plagued by excess inventory and a strong dollar.

December flash manufacturing PMI missed estimates at 51.3 vs. (E) 52.8, as did December Philly Fed, which turned negative again. Empire Manufacturing Survey actually slightly beat estimates, but it remained in negative territory and New Orders in both Empire and Philly plunged (New Orders are the leading indicators in the manufacturing PMIs).

Bottom line, the recent manufacturing data does not imply stabilization, as we said last week. While soft manufacturing won’t derail the US economy, stable manufacturing is needed if the economy is ever going to achieve “escape velocity” of 3.5%-plus growth (and that matters because we need that for stocks to materially break out from current levels).

Bottom line, last week brought closure on the drama surrounding the first rate hike in nearly 10 years, but beyond that it didn’t provide a lot of additional clarity on the economy, so the economic outlook for the US remains unclear, despite the events of last week.

This Week

Even if Christmas wasn’t this week the economic calendar would be pretty light, but the holiday (1/2 day Thursday, off Friday) will make the data this week even less impactful. The only real, notable economic event this week comes Wednesday with the release of the November Personal Income and Outlays Report.

As you likely know by now, this report is important every month not because of the headline but instead because of the Core PCE Price Index contained in the report, which is the Fed’s preferred measure of inflation.

Inflation was highlighted by the Fed even more than normal in last week’s statement, so it’s not an oversimplification to say that what inflation does over the next two months will decide whether the Fed hikes in March (very unlikely given current inflation levels) or June.

Remember inflation pressures continue to firm (Core CPI last week rose 2.0% yoy) so if the Core PCE Price Index begins to reflect any upward pressure, that will be hawkish (and not good for stocks). It likely won’t happen this week, but following last week’s FOMC statement Core PCE Price Index is an even more important indicator to watch.

The other notable reports this week include Durable Goods, which has been strong lately and bodes well (potentially) for Q4 growth as business spending and investment has been a positive surprise economically.

There are also several more housing numbers (November Existing Home Sales on Tuesday and New Home Sales on Wednesday). These reports were disappointing in October and more soft numbers are expected given the decline in Pending Home Sales (which lead existing home sales), but as long as the disappointments are supply based (lack of homes for sale) and price is generally steady, they shouldn’t elicit too much of a reaction from markets.

Final Q3 GDP comes Tuesday, but at this point the data is so old it’s virtually inconsequential, while jobless claims finish the week on Thursday. Overall, it should be a quiet week barring any shocks from the Core PCE.

 

Weekly Economic Cheat Sheet 12.14.15

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Other than the retail sales report out Friday, which was a strong report, there were virtually no notable economic releases last week. We exited last week much as we began, with bond markets signaling an 85% chance of a rate hike this week (which from a market standpoint is basically a sure thing). Looking at the one material report last week, Retail Sales was stronger than expected and again further confirmed that the US consumer remains healthy despite lingering concerns and retail stock underperformance. The important “control group,” which excludes gasoline, autos, building materials and food services, rose a substantial 0.60%.

This was an important report because it helps offset the apparent increased deceleration in US manufacturing. But, as we and other have said many times, it’s much, much more important for US consumer spending to be accelerating than it is manufacturing to be strong. Bottom line, it was the only notable report last week, but it’s an important one as the US consumer appears to be accelerating his/her spending.

This Week

Even if there wasn’t a potentially historic Fed meeting this week, it would still be a busy week from a data standpoint, so the Fed meeting Wednesday just adds to an already-stacked calendar.

Obviously the FOMC is the highlight of this week, and while it’s universally expected the Fed will raise rates 25 basis points, the bigger unknowns are 1) The language surrounding the next hike, 2) How the “dots” shift reflecting the expected number of hikes in 2016, and 3) Yellen’s tone in the press conference (which will likely be very dovish). We will do our typical “Good, Bad, Ugly” FOMC Preview tomorrow, but obviously this is the most important event of the week.

Beyond the Fed this week brings the latest look at both global and US manufacturing data. US and Global December flash manufacturing PMIs (excluding China) are released Wednesday morning, right before the Fed, and they are important because the November data showed a loss of positive momentum in the US and Europe. Those numbers need to firm up to help the markets broadly.

Given the December flash PMIs are released this week, they steal the thunder from Empire and Philly Fed Manufacturing Surveys (Tuesday/Thursday), which will give us an additional look at manufacturing activity in December (further improvement towards a less-negative reading will be welcomed by the market).

CPI will also be released Wednesday before the Fed, and although it’ll be important to see if it shows a further firming of inflation it’s not likely to sway the Fed one way or the other (remember the Fed prefers the PCE Price Index as it’s statistical measure of inflation). But, continued firming in CPI will further validate our idea that inflation may be a bigger story in 2016 than the consensus currently expects.

Bottom line, this week is all about the Fed, and specifically how they signal when to expect the second rate hike (remember March 2016 is too soon, and June is just right). Beyond that we will get more insight into the state of manufacturing in the US and across the globe, and that’s important because we won’t see any material acceleration of economic growth in the US or globally until manufacturing truly stabilizes.

 

Weekly Economic Cheat Sheet 12.7.2015

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Last Week

Last week had the potential for economic data and central banking announcements to cause big volatility in the markets, and they did not disappoint. But, the bottom line is that a rate hike in December is now all but certain while the dollar rally has been temporarily capped thanks to the ECB’s underwhelming actions (at least compared to the markets unrealistic expectations).

Meanwhile, actual global manufacturing activity disappointed last week, although that was generally ignored by markets. Beyond the jobs report, it’s important to note last week’s data wasn’t very good.

Starting with the jobs report, it fell right into the middle of our “Just Right” range at 211K vs (E) 190K. Not only was the headline “Just Right” but so were the details: Unemployment stayed at 5%, wages grew a modest 0.2% in November and are up 2.3% yoy (down from 2.5% in October), and U-6 Unemployment (which measures underemployment) ticked up 0.1% to 9.9%.

In total, the jobs report wasn’t that strong and there were some soft spots, but it perfectly backs the one-and-done Fed policy of a December rate hike, and then nothing until June 2016—and that’s why it ignited such a massive rally in stocks Friday. Whether that actually plays out remains to be seen, but for the short-term bulls that jobs report was borderline perfect.

Looking at other data, global manufacturing PMIs for November were generally a disappointment. First, the official Chinese PMI dropped to 49.6 vs. (E) 49.8, undermining the “stabilization” theory, although Chinese markets took it as a catalyst that would be reason for further easing. But, we challenge that notion because Chinese officials have recently unleashed a slew of stimulus measures and there is really not a whole lot more they can or are willing to do in the near term. So, last week’s soft PMIs make the Chinese data this week more important, and while China is no longer the macro risk that it was in the late summer it remains a risk to monitor.

Meanwhile, in the US ISM Manufacturing PMI fell to 48.6, the worst level since June 2009, which was a big disappointment and also undermines October data that implied the manufacturing sector was stable. But, especially in light of the good jobs report Friday, the manufacturing PMI won’t cause the Fed to delay a rate hike in December.

The ECB decision was the big catalyst of the week as the ECB unleashed more stimulus but didn’t meet the market’s quasi-unreasonable expectations, and the resulting moves in the current markets were historic. The euro rallied 3% on short covering while the dollar dropped more than 2%. Both currencies traded to respective one-month highs and lows.

Somewhat lost in the details was the fact that the ECB actually increased the total size of the QE program to 360 billion euro with the six-month extension, more than the 300 billion expectation. So, the actual decision was not as bad as the market’s reaction. We will provide a more in-depth update on the “Long Europe” thesis in tomorrow’s report, including our opinion short, medium and longer term.

This Week

It should be a pretty quiet week economically, especially in the US. As noted, there are virtually no Fed speakers this week and little data. The undisputed highlight of the data this week will be Friday’s November Retail Sales report, which will include preliminary results from the start of the holiday spending season. Also on Friday, University of Michigan Consumer Confidence will be released, and since the market gyrations in August the Fed has watched this number, so we will too. But, to be clear, Retail Sales and consumer confidence would have to be in near freefall