Weekly Economic Cheat Sheet 10/12/15

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Last Week

Economic data last week generally confirmed what we already knew: There appears to be some loss of positive momentum in the US economy; global growth remains sluggish, and the Fed is dovish. Nothing last week materially changed anyone’s outlook for US or global economic growth.

The FOMC minutes were the highlight of last week, and they largely met dovish expectations. During the September meeting the Fed had lengthy discussions about risks from China and emerging markets, and between that and recent stock market turmoil it was clear there wasn’t even a real debate about hiking rates last month.

If there was one dovish surprise from the minutes it was that some FOMC members expressed doubts about being able to achieve their stated 2% inflation target. If those doubts grow to the rest of the FOMC, that will be a incremental dovish factor on the Fed, and likely delay any expected rate hike well into 2016.

The media said markets rallied on the dovish comments, but we know that isn’t true. March 2016 is the consensus expectation for a rate hike, the minutes only further confirmed that point.

Turning to economic data, ISM Non-Manufacturing (or service sector) PMI (out last Monday) was slightly underwhelming at 56.9 vs. (E ) 58.0. But looking past the dip, the PMI remains at a very healthy absolute level and the service sector of the economy still remains very strong.

Perhaps the best number of the week was the weekly jobless claims, which dropped back to 263k vs. (E ) 271k. This is important because claims are not confirming the soft monthly jobs report. It’s very strange to see the monthly jobs reports come off without some uptick in weekly jobless claims. And, that means we’ll likely see either 1) Claims trend higher over the coming weeks or 2) The monthly jobs reports revised higher (history says it’ll be the latter). Point being, other data on jobs remains healthy and the labor market remains as strong as it’s been in years.

Finally, looking internationally there were some notable developments. First, we got another good number from China last week as currency reserves declined less than expected, which implies that sentiment towards that country’s economy is stabilizing. And, that’s positive because concerns about Chinese growth remain a major headwind on stocks.

This Week

This is a critical week for the markets because we will get significantly more color as to the whether 1) The Chinese economy is stabilizing, and 2) Whether the US economy is being pulled lower by sluggish global growth and market turmoil. With stocks at multi-week highs, this week could very well determine whether markets break out, or break down.

The most important economic data this week will come from China, with Trade Balance out tomorrow morning, CPI & PPI coming Wednesday, and most importantly, Industrial Production, Retail Sales, Fixed Asset Investment and GDP out one week from today.

With the Fed clearly on hold till at least December, and earnings just ramping up, China remains the #1 influence on stocks. If the data over the next six days can reinforce the “green shoots” of stabilization we’ve seen lately, that could be a material positive on stock prices. Conversely, if the data does not stabilize then this market remains vulnerable to a China-inspired decline.

Turning to the US, September Retail Sales (out Wednesday) is the highlight of the week. Recently, evidence has appeared that the turmoil in markets and overseas has hit consumer confidence and further weighed on manufacturing. If we see that retail sales dipped as well in September that will further imply that the international drag is pulling the US economy down with it, and that will not be positive for markets.

Beyond retail sales, Thursday will be a busy day as we get the first look at October data via Philly Fed and Empire Manufacturing Surveys. Both dropped sharply in September, and another weak reading will only further concerns about the manufacturing sector.

Also Thursday September CPI and the latest jobless claims data are released. CPI will almost certainly show continued subdued inflation while jobless claims will be watched to see if they move higher and confirm the week monthly jobs reports.