Turkish Crisis and US Economic Data

 The Turkish Crisis has taken center stage, but good US economic data could limit the damage to stocks.

The Turkish crisis is reminiscent of the 1997-98 Asian crisis.  In both cases, a weakening currency raised default risk on debt denominated in foreign currency.  This, in turn, created problems for European and US banks that had made the loans or held the foreign debt.  It is questionable whether banks are as vulnerable now as in the past episode.  Presumably, their balance sheet strengthening and successful stress tests mean they can withstand the impact of the Turkish debt problem.  There is also a possibility this problem could affect the Fed's rate decisions.  In September 1998, the Fed surprised the markets with a 25 BP rate cut (after the effects of the crisis had hit the Long-Term Capital Market fund).   If the Turkish crisis worsens and spreads, the Fed could skip a rate hike.

The most interesting economic data this week will be Productivity/Labor Costs (due Wednesday).   This will be the first read for Q218, but more interesting will be the impact of the GDP benchmark revisions on Productivity and Unit Labor Costs in the past 3 years.  Productivity Growth could be revised up about 0.5% pt per year from the latest figures (see table).  If so, it should lift market estimates of long-run potential Real GDP growth to the 2.0-2.5% range from the 1.5-2.0% range -- a positive for the profits outlook.  Stronger potential GDP Growth would argue for a higher Fed funds end-point in the Fed's tightening cycle, but it also allow for a longer time to get there when the economy is growing 3.0% and not at full employment.

                                                   (Q4/Q4 Percent Change)
                                        Productivity                Unit Labor Costs
            2017                          1.2                                  1.8
            2016                          0.9                                 -1.2
            2015                          0.7                                   2.4       

Some of last week's US economic data are worth mention:

The 0.2% m/m July Core CPI showed inflation remains subdued. The short-term impacts of tariffs and higher oil prices were noticeable, with jumps in household appliances and airfares and a further increase in vehicle prices. These are relative price changes, not inflation.

The Claims data were mixed -- with Initial down but Continuing up a bit.  They hint at another sub-200k Payroll print for August.


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