The Economy: A Look Back and What’s Ahead (3.17.14)
Last Week
The domestic economic calendar was very sparse last week, as most of the market’s focus was on Chinese data.
Starting with the U.S., though, the two U.S. reports last week were retail sales and weekly jobless claims. Both slightly beat estimates (retail sales rose 0.3% vs. 0.2% and weekly jobless claims were 315K vs. 330K), but neither report really changes anyone’s outlook for the economy or Fed policy.
The most “important” economic data last week came from China, as the country reported its trade balance, retail sales, fixed-asset investment and industrial production last Thursday. All of the report missed estimates, raising concerns that the Chinese economy is seeing growth further slow (multiple firms reduced their Chinese GDP forecasts to between 7.0% and 7.5%).
But, the market didn’t react negatively to the weaker data (it fell on Chinese credit worries, not data). That’s because there was a lot of chatter last week about the Chinese government moving to stimulate the economy via reserve ratio cuts or infrastructure spending if GDP growth slows to 7.0%.
So, concerns about Chinese credit aside, the key takeaway last week from an economic standpoint is that the Chinese economy is seeing growth slow, but the Chinese authorities are already signaling they will move to defend 7% GDP growth. This is encouraging for the market (because it further reduces the chances of a Chinese “hard landing”). While it won’t remove angst about credit conditions in China, economically speaking, Chinese authorities started giving the market signs there’s a “put” on Chinese growth.
This Week
Economically the focus this week will be on the Fed meeting Wednesday. It’s the first FOMC meeting of the “Yellen Fed” and it’s especially important because we also have a press conference following the rate decision (also Yellen’s first as Fed Chair).
Given the jobs report of two weeks ago, the overwhelming consensus is that the Fed will taper QE by an additional $10 billion. But, the focus of this meeting (and press conference) is what the Fed might do to change its “Forward Guidance.”
Several Fed officials recently have come out saying they want to change the way the Fed provides “Forward Guidance” from a quantitative process (the 6.5% unemployment and 2.5% inflation thresholds) to a more-“qualitative” process. (Meaning, they won’t tell us what will cause them to raise rates, so that way they don’t confuse the market they way they have been, seeing as the unemployment rate is just above 6.5%.)
I’ll preview it more in tomorrow’s Report, but the bottom line here is this: However the Fed changes its “Forward Guidance,” don’t get tricked into thinking it’s “dovish.” If we get a rally in bonds off the change in forward guidance, I’d short that bounce, as the guidance change from “quantitative” to “qualitative” won’t delay the rise in interest rates.
In addition to the Fed, there are also several economic reports, although next week is when we get some of the bigger reports. Regardless, though, there are some things to watch this week:
We get the first look at March economic data via the Empire State Manufacturing Survey (today) and Philly Fed Survey (Thursday). The key to these releases will be seeing: More proof that the dip in data in December and January was temporary, and economic activity pick up as the weather improves.
The rest of the economic reports this week are all from February (industrial production this morning, housing starts Tuesday, existing home sales Thursday).
So, while it’s still worth watching (especially the housing data for clues of stabilization of the housing recovery), any very weak data will be most likely given a pass because of the weather excuse. So, outside of the Fed, this week’s economic data won’t be as impactful as it normally would be, thanks to the February weather.