It feels warm, and that's bullish

It’s warm.

For October, the average temperature across the US was 57.4 F — the highest since 1963. And, to date, November has been quite warm as well.

Meteorologists have attributed this unusual autumn weather in part to El Niño, which is basically a fancy name for the prolonged warming in Pacific Ocean temperatures that leads to warmer weather in the northern US, colder weather in the South, and greater rainfall in the Southwest.

Notably, according to experts, it’s not just any old El Niño this year. The World Meteorological Organisation suggests that this will be among the 3 strongest since 1950, and the US NOAA forecasts that the maximum effects will be felt in late 2015 to early 2016.

Naturally, these weather fluctuations mean something for the US economy.

“If we do enjoy a warm winter, the risk is that the 1Q economic data could surprise to the upside, particularly if expectations are for a slump akin to the last two years,” write Bank of America Merrill Lynch’s Michelle Meyer and Lisa C. Berlin.

As they write in a recent note to clients:

“Looking back at prior episodes of El Niño, GDP growth generally accelerated in 1Q, although evidence is weak. … The seasonal adjustment process will be most sensitive to the most recent years, which suggests the seasonal factors will be looking for weakness, therefore, threatening to inflate the data, [but the Bureau of Economic Analysis] took steps to address the ‘residual seasonality’ issue that has biased 1Q GDP lower over the prior few years, which may mitigate the negative effect.”

In English: In warmer winters, Q1 data tends to skew higher than usual. Factor in the last two super cold winters, which made the previous two Q1’s look worse than they might have been, and it could be double-y skewed higher this year. However, since BEA has acknowledged this seasonality issue exists, perhaps, the seasonality issue will be more muted this year.

Assuming weather does turn out ot be a bullish force for the economy, this could have implications for monetary policy, which the Fed expects to tighten with interest rate hikes. The market is currently expecting an initial rate hike in December.

Meyer and Berlin even go as far as suggesting that if the weather is indeed super warm, and that affects economic data, then “this might just prompt the Fed to justify a second hike earlier than markets are expecting.”

“While we are not going to attempt to forecast the weather in the coming months (forecasting the economy is hard enough), it seems that there is a considerable risk of warm winter,” conclude Meyer and Berlin.

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