The Economy: A Look Back and What’s Ahead
Last Week
The ongoing government shutdown delayed several pieces of data last week, so weekly jobless claims and the Federal Open Market Committee minutes were the only two reports released.
Starting with the Sept. 18 FOMC meeting minutes, they revealed, as expected, a divided Fed about when and how to taper QE. The decision not to taper QE was a “close call,” as multiple Fed governors had said in follow-up speeches since the meeting. The market initially took the minutes as a touch “hawkish” based on a sentence that stated most governors still expected tapering this year. But the “hawkish” response from the market was short-lived, as clearly a lot has happened since the September meeting, and virtually none of it has been good—with the exception of President Obama formally nominating Vice Chair Janet Yellen to replace Chairman Ben Bernanke, as was widely expected.
Jobless claims saw a huge jump last Thursday as governmental incompetence trickled down to the state level. California, apparently because of computer upgrades, had a backlog of unreported claims from the last several weeks. (This was despite the Department of Labor saying that, for two weeks, the data has been “clean.”)
Initial claims jumped by more than 60K due to the backlog, although the takeaway is the four-week moving average is basically where it was one month ago (in the mid-320K range). This means the multi-year dip we saw in claims over the past three weeks was a mirage, and the labor market remains basically unchanged since last month (meaning, we aren’t seeing any marginal improvement).
The bottom line of the data last week was that—taken in the context of the Washington fiscal drama and negative effect of the government shutdown on the economy—expectations for QE tapering are now rapidly shifting to early ‘14, in either January of March, and the prospects for a December taper are quickly falling to near-zero.
This Week
Thankfully the most-important economic release this week won’t be delayed because of the shutdown. Most important to the markets this week is data from China.
Over the weekend, we learned exports from China dropped much more than expected in September—falling 0.3% vs. (E) 5.8% increase. It was already an important week of data from China, but that “miss” will have people even more focused on the releases.
Third-quarter GDP, Industrial Production and Retail Sales are all released Thursday night. It goes without saying that Chinese economic growth stabilizing around the 7.5% GDP mark is essential to the “global recovery” investment thesis, so it’ll be important that Chinese data is close to estimates.
Domestically, the Empire State and Philly manufacturing surveys (Tuesday & Thursday, respectively) will give us the first look into economic activity in October, and clearly people will be watching to see if there has been any negative effect on the manufacturing recovery given the drama in Washington. It’ll only be an anecdotal look, but in particular keep an eye on the Philly Fed, as recently it’s been a good predictor of the national Institute for Supply Management’s manufacturing PMIs. So, expect a negative reaction from the market if that number is weak.
Elsewhere, the Fed Beige Book will be released Wednesday. Although, given the nature of the analysis and the government shutdown, this report—unless it’s shockingly negative (which is a very low probability)—shouldn’t be a market-mover. Finally, weekly jobless claims, given last week’s volatility, will again be watched, in particular to make sure they come back down after the big jump from the California backlog.
The shutdown will again delay several pieces of data this week. Industrial production, the Consumer Price Index and housing starts continue to be on hold until further notice.