Here are some thoughts on the main developments that are likely to impact the markets in the coming week. While I think most of the developments will ultimately result in lower Treasury yields and dollar, as well as higher stock prices, uncertainty ahead of the Presidential election should restrain any market move as well as impart volatility during the week.
FOMC Meeting -- Market Neutral
1. No one expects the Fed to hike on Wednesday, and it is unlikely that the Statement will change significantly. So, while the door will remain open for a December rate hike, that's likely to be about all one will be able to conclude from the Statement.
2. The evidence since the September FOMC Meeting was dovish, on balance:
a. The Unemployment Rate ticked up to 5.0% in September, underscoring the point Yellen made in her news conference that better labor market conditions are eliciting an increase in labor supply and thus accommodating stronger demand without undue inflation pressures -- which was a key reason the Fed did not hike rates at the September FOMC Meeting.
b. The September Core CPI slowed to 0.1% m/m, which should hold down the Core PCE Deflator to 0.0-0.1% m/m with a decline in the y/y to 1.6% from 1.7%, due Monday.
c. The Q316 Employment Cost Index -- a major indicator of labor cost inflation -- remained at 0.6% q/q for the 2nd quarter in a row. The y/y was steady at 2.3%, although up from 2.0% in 2015.
d. While Q316 Real GDP Growth sped up to 2.9% (q/q, saar), about 1 percentage point of it resulted from a jump in US soybean exports to China -- which could be one-off, in which case it will subtract from Q4 GDP Growth. An underlying 2.0% pace in Q316 is an anemic bounce after the 1.1% H116 Real GDP average.
Key US Macroeconomic Data -- Mostly Softer
1. I think the risk is for a counter-consensus decline in the October Mfg ISM, due Tuesday.
a. The Phil Fed Mfg Index points to a decline. It correctly predicted the direction of the Mfg ISM in 6 of 9 months this year. This is a better tracking record than any other manufacturing survey, including the Market US Mfg PMI. Although the latter rebounded in October after it fell in September, the bounce-back was likely catch-up to the increase in the Mfg ISM in September.
b. The damage of the stronger dollar on manufacturers could be one of the fundamental factors behind a decline in the Mfg ISM.
c. Seasonal factors boost the m/m change in the October Mfg ISM by 0.4 pt less than they did in October 2015.
2. The Chicago PM - which is based on a broader sample than just manufacturing -- also has a 6 of 9 month tracking record with the Mfg ISM so far this year. Chicago PM comes on out Monday.
3. I think the October Employment Report risks printing weaker than or in line with consensus.
a. Consensus is for a speedup in Payrolls to +175k m/m from +156k in September. I think Payrolls may stay around 150k. While the Unemployment Claims data improved in early October, they are not a reliable predictor of speedups/slowdowns in Payrolls. A downside risk that I see comes from the potential for employers to delay hiring until after the Presidential election -- hiring delays would not have impacted the Claims data. Also, I think there is a possibility that economic growth is slowing somewhat. And, it is possible that the jump in Private Payrolls in September was just an offset to their sharp slowdown in August. If so, October Private Payrolls should slow. Evidence for these risks could be the drop in "Jobs Plentiful" in the October Conference Board Consumer Confidence Survey. October Payrolls show no tendency to pull back from trend in past Presidential election years, however.
b. Consensus is for a dip in the Unemployment Rate to 4.9% from 5.0% in September, and cannot be ruled out. A decline in the Rate is suggested -- counter-intuitively -- by the weaker jobs components of the Conference Board Consumer Confidence Survey. Also, the un-rounded Rate was 4.96% in September, so a small decline would round down to 4.9%. Note that a 4.9% print should still be viewed as providing slack in the labor market, since it would be the same level the Fed had seen in the September FOMC Meeting.
c. Consensus is for 0.3% m/m in Average Hourly Earnings, after AHE came in lower than expected at 0.2% in September. Calendar considerations support a 0.3% print, but these considerations were in effect in September, as well -- and did not dominate the print. Note that calendar considerations point to a 0.1% m/m AHE (and decline in the y/y) in November.
Oil Prices and the Dollar -- Bearish for Dollar
1. Oil prices are likely to sink further on Monday, after OPEC failed to reach agreement to cut production at this week's meeting. A drop in oil prices could push down the dollar, as it should reduce the "transactions" demand for this global currency. The dollar also could be held down by this week's US economic data, if my expectations for them turn out correct.
Presidential Election -- Volatility
1. Headlines regarding Clinton's emails and the latest polls will likely be the focus in this last full week before the election.
Sunday, October 30, 2016
Sunday, October 23, 2016
Next Week's Important US Economic Data
The advance report on Q316 Real GDP, due this coming Friday, could be important. Consensus is for 2.5% (q/q, saar), which would be a pickup from 1.4% in Q216 and 1.1% on average in H116. It also would be well above the 1.7% pace viewed by many, including Fed staff, as trend.
Some Street Economists, like those at Goldman Sachs, base their expectation of a December Fed rate hike at least in part on such a strong Q3 GDP print. Goldman Sachs' estimate, the last I saw, was at 2.7%. So, a near-consensus print could solidify these expectations. But, if Q3 Real GDP comes in at the Atlanta and NY Fed's nowcast model projections of 2.0-2.2%, the market probability of a December hike could be dampened.
All these forecasts could change significantly ahead of Friday's report, however. This is because the Commerce Department will release September data for inventories, trade deficit, new home sales, and durable goods shipments between Tuesday and Thursday. In July, when Commerce began releasing the data for the third month of a quarter ahead of the advance GDP report, forecasts of the latter were marked down.
a. Note that this earlier release of what had been "missing data" in the advance GDP report aims at reducing the size of the subsequent GDP revision. So, the advance print now should be viewed as more reliable than it had been before the change in procedure.
Another interesting report this week will be the October Conference Board Consumer Confidence Index, due Tuesday. The jobs components of this report have a tendency not to move intuitively with the Unemployment Rate. For example, in September the jobs components improved, but the Unemployment Rate rose. It is possible that a better view of the job market brings people back into the labor force (and vice versa), boosting labor supply more than employment.
a. Consensus is looking for the Confidence Index to fall to 101.5 from 104.1 in September. A decline in Confidence would raise the risk of a decline in the October Unemployment Rate from 5.0% in September.
Some Street Economists, like those at Goldman Sachs, base their expectation of a December Fed rate hike at least in part on such a strong Q3 GDP print. Goldman Sachs' estimate, the last I saw, was at 2.7%. So, a near-consensus print could solidify these expectations. But, if Q3 Real GDP comes in at the Atlanta and NY Fed's nowcast model projections of 2.0-2.2%, the market probability of a December hike could be dampened.
All these forecasts could change significantly ahead of Friday's report, however. This is because the Commerce Department will release September data for inventories, trade deficit, new home sales, and durable goods shipments between Tuesday and Thursday. In July, when Commerce began releasing the data for the third month of a quarter ahead of the advance GDP report, forecasts of the latter were marked down.
a. Note that this earlier release of what had been "missing data" in the advance GDP report aims at reducing the size of the subsequent GDP revision. So, the advance print now should be viewed as more reliable than it had been before the change in procedure.
Another interesting report this week will be the October Conference Board Consumer Confidence Index, due Tuesday. The jobs components of this report have a tendency not to move intuitively with the Unemployment Rate. For example, in September the jobs components improved, but the Unemployment Rate rose. It is possible that a better view of the job market brings people back into the labor force (and vice versa), boosting labor supply more than employment.
a. Consensus is looking for the Confidence Index to fall to 101.5 from 104.1 in September. A decline in Confidence would raise the risk of a decline in the October Unemployment Rate from 5.0% in September.
Sunday, October 16, 2016
Overreations to Friday's Fed Talk?
Two Fed speeches on Friday sparked noticeable market reactions that might have been overdone.
Yellen conjectured that the Fed could temporarily allow "a high-pressure economy" in order to boost productivity. The long end of the Treasury curve sold off on the inflationary implications of this scenario.
NY Fed President Dudley gave a wide-ranging interview to the NY Times in which he touched on many of the considerations and issues mentioned in prior FOMC Statements/Minutes and other Fed speeches. The markets picked up on his expectation of a rate hike by the end of the year, and stocks came off their highs.
There may be less than meets the eye in these comments, however:
1. A "high-pressure economy" is not that far different from prior Fed talk that inflation would be allowed to exceed the 2.0% target for awhile. Also, such an economy might not be inflationary if it is successful in boosting productivity growth. While wage growth might pick up, it would be offset by higher productivity growth so that unit labor costs would not speed up. Moreover, her discussion was essentially theoretical and not necessarily what will be Fed policy.
The sell-off in the long end of the Treasury market after her speech very well may have been a warning sign that such a policy would backfire. Higher long-term yields would hurt economic growth. To be sure, from an optimal control approach to analyzing markets -- markets will move in ways to achieve the Fed's goal -- stocks could rally and the dollar fall to offset the drag from higher Treasury yields.
2. Dudley spent a lot of time in the interview agreeing withe Brainard/Yellen contention that the strong payroll growth this year could be accommodated in a non-inflationary way as a result of more people coming back into the labor force in response to their perceptions of a improved job opportunities. In other words, the Unemployment Rate has been steady at about 4.9% this year (5.0% in September) despite the good-sized gains in Payrolls. Labor market capacity remained ample.
So, it was somewhat disconcerting that his expectation of rate hike this year seemed to be solely due to calendar considerations and to ignore this economic argument. But, the two can be reconciled: Dudley may think the Unemployment Rate will decline over October-November. In this case, however, his expectation of a rate hike does not represent any more evidence than what will be seen in the next two Employment Reports. So, the interview should not significantly impact the probability of a December rate hike.
Yellen conjectured that the Fed could temporarily allow "a high-pressure economy" in order to boost productivity. The long end of the Treasury curve sold off on the inflationary implications of this scenario.
NY Fed President Dudley gave a wide-ranging interview to the NY Times in which he touched on many of the considerations and issues mentioned in prior FOMC Statements/Minutes and other Fed speeches. The markets picked up on his expectation of a rate hike by the end of the year, and stocks came off their highs.
There may be less than meets the eye in these comments, however:
1. A "high-pressure economy" is not that far different from prior Fed talk that inflation would be allowed to exceed the 2.0% target for awhile. Also, such an economy might not be inflationary if it is successful in boosting productivity growth. While wage growth might pick up, it would be offset by higher productivity growth so that unit labor costs would not speed up. Moreover, her discussion was essentially theoretical and not necessarily what will be Fed policy.
The sell-off in the long end of the Treasury market after her speech very well may have been a warning sign that such a policy would backfire. Higher long-term yields would hurt economic growth. To be sure, from an optimal control approach to analyzing markets -- markets will move in ways to achieve the Fed's goal -- stocks could rally and the dollar fall to offset the drag from higher Treasury yields.
2. Dudley spent a lot of time in the interview agreeing withe Brainard/Yellen contention that the strong payroll growth this year could be accommodated in a non-inflationary way as a result of more people coming back into the labor force in response to their perceptions of a improved job opportunities. In other words, the Unemployment Rate has been steady at about 4.9% this year (5.0% in September) despite the good-sized gains in Payrolls. Labor market capacity remained ample.
So, it was somewhat disconcerting that his expectation of rate hike this year seemed to be solely due to calendar considerations and to ignore this economic argument. But, the two can be reconciled: Dudley may think the Unemployment Rate will decline over October-November. In this case, however, his expectation of a rate hike does not represent any more evidence than what will be seen in the next two Employment Reports. So, the interview should not significantly impact the probability of a December rate hike.
Sunday, October 9, 2016
Did the Markets Make a Mistake On Friday?
The markets may have made a mistake on Friday as they did not appear to appreciate the dovish implications of the September Employment Report and a dovish speech by Fed Vice Chair Stan Fischer on Friday. Stocks fell, Treasuries sold off initially and then ended little changed, and the dollar rose on the day. To the extent that these moves reflected a failure to analyze the data/speech correctly, there could be reversals this coming week. It is possible, however, that the markets were still fixated on the fall-out from Brexit and developments regarding Deutsche Bank. These two items, along with the Presidential election and Q316 earnings, are likely to be the most important factors overhanging the markets in the next few weeks.
The Report was dovish for two reasons:
1. The uptick in the Unemployment Rate to 5.0% -- thanks to a higher Participation Rate -- was exactly consistent with the factor cited by Yellen as the reason the Fed did not hike in the prior week's FOMC Meeting. That is, the labor market capacity expanded to allow for sold job growth without inflation.
2. The 0.2% Average Hourly Earnings was on the low side of the increase implied by calendar considerations. This supported the idea that wage inflation is well under control and suggests that many of the new jobs are low-productivity/low-wage.
Fischer devoted a speech to acknowledging (by explaining) the possibility that the "natural" rate of the funds rate is close to zero. This is the first speech I recollect him making that raised dovish implications for monetary policy. The speech can be found on the Fed's website. Moreover, on Sunday, Fischer voiced little concern that the Fed was at risk of waiting too long to hike.
The failure of the markets to react appropriately to these two events might be explained a number of ways:
1. The markets focused on the solid Payroll gain, even though it was well below the average pace seen in prior months this year (156k m/m versus 181k). The few Street economists/analysts I read seemed to emphasize this part of the Report. This focus was incorrect, however, given the uptick in the Unemployment Rate.
a. To be sure, this September Employment Report is not the last word on the labor market this year, but it is ahead of the November FOMC Meeting. The October and November Reports will be released ahead of the December meeting.
2. Weakness in the Pound and, to a lesser extent, the Euro dominated the FX market and exacerbated fears of significant economic problems stemming from Brexit.
a. As I wrote in a prior blog (June 26), a way to understand Brexit is that it entails a loss of value-added from the association for both the UK (and to a lesser extent) the Euro area. Both now have to work harder to maintain the same standard of living -- and the boost to exports and import substitutes from their weaker currencies is the way the markets act to allow that to happen. This means that it should be no surprise that UK and Euro area real-side economic indicators improve -- contrary to the expectation of a recession by most economists. But, their weaker currencies could hurt US net exports.
3. The regulatory problems with Deutsche Bank continued to hold back stocks.
a. The demand by the US Department of Justice for a large fine for alleged misdeeds in 2007-08 is an example of policymakers aiming for a goal with the unintended consequence of harming economic growth -- a factor behind the sluggish recovery since 2009 (see my blog of September 27).
The Report was dovish for two reasons:
1. The uptick in the Unemployment Rate to 5.0% -- thanks to a higher Participation Rate -- was exactly consistent with the factor cited by Yellen as the reason the Fed did not hike in the prior week's FOMC Meeting. That is, the labor market capacity expanded to allow for sold job growth without inflation.
2. The 0.2% Average Hourly Earnings was on the low side of the increase implied by calendar considerations. This supported the idea that wage inflation is well under control and suggests that many of the new jobs are low-productivity/low-wage.
Fischer devoted a speech to acknowledging (by explaining) the possibility that the "natural" rate of the funds rate is close to zero. This is the first speech I recollect him making that raised dovish implications for monetary policy. The speech can be found on the Fed's website. Moreover, on Sunday, Fischer voiced little concern that the Fed was at risk of waiting too long to hike.
The failure of the markets to react appropriately to these two events might be explained a number of ways:
1. The markets focused on the solid Payroll gain, even though it was well below the average pace seen in prior months this year (156k m/m versus 181k). The few Street economists/analysts I read seemed to emphasize this part of the Report. This focus was incorrect, however, given the uptick in the Unemployment Rate.
a. To be sure, this September Employment Report is not the last word on the labor market this year, but it is ahead of the November FOMC Meeting. The October and November Reports will be released ahead of the December meeting.
2. Weakness in the Pound and, to a lesser extent, the Euro dominated the FX market and exacerbated fears of significant economic problems stemming from Brexit.
a. As I wrote in a prior blog (June 26), a way to understand Brexit is that it entails a loss of value-added from the association for both the UK (and to a lesser extent) the Euro area. Both now have to work harder to maintain the same standard of living -- and the boost to exports and import substitutes from their weaker currencies is the way the markets act to allow that to happen. This means that it should be no surprise that UK and Euro area real-side economic indicators improve -- contrary to the expectation of a recession by most economists. But, their weaker currencies could hurt US net exports.
3. The regulatory problems with Deutsche Bank continued to hold back stocks.
a. The demand by the US Department of Justice for a large fine for alleged misdeeds in 2007-08 is an example of policymakers aiming for a goal with the unintended consequence of harming economic growth -- a factor behind the sluggish recovery since 2009 (see my blog of September 27).
Friday, October 7, 2016
September Employment Report Should Be Bullish for Stocks and Treasuries, Bearish Dollar
The September Employment Report should be bullish for both stock and Treasury prices but bearish for the dollar -- as its key elements should keep the Fed on hold at least through November. In particular, the Report underscores Yellen's rationale for not tightening in September -- the labor market has enough capacity to accommodate decent job growth without igniting inflation.
1. The +156k m/m increase in Total Payrolls, with net downward revisions in July and August, is decent but not kept them under the +181k m/m January-August average.
2. The uptick in the Unemployment Rate to 5.0% (4.96% unrounded) from 4.9% in August (4.92% unrounded) occurred even with a large 354k increase in Civilian Employment.
a. This is because the Labor Force jumped 444k as Labor Force Participation (percentage of working age population that is working or unemployed but looking for work) rose. The higher Participation Rate is a sign that people are becoming more confident about the labor market. If it continues, it would give the economy more room to grow without pushing up inflation.
b. The broader measure of labor market slack -- U-6 -- was unchanged at 9.7%.
3. The 0.2% m/m increase (0.23% unrounded) in Average Hourly Earnings was modest, after a 0.1% August increase and in light of calendar considerations that should have biased up the September print.
a. The y/y rebounded to 2.6%, but this remains within this year's range. And, it should fall back to 2.4% by November.
1. The +156k m/m increase in Total Payrolls, with net downward revisions in July and August, is decent but not kept them under the +181k m/m January-August average.
2. The uptick in the Unemployment Rate to 5.0% (4.96% unrounded) from 4.9% in August (4.92% unrounded) occurred even with a large 354k increase in Civilian Employment.
a. This is because the Labor Force jumped 444k as Labor Force Participation (percentage of working age population that is working or unemployed but looking for work) rose. The higher Participation Rate is a sign that people are becoming more confident about the labor market. If it continues, it would give the economy more room to grow without pushing up inflation.
b. The broader measure of labor market slack -- U-6 -- was unchanged at 9.7%.
3. The 0.2% m/m increase (0.23% unrounded) in Average Hourly Earnings was modest, after a 0.1% August increase and in light of calendar considerations that should have biased up the September print.
a. The y/y rebounded to 2.6%, but this remains within this year's range. And, it should fall back to 2.4% by November.
Wednesday, October 5, 2016
Do US Economic Data Explain Recent Market Behavior -- And What About Friday's Employment Report?
The markets are moving in seemingly inconsistent directions -- with Treasury yields up despite a range-bound stock market and stronger dollar. However, this is essentially the scenario I laid out in my blog of September 18, where I argued that "early considerations suggest that most key US economic data in the next month or so will be strong enough to keep the risk of a December Fed rate hike alive in the markets, but not strong enough to eliminate all doubt. Treasury yields would likely stay in the recently higher range and stocks remain in their range."
This week's key data so far fit this expectation, although my expectation for Friday's September Employment Report (+140k Payrolls, 4.9% Unemployment Rate, but 0.3% m/m Average Hourly Earnings) argues for a relief rally in Treasuries and a pullback in the dollar. Stocks should rally, as well.
1. While the September Mfg ISM rose to 51.5, above consensus, it remained within the 48.2-53.2 range (average, 50.9) between January and August -- a period in which the Fed did not tighten.
a. The jump in the September Non-Mfg ISM to 57.1 from 51.8 in August also kept it within this year's range (51.8-59.5).
2. The +154k September ADP Estimate is a decent print, but the smallest m/m gain this year (156-257k between January and August).
a. There were 2 conflicting technical considerations regarding a forecast of the September ADP Estimate: /1/ The low +126k m/m increase in August Payrolls acted to hold it down, /2/ but, a weekly index maintained by the Phil Fed argued for a stronger print. The unknown was the strength of the ADP sample, itself. The fact that the September print remained on the low side of the range suggests that the sample reflected modest labor market fundamentals.
b. Recent history suggests Friday's September Payrolls will print below the ADP Estimate, the same as what happened in August. September and August Private Payrolls were both above or below the ADP Estimate in 3 of the past 4 years.
c. I"m estimating +140k for September Total Payrolls. Consensus is +172k.
Modest labor market fundamentals would be consistent with the sluggish pace of GDP Growth being projected by the NY and Atlanta Fed's nowcast models. The Atlanta Fed's forecast for Q3 Real GDP Growth is now only 2.2%, and may very well be lowered after today's wider August Trade Deficit is incorporated. The NY Fed's forecast also is 2.2% and will likely be lowered when it is updated on Friday. Its early projection of Q4 Real GDP Growth is now only 1.2%.
One piece of evidence that appears to contradict the idea of modest labor market fundamentals is the strength seen in the Conference Board Consumer Confidence Index, which is considered to be the consumer survey most reflective of labor market conditions. My guess is that the strength in people's perceptions of the labor market is showing up in an increase in labor market participation by those who previously stopped looking for jobs. If so, it should keep the Unemployment Rate about 4.9% -- the consensus estimate.
a. The Fed is likely to look past any strength in job growth if the Unemployment Rate remains near 4.9%. Yellen highlighted that labor market is sufficient to allow for good-sized job gains without putting much, if any, upward pressure on wage inflation.
Note that the risk for Average Hourly Earnings is an above-trend 0.3% m/m increase in both September and October because of calendar considerations. But, they should slow to 0.1% in November. While the y/y would climb in September and October to 2.6% -- the high end of the recent range -- it would fall to 2.4% in November. So, large gains in September and October should be discounted if not ignored.
a. Note that consensus is 0.3% m/m for September AHE.
This week's key data so far fit this expectation, although my expectation for Friday's September Employment Report (+140k Payrolls, 4.9% Unemployment Rate, but 0.3% m/m Average Hourly Earnings) argues for a relief rally in Treasuries and a pullback in the dollar. Stocks should rally, as well.
1. While the September Mfg ISM rose to 51.5, above consensus, it remained within the 48.2-53.2 range (average, 50.9) between January and August -- a period in which the Fed did not tighten.
a. The jump in the September Non-Mfg ISM to 57.1 from 51.8 in August also kept it within this year's range (51.8-59.5).
2. The +154k September ADP Estimate is a decent print, but the smallest m/m gain this year (156-257k between January and August).
a. There were 2 conflicting technical considerations regarding a forecast of the September ADP Estimate: /1/ The low +126k m/m increase in August Payrolls acted to hold it down, /2/ but, a weekly index maintained by the Phil Fed argued for a stronger print. The unknown was the strength of the ADP sample, itself. The fact that the September print remained on the low side of the range suggests that the sample reflected modest labor market fundamentals.
b. Recent history suggests Friday's September Payrolls will print below the ADP Estimate, the same as what happened in August. September and August Private Payrolls were both above or below the ADP Estimate in 3 of the past 4 years.
c. I"m estimating +140k for September Total Payrolls. Consensus is +172k.
Modest labor market fundamentals would be consistent with the sluggish pace of GDP Growth being projected by the NY and Atlanta Fed's nowcast models. The Atlanta Fed's forecast for Q3 Real GDP Growth is now only 2.2%, and may very well be lowered after today's wider August Trade Deficit is incorporated. The NY Fed's forecast also is 2.2% and will likely be lowered when it is updated on Friday. Its early projection of Q4 Real GDP Growth is now only 1.2%.
One piece of evidence that appears to contradict the idea of modest labor market fundamentals is the strength seen in the Conference Board Consumer Confidence Index, which is considered to be the consumer survey most reflective of labor market conditions. My guess is that the strength in people's perceptions of the labor market is showing up in an increase in labor market participation by those who previously stopped looking for jobs. If so, it should keep the Unemployment Rate about 4.9% -- the consensus estimate.
a. The Fed is likely to look past any strength in job growth if the Unemployment Rate remains near 4.9%. Yellen highlighted that labor market is sufficient to allow for good-sized job gains without putting much, if any, upward pressure on wage inflation.
Note that the risk for Average Hourly Earnings is an above-trend 0.3% m/m increase in both September and October because of calendar considerations. But, they should slow to 0.1% in November. While the y/y would climb in September and October to 2.6% -- the high end of the recent range -- it would fall to 2.4% in November. So, large gains in September and October should be discounted if not ignored.
a. Note that consensus is 0.3% m/m for September AHE.
Subscribe to:
Posts (Atom)