The stock market may have put in a bottom last week, after it held a key support level. While there are still potential hurdles before a sustained rally, there is reason to think the worst is over.
The size and speed of the October-December descent was shocking. Here's one explanation. Stock market valuation was based on expectations of 3% sustained GDP Growth, counting on Trump's pro-growth mantra. These expectations were punctured by two events. First, Powell's early-October comment regarding the so-called neutral rate underscored that the Fed did not intend to support such a high trend. Second, Trump's trade war with China showed he was willing to accept a near-term hit to the economy for a long-term gain. Algorithmic trading models caused a very quick and sharp market adjustment to these changed factors.
With at least the bulk of the market adjustment likely over, stocks likely have room to climb as long as GDP is seen growing near the Fed's 1.8-2.0% trend GDP growth and not headed into recession. There still may be a few hurdles before a sustained rally, however. This week's key US economic data -- December Mfg ISM, Payrolls, Unemployment -- risk being on the soft side (see below). But, they may not have a significant or lasting impact on the stock market, which already has adjusted down to low-growth expectations. Moreover, the Treasury market has built in expectations of no Fed hikes in 2019, which shouldn't change as a result of these data. A possibly more important hurdle is the Q418 earnings season, beginning mid-January. The stock market has not done well in the past two reporting periods. Earnings are expected to slow y/y but still be strong; their macroeconomic background has weakened a bit (see my blog on Dec 16).
There are some near-term positives for the market, as well. Internationally, US/China negotiations are set to resume in early January. China is in the process of passing legislation prohibiting forced technical information transfer. And, Trump issued positive tweets about them. Domestically, resolution of the budget impasse in Washington presumably will happen soon.
This Week's Key US Economic Data
Evidence points to a decline in the Mfg ISM (due January 2), consistent with the consensus estimate of 58.0 versus 59.3 in November. Other business surveys weakened this month, including the Chicago PM (correctly predicted m/m direction of Mfg ISM in each of the past 7 months).
The consensus estimate of a speedup in December Nonfarm Payrolls to +180k m/m from +155k in November may be optimistic. The Claims data have softened a bit, as did the jobs components (on balance) in the Conference Board Consumer Confidence Survey.
Consensus looks for a steady 3.7% Unemployment Rate. There is downside risk from rounding analysis. On an unrounded basis, the Rate was 3.67% in November, so a small decline could round the headline down to 3.6% while a large increase is needed to round it up to 3.8%.
Consensus looks for +0.3% m/m in Average Hourly Earnings, which is consistent with calendar considerations. There is downside risk from a composition shift toward lower-paid holiday workers. Consensus looks for a dip in the y/y to 3.0% from 3.1%. The y/y print would fall to 2.9% if the unrounded m/m is 0.26-0.27%.
Sunday, December 30, 2018
Sunday, December 23, 2018
Stock Weakness Not Over Yet, Favorable Macro Economic Background Needed
The stock market will likely continue moving down sharply into early January, despite NY Fed President Williams' attempt to undo Powell's inflexible portrayal of monetary policy after the FOMC meeting. The partial federal government shutdown may not end quickly. Also, the market probably has to overshoot on the downside before a bottom is put in. Moreover, the most significant factor behind the Q418 plunge in stocks -- concern about a global and US economic slowdown -- may not recede until the Spring. And, if it does, another Fed tightening will likely return to the radar screens. So, any rally then may very well be restrained and short-lived. The macro-economic background may have to be just right -- neither too cold nor too hot -- to keep the Fed on hold.
Market fears of a sharp slowdown in US and global economic growth likely need to subside for stocks to stabilize. Both US and non-US economic data need to point away from recession but not be so strong as to flame fears of further central bank tightening. With sales abroad accounting for about 45% of S&P 500 company revenue, foreign economic growth is almost as important as US growth for these stocks.
The macro background has to be just right to stabilize the stock market without stoking fears of Fed tightening. Immediately ahead, Q119 Real GDP Growth has to be seen above 2.0% (q/q, saar), the Unemployment Rate staying near the current 3.7% level, and Core PCE Deflator inflation remaining below 2.0% (y/y). While it will take several months to get a reliable handle on Q119 GDP Growth, the monthly Unemployment Rate will be available. For the year as a whole, Real GDP Growth near the bottom of the 2.3-2.5% Fed Central Tendency and the Unemployment Rate near the top of the Fed's 3.5-3.7% Central Tendency could keep policy on hold.
A very positive development for stocks would be if GDP Growth is above 2% in 2019 and the Unemployment Rate does not fall. This combination would suggest potential economic growth is higher than the Fed's estimate of 1.8-2.0% -- a very big positive for the profits outlook. There is already reason to think this may be the case. The two main determinants of potential growth -- labor force and productivity growth -- have sped up in the past couple of years. Labor Force is now growing 1.4% (y/y) after trending 1.0%, as the participation rate is no longer trending down. Productivity is growing 1.3%, after trending 1.0% in recent years. Fed officials so far apparently have been reluctant to incorporate these higher rates of growth in their estimate of potential economic growth. It would be a major dovish shift on their part if they do.
Another positive development for stocks would be if wage inflation starts to decelerate while the Unemployment Rate is steady at 3.7% or at least does not speed up if the Rate moves lower. This result would imply a tenuous relationship between the Unemployment Rate and inflation, making a further decline in the Rate less problematical for the Fed. There are several reasons why wage inflation may slow down independently of the Unemployment Rate -- /1/ Increased competition from abroad, as worsening labor market slack pushes down wage rates there; /2/ an ending of the push to boost the minimum wage to $15/hour, as the bulk of the increases may have occurred already; /3/ lower overall inflation, thanks to the drop in oil prices, lifting real wages and taking pressure off the need to increase nominal wages.
Market fears of a sharp slowdown in US and global economic growth likely need to subside for stocks to stabilize. Both US and non-US economic data need to point away from recession but not be so strong as to flame fears of further central bank tightening. With sales abroad accounting for about 45% of S&P 500 company revenue, foreign economic growth is almost as important as US growth for these stocks.
The macro background has to be just right to stabilize the stock market without stoking fears of Fed tightening. Immediately ahead, Q119 Real GDP Growth has to be seen above 2.0% (q/q, saar), the Unemployment Rate staying near the current 3.7% level, and Core PCE Deflator inflation remaining below 2.0% (y/y). While it will take several months to get a reliable handle on Q119 GDP Growth, the monthly Unemployment Rate will be available. For the year as a whole, Real GDP Growth near the bottom of the 2.3-2.5% Fed Central Tendency and the Unemployment Rate near the top of the Fed's 3.5-3.7% Central Tendency could keep policy on hold.
A very positive development for stocks would be if GDP Growth is above 2% in 2019 and the Unemployment Rate does not fall. This combination would suggest potential economic growth is higher than the Fed's estimate of 1.8-2.0% -- a very big positive for the profits outlook. There is already reason to think this may be the case. The two main determinants of potential growth -- labor force and productivity growth -- have sped up in the past couple of years. Labor Force is now growing 1.4% (y/y) after trending 1.0%, as the participation rate is no longer trending down. Productivity is growing 1.3%, after trending 1.0% in recent years. Fed officials so far apparently have been reluctant to incorporate these higher rates of growth in their estimate of potential economic growth. It would be a major dovish shift on their part if they do.
Another positive development for stocks would be if wage inflation starts to decelerate while the Unemployment Rate is steady at 3.7% or at least does not speed up if the Rate moves lower. This result would imply a tenuous relationship between the Unemployment Rate and inflation, making a further decline in the Rate less problematical for the Fed. There are several reasons why wage inflation may slow down independently of the Unemployment Rate -- /1/ Increased competition from abroad, as worsening labor market slack pushes down wage rates there; /2/ an ending of the push to boost the minimum wage to $15/hour, as the bulk of the increases may have occurred already; /3/ lower overall inflation, thanks to the drop in oil prices, lifting real wages and taking pressure off the need to increase nominal wages.
Tuesday, December 18, 2018
How the Fed Could Help Stocks
The Fed has to move away from two concepts at tomorrow's post-FOMC briefing if it wants to address the markets' concerns -- forward guidance and neutral funds rate. While both concepts may have helped when the Fed was beginning to normalize policy, sending the message that rates would stay low for a long time, they now appear to lead market participants to believe the Fed is on a predetermined course to raise rates. While Powell may give lip service to them, he should emphasize the Fed will be ready to move in either direction at any FOMC meeting if the data or circumstances require. Opening the door to cutting rates should be a big positive for stocks.
A major problem with forward guidance is that it could be self-fulfilling by reinforcing market expectations. For example, if the Fed lowers its GDP forecast in its Central Tendencies, the bearish economic view in the market would get a boost and hurt stocks. A further drop in stocks would be a negative for the economic outlook. Moreover, a weaker Fed GDP forecast could persuade companies to pull back from investment and hiring. Bernanke and Paulson fell into that trap in September 2008 when they appeared on TV to say the US was heading to the worst recession ever (they were trying to sell TARP to Congress). Massive layoffs occurred right afterwards.
A major problem with the concept of a neutral funds rate is that it is a feature of what economists call a "steady state" long-run path of the economy. The economy is assumed to be growing at a constant rate, with no effect from "exogenous" factors or initial conditions. In the real world, exogenous factors and initial conditions matter. So, by targeting an unobservable, estimated neutral rate, the Fed could be ignoring important information. At the moment, the stock market is focused on the exogenous -- weakening foreign economic growth, government shutdown possibility, and trade negotiations.
A major problem with forward guidance is that it could be self-fulfilling by reinforcing market expectations. For example, if the Fed lowers its GDP forecast in its Central Tendencies, the bearish economic view in the market would get a boost and hurt stocks. A further drop in stocks would be a negative for the economic outlook. Moreover, a weaker Fed GDP forecast could persuade companies to pull back from investment and hiring. Bernanke and Paulson fell into that trap in September 2008 when they appeared on TV to say the US was heading to the worst recession ever (they were trying to sell TARP to Congress). Massive layoffs occurred right afterwards.
A major problem with the concept of a neutral funds rate is that it is a feature of what economists call a "steady state" long-run path of the economy. The economy is assumed to be growing at a constant rate, with no effect from "exogenous" factors or initial conditions. In the real world, exogenous factors and initial conditions matter. So, by targeting an unobservable, estimated neutral rate, the Fed could be ignoring important information. At the moment, the stock market is focused on the exogenous -- weakening foreign economic growth, government shutdown possibility, and trade negotiations.
Sunday, December 16, 2018
December FOMC Meeting and Q418 Corporate Earnings
The stock market has a chance to stabilize into early January if this week's FOMC Meeting's results are viewed as market friendly (see below). The market still will have to contend with concerns about US and global economic growth, headlines regarding US/China trade negotiations, Democratic attacks on Trump, possible government shutdown, and a slowdown in Q418 corporate earnings. So, any rally after the Meeting may be modest and uneven.
FOMC Meeting
This week's FOMC Meeting probably needs the following results to help stabilize the stock market near term:
1. Hike the funds rate by 25 BPs, signaling officials still see solid economic growth.
2. Lower their estimate of the neutral funds rate, citing increased downside economic risks.
3. Cut the projected number of hikes to 2 from 3 in 2019.
4. Project no hikes in 2020 or 2021, implicitly consistent with a 3.0% neutral funds rate.
5. Make no significant change to the economic forecasts laid out in the Fed's Central Tendencies, suggesting still good growth is expected despite the increased downside risks.
If these results do not come out of the Meeting, the market reaction may very well be negative.
Q318 Corporate Earnings
Corporate earnings (mostly due in January) should slow in Q418 from the huge 28.3% y/y gain seen in Q318. Consensus looks for a slowdown to a still strong 16.9%. Domestic fundamentals softened for the most part in the quarter. Oil earnings should have slowed, as did oil prices. And, domestic profit margins should have contracted somewhat, as prices (measured by the Core CPI) did not climb with Average Hourly Earnings. Moreover, earnings from abroad likely weakened, because of the stronger dollar and softer economic activity. However, US Real GDP Growth on a y/y basis was steady at 3.2%, incorporating the 3.0% q/q Atlanta Fed model estimate for Q418.
Markit
Eurozone Real GDP Oil Prices Trade-Weighted Dollar AHE Core CPI PMI
[ y/y percent change ] (level)
Q117 2.0 +65.3 2.3 2.7 2.2 55.6
Q217 2.2 +13.1 3.1 2.5 1.8 56.8
Q317 2.3 +6.0 -1.9 2.5 1.7 57.4
Q417 2.5 +12.7 -4.1 2.5 1.7 59.7
Q118 2.8 +21.5 -6.6 2.7 1.9 59.1
Q218 2.9 +41.0 -1.8 2.7 2.2 55.9
Q318 3.2 +45.4 +5.1 2.8 2.2 54.3
Q418 3.2 +7.6 +6.4 3.0 2.2 51.7
FOMC Meeting
This week's FOMC Meeting probably needs the following results to help stabilize the stock market near term:
1. Hike the funds rate by 25 BPs, signaling officials still see solid economic growth.
2. Lower their estimate of the neutral funds rate, citing increased downside economic risks.
3. Cut the projected number of hikes to 2 from 3 in 2019.
4. Project no hikes in 2020 or 2021, implicitly consistent with a 3.0% neutral funds rate.
5. Make no significant change to the economic forecasts laid out in the Fed's Central Tendencies, suggesting still good growth is expected despite the increased downside risks.
If these results do not come out of the Meeting, the market reaction may very well be negative.
Q318 Corporate Earnings
Corporate earnings (mostly due in January) should slow in Q418 from the huge 28.3% y/y gain seen in Q318. Consensus looks for a slowdown to a still strong 16.9%. Domestic fundamentals softened for the most part in the quarter. Oil earnings should have slowed, as did oil prices. And, domestic profit margins should have contracted somewhat, as prices (measured by the Core CPI) did not climb with Average Hourly Earnings. Moreover, earnings from abroad likely weakened, because of the stronger dollar and softer economic activity. However, US Real GDP Growth on a y/y basis was steady at 3.2%, incorporating the 3.0% q/q Atlanta Fed model estimate for Q418.
Markit
Eurozone Real GDP Oil Prices Trade-Weighted Dollar AHE Core CPI PMI
[ y/y percent change ] (level)
Q117 2.0 +65.3 2.3 2.7 2.2 55.6
Q217 2.2 +13.1 3.1 2.5 1.8 56.8
Q317 2.3 +6.0 -1.9 2.5 1.7 57.4
Q417 2.5 +12.7 -4.1 2.5 1.7 59.7
Q118 2.8 +21.5 -6.6 2.7 1.9 59.1
Q218 2.9 +41.0 -1.8 2.7 2.2 55.9
Q318 3.2 +45.4 +5.1 2.8 2.2 54.3
Q418 3.2 +7.6 +6.4 3.0 2.2 51.7
Sunday, December 9, 2018
The FOMC Meeting Holds Key to Near-Term Stock Market Stabilization
Some technicians look for the stock market to fall another 20-30% in the coming year. Given the risks of bad outcomes from the US/China trade negotiations and Democratic opposition to Trump in Congress, such a dire prediction cannot be ruled out. However, the outcome of the December 18-19 FOMC Meeting may hold the key to a near-term stabilization of the stock market -- but its message must be just right. The Fed needs to be seen as a steady and judicious hand in a confusing and risky environment. And, the details of the forward guidance cannot be bearish on the economy.
The best result would be if Fed officials stick close to market expectations. They should hike the funds rate by 25 BPs and state that, because of increased uncertainty surrounding the economic outlook, monetary policy will be flexible so as to respond in the appropriate way to how real growth and inflation evolve. And, with all the recent talk by Fed officials of a lower-than-thought neutral funds rate, the Central Tendency for the funds rate should be cut to imply 2 hikes in 2019 and 0 hikes in 2020 and 2021. However, they also should not change their Central Tendency forecasts of the economy or inflation, sending the message that officials still see solid growth and near-2.0% inflation next year.
Fed's September Central Tendencies
2018 2019 2020 2021
Real GDP Growth 3.0-3.2 2.4-2.7 1.8-2.1 1.6-2.0
Unemployment Rate 3.7 3.4-3.6 3.4-3.8 3.5-4.0
PCE Deflator 2.0-2.1 2.0-2.1 2.1-2.2 2.0-2.2
Core PCE Deflator 1.9-2.0 2.0-2.1 2.1-2.2 2.0-2.2
Fed Funds Rate 2.1-2.4 2.9-3.4 3.1-3.6 2.9-3.6
Note: Real GDP Growth and PCE Deflators are Q4/Q4 percent change. Unemployment Rate is Q4 average.
In contrast, if Fed officials downshift their Real GDP growth forecasts or just push rate hikes into the future, the stock market reaction will likely be negative. Lowering the GDP forecast would throw doubt on the wisdom of the 25 BP rate hike at the December meeting. It also would add to market concerns of weaker corporate profits ahead.
The stock market's woes will not necessarily disappear if the FOMC Meeting succeeds in sending a calming message. Besides continuing risks surrounding US/China trade and Congress Versus Trump, the data dependency of Fed policy could impart further market volatility next year, as market participants guess at the policy implications of strong or weak data prints. To be sure, Fed officials will not likely react to any individual data release, but wait to see a trend before acting. There is still a good chance Fed policy will be on hold in H119, as I discussed last week.
This week's US key economic data -- November CPI and Retail Sales -- should have little, if any, influence on the FOMC Meeting's outcome. Consensus estimates of +0.2% m/m Core CPI and (strong) +0.7% m/m Ex Auto Retail Sales would just confirm expectations of a 25 BP hike at the meeting. Weaker prints should not derail a hike.
The best result would be if Fed officials stick close to market expectations. They should hike the funds rate by 25 BPs and state that, because of increased uncertainty surrounding the economic outlook, monetary policy will be flexible so as to respond in the appropriate way to how real growth and inflation evolve. And, with all the recent talk by Fed officials of a lower-than-thought neutral funds rate, the Central Tendency for the funds rate should be cut to imply 2 hikes in 2019 and 0 hikes in 2020 and 2021. However, they also should not change their Central Tendency forecasts of the economy or inflation, sending the message that officials still see solid growth and near-2.0% inflation next year.
Fed's September Central Tendencies
2018 2019 2020 2021
Real GDP Growth 3.0-3.2 2.4-2.7 1.8-2.1 1.6-2.0
Unemployment Rate 3.7 3.4-3.6 3.4-3.8 3.5-4.0
PCE Deflator 2.0-2.1 2.0-2.1 2.1-2.2 2.0-2.2
Core PCE Deflator 1.9-2.0 2.0-2.1 2.1-2.2 2.0-2.2
Fed Funds Rate 2.1-2.4 2.9-3.4 3.1-3.6 2.9-3.6
Note: Real GDP Growth and PCE Deflators are Q4/Q4 percent change. Unemployment Rate is Q4 average.
In contrast, if Fed officials downshift their Real GDP growth forecasts or just push rate hikes into the future, the stock market reaction will likely be negative. Lowering the GDP forecast would throw doubt on the wisdom of the 25 BP rate hike at the December meeting. It also would add to market concerns of weaker corporate profits ahead.
The stock market's woes will not necessarily disappear if the FOMC Meeting succeeds in sending a calming message. Besides continuing risks surrounding US/China trade and Congress Versus Trump, the data dependency of Fed policy could impart further market volatility next year, as market participants guess at the policy implications of strong or weak data prints. To be sure, Fed officials will not likely react to any individual data release, but wait to see a trend before acting. There is still a good chance Fed policy will be on hold in H119, as I discussed last week.
This week's US key economic data -- November CPI and Retail Sales -- should have little, if any, influence on the FOMC Meeting's outcome. Consensus estimates of +0.2% m/m Core CPI and (strong) +0.7% m/m Ex Auto Retail Sales would just confirm expectations of a 25 BP hike at the meeting. Weaker prints should not derail a hike.
Friday, December 7, 2018
November Employment Report Doesn't Change Story for the Fed
The November Employment Report does not change the story for the Fed. Economic growth still looks to be above trend in Q418, while inflation remains contained. The possibility that November is the start of a more significant slowdown cannot be ruled out. A December rate hike still looks highly likely, while forward guidance should reflect some caution -- as yesterday's WSJ report hinted.
Although Nonfarm Payrolls slowed to +155k m/m in November, the pace is still above trend. This can be seen in the Unemployment Rate edging down to 3.67% from 3.74% in October (both rounded to 3.7% in the headlines). To be sure, there was some softening in the "margins" of the labor market, so the broader measure, U-6, rebounded to 7.6% from 7.4% in October. It had been bouncing between 7.4% and 7.5% in the prior few months.
In addition to a slowdown in Payrolls, the Average Workweek slipped to 34.4 hours from a prior trend of 34.5 hours. As a result, Total Hours worked fell 0.2% m/m in November. Nevertheless, THW look to be up 1.3-1.5% (q/q, saar) in Q418 (depending on whether THW is steady or rebounds in December) -- stronger than the +1.1% in Q318.
The 0.2% m/m in Average Hourly Earnings matched the average pace seen over the first 10 months of the year. On an unrounded basis, it was actually slightly below this January-October pace (0.22% versus 0.24%). AHE is the narrowest of the major measures of labor costs. The broadest measure -- Compensation/Hour -- was softer over the first 3 quarters of the year.
Although Nonfarm Payrolls slowed to +155k m/m in November, the pace is still above trend. This can be seen in the Unemployment Rate edging down to 3.67% from 3.74% in October (both rounded to 3.7% in the headlines). To be sure, there was some softening in the "margins" of the labor market, so the broader measure, U-6, rebounded to 7.6% from 7.4% in October. It had been bouncing between 7.4% and 7.5% in the prior few months.
In addition to a slowdown in Payrolls, the Average Workweek slipped to 34.4 hours from a prior trend of 34.5 hours. As a result, Total Hours worked fell 0.2% m/m in November. Nevertheless, THW look to be up 1.3-1.5% (q/q, saar) in Q418 (depending on whether THW is steady or rebounds in December) -- stronger than the +1.1% in Q318.
The 0.2% m/m in Average Hourly Earnings matched the average pace seen over the first 10 months of the year. On an unrounded basis, it was actually slightly below this January-October pace (0.22% versus 0.24%). AHE is the narrowest of the major measures of labor costs. The broadest measure -- Compensation/Hour -- was softer over the first 3 quarters of the year.
Sunday, December 2, 2018
Will A December Fed Rate Hike Be the Last for Awhile?
The US/China trade truce should be only a short-term positive for stocks, with the dispute pushed to the back-burner for the next 2-3 months. The market focus now will be back squarely on the Fed. A December rate hike still looks to be in the cards. But, there may a pause in hiking in H119, as economic growth slows and inflation remains low.
Fed Chair Powell's testimony to the Joint Economic Committee on Wednesday should be a highlight of the week, along with the November Employment Report. It is unlikely he will be specific about a December hike or about the extent of tightening next year. Presumably, he is still constrained by the FOMC's forward guidance presented at the September Meeting.
Nevertheless, a December Fed rate hike now looks highly likely, based on Powell's characterization of the US economy as strong and the November FOMC Minutes. But, there are reasons to think the Fed might refrain from hiking rates in H119. There are hints economic growth may slow in Q119 before picking up again in Q219. If this pattern comes about, sufficient evidence to warrant renewed tightening probably would not be available until late Spring. And, core inflation may stay below 2.0% ahead.
Recent US economic data are beginning to support the downside risks to the outlook. In particular, both Initial and Continuing Unemployment Claims rose notably in the past week or two. They need to stay high or rise further to maintain a bearish clue to the outlook.
Unemployment Insurance Claims (level, 000s)
Initial Continuing
July 214 1745
Aug 212 1720
Sep 206 1663
Oct 214 1635
11/3 wk 214 1670
11/10 216 1660
11/17 224 1710
11/24 234 na
Although the Claims data are not reliable evidence regarding the Employment Report, they suggest the consensus estimate of +200k m/m November Payrolls is too high and steady 3.7% Unemployment Rate too low.
Evidence regarding Monday's November Mfg ISM is mixed. The most reliable predictor -- Richmond Fed Mfg Index (correctly predicting direction in 9 of 10 months this year) -- points to a counter-consensus decline. The Chicago PM Index (correct in 7 of past 10 months) -- points to an increase.
To be sure, Q418 Real GDP Growth remains above trend -- in line with Powell's characterization of a currently strong economy. The Atlanta Fed model projects 2.6% for Q418 Real GDP Growth, with consumer spending climbing faster than 3%. The strength would justify a December rate hike.
Meanwhile, core inflation data have softened notably. The Core PCE Deflator has been flat to up only 0.1% m/m in 3 of the past 5 months. The 3-month annualized rate of change is 1.1%. The Market-Based Core PCE Deflator (which excludes imputed prices) has been flat to up 0.1% in 4 of the past 5 months. Its 3-month annualized rate of change is 0.5%. There are several reasons for the low underlying inflation rate, including a slowdown in Unit Labor Costs, softer import prices (in part, due to stronger dollar), and a moderation in housing rent. A filtering through of the recent drop in oil prices should add to these factors in holding down core inflation in coming months.
Core PCE Deflators (m/m percent change)
Oct Sep Aug Jul Jun May Apr Mar
Core PCE Deflator 0.1 0.2 0.0 0.2 0.1 0.2 0.2 0.2
Market-Based Core PCE Deflator 0.0 0.1 0.0 0.2 0.0 0.2 0.2 0.2
Fed Chair Powell's testimony to the Joint Economic Committee on Wednesday should be a highlight of the week, along with the November Employment Report. It is unlikely he will be specific about a December hike or about the extent of tightening next year. Presumably, he is still constrained by the FOMC's forward guidance presented at the September Meeting.
Nevertheless, a December Fed rate hike now looks highly likely, based on Powell's characterization of the US economy as strong and the November FOMC Minutes. But, there are reasons to think the Fed might refrain from hiking rates in H119. There are hints economic growth may slow in Q119 before picking up again in Q219. If this pattern comes about, sufficient evidence to warrant renewed tightening probably would not be available until late Spring. And, core inflation may stay below 2.0% ahead.
Recent US economic data are beginning to support the downside risks to the outlook. In particular, both Initial and Continuing Unemployment Claims rose notably in the past week or two. They need to stay high or rise further to maintain a bearish clue to the outlook.
Unemployment Insurance Claims (level, 000s)
Initial Continuing
July 214 1745
Aug 212 1720
Sep 206 1663
Oct 214 1635
11/3 wk 214 1670
11/10 216 1660
11/17 224 1710
11/24 234 na
Although the Claims data are not reliable evidence regarding the Employment Report, they suggest the consensus estimate of +200k m/m November Payrolls is too high and steady 3.7% Unemployment Rate too low.
Evidence regarding Monday's November Mfg ISM is mixed. The most reliable predictor -- Richmond Fed Mfg Index (correctly predicting direction in 9 of 10 months this year) -- points to a counter-consensus decline. The Chicago PM Index (correct in 7 of past 10 months) -- points to an increase.
To be sure, Q418 Real GDP Growth remains above trend -- in line with Powell's characterization of a currently strong economy. The Atlanta Fed model projects 2.6% for Q418 Real GDP Growth, with consumer spending climbing faster than 3%. The strength would justify a December rate hike.
Meanwhile, core inflation data have softened notably. The Core PCE Deflator has been flat to up only 0.1% m/m in 3 of the past 5 months. The 3-month annualized rate of change is 1.1%. The Market-Based Core PCE Deflator (which excludes imputed prices) has been flat to up 0.1% in 4 of the past 5 months. Its 3-month annualized rate of change is 0.5%. There are several reasons for the low underlying inflation rate, including a slowdown in Unit Labor Costs, softer import prices (in part, due to stronger dollar), and a moderation in housing rent. A filtering through of the recent drop in oil prices should add to these factors in holding down core inflation in coming months.
Core PCE Deflators (m/m percent change)
Oct Sep Aug Jul Jun May Apr Mar
Core PCE Deflator 0.1 0.2 0.0 0.2 0.1 0.2 0.2 0.2
Market-Based Core PCE Deflator 0.0 0.1 0.0 0.2 0.0 0.2 0.2 0.2
Subscribe to:
Posts (Atom)