The Economy: A Look Back and What’s Ahead (12.2.13)
Last Week
Economic data was pretty light last week, even despite the holiday, but there were a few takeaways worth noting.
Generally speaking, the data was mixed. In particular, one of the main takeaways from last week was that the slowdown in the housing recovery is still ongoing. Both Pending Home Sales and permits contained in the housing starts number missed expectations. Technically, permits beat the headline expectation, although that was due to an increase in permits for multi-family structures. The more-important single-family permits continued to be soft.
The key here isn’t so much that we need to be worried about the housing market (prices are still holding up, which is the most-important part). But clearly the higher mortgage rates are biting, and I think collectively the market will breathe a sigh of relief when the housing data stabilizes.
The other main takeaway from economic data last week was the continued improvement in jobless claims. Weekly claims dropped to a multi-week low at 316K (vs. estimates of 330K), and the four-week moving average also dropped to a multi-week low. This is important because if this drop in claims is accurate (there’s some concern the Columbus Day holiday may be positively skewing the data), then claims will “confirm” the improvement we’ve seen in the monthly Employment Situation Report. This would in turn strongly imply we’re seeing positive momentum again in the jobs market, which obviously is important because it further solidifies the Fed will taper.
Finally, Durable Goods was a bit of a disappointment. New Orders of Non-Defense Capital Goods ex-Aircraft (NDCGXA) fell for the third-straight month, and it’s now at its lowest level since March. Part of this could be seasonal, but it does raise some concern we’re seeing business pull back on investment (buying machinery, etc.) and that could be a drag on GDP in Q4. But, we’re not seeing a dip in the manufacturing PMIs, so until we do, the market will largely shrug off the drop in NDCGXA, although it is something to watch.
Bottom line: Nothing materially changed last week. The housing recovery is still ongoing but momentum is slowing, and that’s something we need to continue to watch. The drop in claims will make people cautiously optimistic that the good October jobs report is legitimate, and if it is, expectations for Fed tapering will be further solidified. But, nothing last week changed the market’s expectation on the economy (still slow growth) or toward the Fed (a Q1 taper remains the expectation, with March slightly ahead of January as the consensus month, although expectations have been shifting to January).
This Week
This is a busy week, and it is especially important because it’s basically the last big week of data for 2013.
First, it’s “jobs week.” So, we will get the ADP Employment Report Wednesday, jobless claims Thursday and the Employment Situation Report (the big jobs report) Friday.
This report is probably a bit more important than normal because if it’s very strong, then the prospects of a December taper of QE will rise substantially. (As mentioned, that is not priced into the equity or bond market.) And, I’m not sure anyone knows exactly how the stock market would react to a December taper announcement (it could rally because of the good data or sell off because tapering may be too “early,” in what would be a “taper tantrum”).
In addition to jobs week, it’s also Purchasing Managers’ Indexes week. We’ve already gotten the final look at Chinese and EU manufacturing PMIs, and will see the U.S. number at 10 this morning. But, Tuesday night/Wednesday morning we also get Composite PMIs for China and Europe, respectively, and the Institute for Supply Management’s Non-Manufacturing PMI for the U.S.
These numbers are obviously important because the pace of the global economic recovery appears to have slowed a bit, and if we see a soft number in China or Europe, that could present a new headwind on risk assets.
In addition to the global PMIs, we also get rate decisions from the Reserve Bank of Australia (tonight) and the Bank of England and European Central Bank Thursday. None of the banks are expected to change policy, but the ECB press conference will be scrutinized to see what, if anything, Mario Draghi says about what “more” the ECB is prepared to do to help combat dis-inflation. (If he disappoints and doesn’t imply they are ready to do anything, European stocks could get hit.)
Finally, domestically we also get the second look at Q3 GDP, as well as September and October New Home Sales. (Like Housing Starts, the data was delayed because of the government shutdown.)
Bottom line is this is an important week because:
1) It should definitively tell us whether a December taper of QE is possible, and
We get the latest look at the pace of the global economic recovery, and specifically whether the ECB remains committed to “doing more” to help the EU economy gather steam.