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.