This Week's Focus: The Tax Bill, FOMC Minutes and Holiday Spending

The markets will likely remain on edge this week, focused on speculation about the Senate headcount regarding the upcoming tax cut vote.   The uncertainty should weigh on stocks but lift Treasuries.  Some Senators already have said they will study the bill over the holiday recess before making a decision, so the uncertainty will not likely be resolved until then.  If the Senate passes a tax bill, stocks will rally and Treasuries sell off.   But, after these initial responses, economic growth and inflation as well as the Fed's reactions to them will once again be the main drivers of the markets. 

Besides the Senate tax bill, the markets also will likely focus this week on hints in the November FOMC Minutes (due Friday) on rate hikes in December and 2018, and expectations for Black Friday and Cyber Monday shopping.  This week's US economic data are minor, but are expected to be growth-positive.

The November FOMC Minutes will keep open the door for a December rate hike, and the markets' near-certain probability of one should not change.   But, there will probably be little new information regarding Fed thinking about the path of monetary policy in 2018.  The inflation outlook will probably be the most important information.  The question is whether the doves will continue to argue for caution in hiking without clear signs of a speedup in inflation.  There also may be some discussion about fiscal policy, but nothing definitive is likely in the absence of the details of a tax cut. 

Expectations are high for this year's holiday spending.  The National Retail Federation expects holiday sales to climb 3.6-4.0% y/y, among the strongest in recent years.  The strength should be particularly noticeable over the Black Friday/Cyber Monday weekend, according to a survey reported by Forbes Magazine.  Retailer stocks have already begun to anticipate the start of the holiday season, and should continue to move up in the next couple of weeks if these predictions are correct.

                               Holiday Spending (y/y percent change)
      2017 (est)                                 3.6-4.0
      2016                                         3.6
      2015                                         3.2
      2014                                         5.0
      2013                                         2.9
      2012                                         2.6
      2011                                         4.6
      2010                                         5.2
      2009                                         0.2

The economy's strength looks like it continued into Q417.  Both the Atlanta Fed and NY Fed models boosted their forecasts to 3.4-3.8% (q/q, saar) from 3.2% after incorporating last week's data.  These projections show an acceleration from the 3.0% Q317 pace.  The Initial Claims data, however, have turned up a bit in the past two weeks, hinting at a crack in the strong growth story.   But, so far Continuing Claims have not corroborated the softening, and consensus looks for Initial to fall in next week's report.  At this point, these data just should be watched.

                             Initial Claims       Continuing Claims
   Aug Avg            237k                       1.951 Mn
   Sep                   274                         1.935
   Oct                    232                         1.894

   Nov 4 Wk          239                         1.860   
   Nov 11              249                          na

The spending strength is not likely to boost inflation, given the stiff competition between internet and brick & mortar retailers.   Moreover, there was little in the October CPI report to spark significant concern about a pickup in inflation.  The 0.2% m/m Core CPI showed a speedup in rent as its pace returned to trend (some of the speedup, though, could have reflected temporary spikes in hurricane-related areas) and a pass-through of higher oil prices (such as airfares).  But, other price movements were mostly benign or down.