The Economy: A Look Back and What’s Ahead

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Last Week

Economic data last week were stronger than their relatively low expectations, as concerns about the negative effects of the government shutdown had resulted in pretty low expectations for most of October’s economic releases.

And, it would appear that those concerns have been misplaced, because we’re not seeing the drop in economic activity you would think we would have.  At the same time though, while the data is better than depressed expectations, it’s not clear we’re seeing an acceleration of activity, either.

Certainly the highlight last week was the jobs report Friday, which was a solid “beat” vs. pretty depressed expectations.  October payrolls grew by 204K, much more than the 120K expectation, and the revisions to September and August were a positive 60K. (The direction of revisions to prior months can often be a good signal of the overall trend in hiring.)

But, the jobs report was just the highlight of consistently “good” data last week. Third-quarter GDP was 2.8%, higher than the 2.0% expectation, although that number was a bit deceiving as inventories added 0.8% to the report. (So, in reality, real economic growth in Q3 met expectations.) October Non-Manufacturing (or service sector) PMI rose to 55.4, beating expectations, although the new orders component (the leading indicator of the report) declined.  Finally jobless claims declined marginally to the 330K level, which is pretty much where they were in August.

Internationally, last week was also busy.  The highlight overseas was the “surprise” 25-basis-point cut in interest rates by the European Central Bank, which led to a plunge in the euro and a rally in the Dollar Index.  The cut was in response to currently very low inflation across the European Union, which some are fearing might turn into “dis-inflation” if allowed to persist.

Somewhat lost in the ECB and jobs report hysteria was strong economic data from China.  October composite PMIs beat estimates early last week and exports rose more than forecast Friday morning. (Strong exports to Europe are an encouraging sign of a continued economic recovery, not only in Europe but also globally).

The economic data remains very important mainly because of WWFD (What Will the Fed Do?).  In an absolute sense, while last week’s data beat low expectations, it’s still a long way from achieving “escape velocity” for the economy, where we no longer need QE or very, very low interest rates.

But, from a WWFD standpoint, last week’s better-than-expected data furthered the shifting expectations for when the Fed will taper QE, which seems to be the dominant theme in markets these days and the single-biggest influence on the bond market.  Although I don’t think the Fed will taper QE in December, the strong jobs report from Friday did result in January now becoming a strong contender for the first tapering.  But, at this point we need to see follow-through on this stronger-than-expected economic data in November before the consensus shifts from the current March expectation of the first tapering.

This Week

This should be a relatively quiet week on the economic front, especially compared to last week.  The most important event of the week will be the confirmation hearings for presumptive Fed Chair Janet Yellen, which begin Thursday.  There will be plenty of grandstanding and some tough questions and obstacles (in particular from Rand Paul). Despite this, she is widely expected to be confirmed (it would be a shock to the market if she wasn’t).

Looking at the actual hard data coming this week, we get our first look at November data with the Empire State Manufacturing Index on Friday. (Although it’s just one region, markets will be looking for any signs of follow-through from October’s surprisingly strong data.)

Jobless claims and October industrial production will also be watched.  In particular, markets would like to see the weekly claims start to decline and confirm the surprisingly good October jobs report. (Right now it’s a bit of a contradiction, in that claims are at the same level as in August while the monthly jobs report has improved.)

It’s actually a busier week in Europe from a data perspective, and given the ECB’s rate cut last week and growing concerns about dis-inflation, data there will be watched closely to see if the fledgling economic recovery is still intact.  HICP (the EU equivalent to our CPI) will be released Friday, and markets will be looking to see if there is any uptick in this final reading from the “flash” reading of two weeks ago.  It was the very low “flash” HICP reading that was really the big catalyst behind the ECB cutting rates, as it’s starting to flash a “deflation” warning sign.