Your Weekly Economic Cheat Sheet

Last Week

The market needed economic data last week to show that the global economy wasn’t as bad as markets had come to believe over the past month, and the data delivered.

On the growth and inflation fronts (the two main areas of concern for risk assets), data last week were solid if unspectacular (but helped correct sentiment, which had been getting almost exponentially worse each day).

The data started good last week as Chinese Q3 GDP was 7.3%, slightly under the 7.5% “target” but better than expected. And, importantly, it was comfortably above the 7% GDP “Maginot Line” that determines when concerns about Chinese growth become a significant headwind on risk assets.

But, the October flash manufacturing PMIs really helped calm nerves about the global recovery. Again, while not spectacular, they were definitely better than feared. At a 10K-foot level, the data last week showed the global economy is still recovering, and not contracting again, as expectations for German and Chinese PMIs were for both numbers to fall below 50 (signaling contraction) but both surprised to the upside.

The highlight was the German data (remember Germany is now “Ground Zero” for European economic worries. German manufacturing PMI rose 51.8 vs. (E) 49.5, while the Chinese data hung on, rising to 50.2 vs. (E) 49.9.

The broader EMU PMI was also a beat at 50.7 vs. 50.0 (but again showing expansion) while the U.S. number was a slight miss at 56.2 vs (E) 57.0—but the important thing is that, at an absolute level, activity in the manufacturing sector is still brisk.

Turning to inflation (and specifically worries about dis-inflation/deflation), the September CPI was also steady. Month-over-month CPI rose +0.1% vs. (E) 0.0%, and the year-over-year change in “core” CPI (which is the most important metric to watch) was unchanged from August at 1.7%. Again, while unspectacular, the data implied the dis-inflation threat in the U.S. isn’t increasing, which is a positive.

This Week

We get more important data on growth and inflation this week, but the most important event of the week will be the FOMC meeting Wednesday.

I’ll preview it as we get closer, but the almost universal expectation is for the FOMC to end QE (as expected). Where expectations differ, though, is what the statement will look like. Specifically, the big question is whether the Fed will remove the “significant time” statement or the “significant underutilization of resources,” thereby making the statement slightly more “hawkish.”

Given recent events with inflation and the global economy, the market is very interested to see if this has made the core of the FOMC more “dovish” or if they appear intent to stay the course. Given the rally in stocks, a slightly “dovish” statement has been priced in already.

After the Fed, the focus this week will be on inflation. The second most important event this week will be the October flash EU HICP, which comes Friday. Europe remains the major source of risk to global equities, and we need positive news on that front.

In the U.S. we also get an important inflation indicator Friday, via the “Core PCE Price Index” contained in the Personal Income and Outlays Report. The Core PCE Price Index is the Fed’s preferred measure of inflation, and for dis-inflation worries to recede further, we need to see the year-over-year number hold firm like in CPI.

Also, we get the quarterly Employment Cost Index Friday, which provided a big surprise to markets back in June when wage costs jumped higher. Remember, wage inflation begets broad inflation, so this will be watched to see if wage increases continued in Q3.

If those numbers are good, that will go a long way toward easing deflation worries in the EU and dis-inflation worries in the U.S.

From a growth standpoint, the first look at Q3 GDP comes Thursday, with expectations currently sitting just under 3.0%. Other than that we Durable Goods tomorrow and some more housing data (Pending Home Sales today, Case-Shiller tomorrow) and weekly jobless claims, which continue to hover at a near-15-year low.

Bottom line this week will be important from a Fed expectation and deflation/dis-inflation standpoint. If the Fed is dovish and the inflation numbers are steady, it will support a further rally in equities.

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