Last Week
It was a slow week economically given the Christmas holiday, but the data that was released was positive, and supportive of the growing view that we are seeing economic growth starting to accelerate.
Last week’s highlight was the Durable Goods report, which not only was a headline beat, but New Orders for Non-Defense Capital Goods Ex-Aircraft saw a strong uptick, rising by 4.5% in November. That’s important because it implies that business spending and investment may be starting to expand again after basically treading water since May, and if that is the case, then it’s an unexpected positive for the economy.
Housing data was also surprisingly strong, as New Home Sales showed a huge positive revision in October (the November data was down slightly month over month, but that’s only because of the huge October revision). While it certainly doesn’t settle the debate about just how much of a headwind higher interest rates will be on housing (remember October was when we saw the dip in interest rates, so perhaps that pulled more buying forward). Point being, the New Home Sales data was a nice surprise last week, but it’s December now, and the housing market will remain a sector to watch in the face of increasing rates.
On the consumer front, November consumer spending, which was contained in the Personal Income and Outlays Report released last Monday, beat expectations, confirming recent strength in the monthly retail sales reports. Also in the Personal Income and Outlays Report was the “Core PCE Price Index” for November, which was unchanged from October. That’s the Fed’s preferred measure of inflation, and what it means is that inflation remains very, very low and that gives the Fed plenty to scope to keep rates “low for long.” (Meaning the low inflation readings help to further validate the Fed’s Forward Guidance, and markets traded slightly “dovishly” off the reading).
Finally, jobless claims saw a big drop, although this release is so volatile right now because of seasonal distortions, weekly claims are largely being ignored. The key is that the 4 week moving average for weekly jobless claims is basically at the same level as August—so the jobs market is continuing to improve, but at about the same pace as in the last few months (meaning we aren’t seeing incremental improvement and likely should expect another 200kish monthly jobs report for December).
Bottom line last week was that while most of the data was “second tier” and none of the releases, by themselves, will change current Fed policy, the strong Durable Goods Report and Consumer Spending data in the Personal Income and Outlays Report will put upside risk to most analysts current Q4 GDP estimates (meaning the economy might be stronger than we currently think).
And, most importantly, the continued strong economic data is helping to make 3% on the 10 year yield “ok” for stocks. As long as there is constant re-enforcement by the data that economic growth in accelerating, higher interest rates won’t be a major negative for risk assets, at least not at these levels.
This Week
This will be another slow week economically, given the New Year Holiday, although the release of the global manufacturing PMIs on Thursday morning makes this week a bit more important, economically speaking, than last week.
The flash PMIs for December were released two weeks ago, so markets will be watching to see if the final readings match the trends we saw in the Flashes—that of a slight dip in manufacturing activity in China, and stronger than expected activity in Europe. Also, the Chinese government will release their monthly PMIs (not-surprisingly they are almost always stronger than the privately gathered Markit PMIs). But watch to see if there’s also a dip in the government data that confirms the dip in activity in the Markit PMIs.
The Pending Home Sales (this morning) is the only other notable report. It’s November data, so it’ll be interesting to see what effect the creep higher in interest rates that occurred throughout November had on sales.
Bottom line is this week won’t have much of an effect on things here in the US (the ISM Manufacturing PMI release Thursday should only move markets if it’s a big miss), but it is an important week to gauge the progress of the global economic recovery, and the reports from China and Europe will be watched closely.
