Weekly Economic Cheat Sheet 10/26/15

Last Week

Global markets got a badly needed boost of confidence last week from economic data, as reports gave further proof that the Chinese economy is stabilizing and that turmoil from the emerging markets is not dragging European and US economies downward. That, combined with more global central bank easing (the PBOC cut rates Friday and the ECB plans on doing more QE in December), pushed stocks to two-month highs.

The most important data and activity last week came from China. Early last week Q3 Chinese GDP slightly beat estimates at 6.9% vs. (E ) 6.8% while September Retail Sales also beat expectations. The data wasn’t universally positive, as September Fixed Asset Investment and industrial Production slightly missed estimates, but those numbers, combined with August data and September manufacturing PMIs, does imply the Chinese economy is stabilizing.

That helped markets broadly to start last week, and a very active PBOC helped support markets throughout the week. Last Wednesday, the PBOC made targeted liquidity injections into 11 financial institutions to promote lending, and on Friday the PBOC did a (somewhat) surprise 25-basis-point interest rate cut and 50-basis-point reserve requirement cut.

Bottom line on China last week was economic data continued to get better, and while data is still far from “good” on an absolute basis, it is stabilizing, and Chinese authorities continue to actively support the economy.

Looking more globally, the October flash PMIs were better than expected in Japan, Europe and the US (54.0 vs. (E) 53.0 in the USA). This is important because these PMIs refute the growing idea that the emerging market turmoil and global market volatility in August/September was pulling developed market economies back toward recession.

The event that effected the markets the most was a very dovish ECB meeting and rate announcement. ECB President Draghi basically told markets that the ECB would be doing more QE in December in reaction to declining economic growth and inflation. Much like the PBOC, the fact that the ECB is going to more QE isn’t a shock, but the fact that Draghi was so explicit about it was a surprise. That dovish ECB meeting was the major positive stock market catalyst last Thursday.

Finally, looking at some hard domestic economic data, September housing continues to come in “fine” with both Existing Home Sales and Housing Starts both beating expectations, and implying a still-healthy housing market while jobless claims continue to refute the soft August and September monthly data. Jobless claims beat estimates at 259k vs. (E ) 265k, and remain near 42-year lows, implying the jobs market remains strong.

Bottom line, last week was a good week from a macro standpoint as we were 1) Reminded that the biggest global central banks remain active and committed to propping up stock prices and being ultra-accommodative, and 2) That actual economic data (especially in China) is stable, and so far the fear that China would drag down the developed economies is not coming true.

This Week

The FOMC decision this Wednesday is obviously the highlight of this week. There is virtually zero chance the FOMC hikes this week (for multiple reasons). We will do our typical FOMC Preview in tomorrow’s Report, but the focus of this meeting will be on how much the FOMC acknowledges the improvement in Chinese economic data and the stabilization in US stocks (if both those developments are highlighted that will be “hawkish,” and increase chances of a December rate hike).

Away from the Fed there are several important domestic economic releases to watch. From an inflation standpoint, Friday we get the September Personal Income and Outlays Report (which includes the Fed’s preferred measure of inflation, the core PCE Price Index) and the quarterly Employment Cost Index, which is a closely followed measure of wage inflation (wage inflation is typically a precursor to broad inflation). Remember, core CPI was a touch more “firm” than expectations two weeks ago, so these inflation numbers will be watched closely.

After the inflation data most of the focus is on growth, with the highlight being the first look at Q3 GDP out Thursday. Durable Goods (tomorrow) will also be closely watched to see if business investment remains resilient.