This is going to be a big week for the Federal Reserve.
On Wednesday, the Fed will publish the minutes of its July Federal Open Market Committee (FOMC) meeting, which should offer some colour regarding the Fed’s view on the labour market.
On Friday, Federal Reserve Board Chair Janet Yellen will speak at Jackson Hole, where the theme of this year’s Economic Policy Symposium will be “Re-Evaluating Labour Market Dynamics.”
This comes as the labour market continues to improve, inflation shows signs of picking up, geopolitical tensions remain high, and everyone awaits the Fed’s first rate hike.
Here’s your Monday Scouting Report:
Jackson Hole: The Kansas City Fed’s annual Economic Policy Symposium became a market-moving event in 2010 when then-Fed Chairman Ben Bernanke prepared the world for QE2, a second round of stimulative bond purchases.
“Under different circumstances, this year’s Jackson Hole conference might have presented Fed Chair Janet Yellen with an ideal opportunity to clarify the FOMC’s policy strategy given the progress made toward its full-employment objectives,” said Credit Suisse. “Perhaps she would have struck a less dovish tone, preparing the verbal groundwork for an eventual reduction in policy accommodation. But the threatening geopolitical backdrop, the soft patch in European economic data, and the corresponding fragility in risky assets may constrain Yellen’s rhetoric. She likely would prefer to make no waves in the financial markets next week.”
Here’s Bank of America Merrill Lynch’s Ethan Harris: “Clearly, the conference topic — ‘Re-Evaluating Labour Market Dynamics’ — offers plenty of room for discussion. Hence, if the Chair wants to be a bit more interesting, presumably, she will talk a bit about why she still sees a long recovery ahead in the labour market, pointing to the weakness in wages and broader measures of slack. In the past, the papers have been released to participants before the general public, creating some potential for a pre-conference market reaction. However, the papers usually stoke more economic debate than market action. The participants include the usual cast of critics who warn of inflation and asset bubbles every year — recall that in 2008, just before the markets and economy collapsed, conference participants were much more worried about inflation than about a credit crunch. This year, as in the past, criticism of the Fed is a useful ‘stress test’ for Chair Yellen and her allies, but is usually a poor signal of the likely path of Fed policy.”
- NAHB Housing Market Index (Mon): Economists estimate this index of homebuilder confidence was unchanged at 53 in August. “While momentum has been positive, we only expect a modest increase due to a yet-to-be seen rebound in new home sales,” said Bank of America Merrill Lynch economists who are expecting a print of 54.
- Consumer Price Index (Tues): Economists estimate CPI climbed by 0.1% month-over-month or 2.0% year-over-year. Excluding food and energy, core CPI is estimated to have climbed by 0.2% or 1.9%, respectively. Here’s Morgan Stanley’s Ted Wieseman: “Lower retail gasoline prices and lower utility rates as natural gas prices extended a sharp reversal of winter elevation point to lower energy prices. Food prices were flat in June after surges averaging 0.4% from March to May, but farm prices and PPI pointed to renewed upside concentrated in meats. Core inflation, meanwhile, should continue to be boosted by a gradual acceleration in shelter costs. Taken together, rent and owners’ equivalent rent, accounting for 40% of core CPI, were at a six-year high of 2.8% year/year in June, up from 2.6% in December and 2.4% in June 2013, and a plunge in the national rental vacancy rate to a twenty- year low in Q2 points to further upside going forward. Otherwise, a decline new car prices restrained core CPI in June, but industry sources estimated lower sales incentives in July. Industry figures also pointed to more stable hotel rates after a 1.9% pullback in June reversed a 2.0% rise in May, and airlines have seen continued strength in domestic revenues.”
- Housing Starts (Tues): Economists estimate the pace of starts jumped 8.4% to 968,000 per year in July, reversing June’s drop to 893,000. Permits are estimated to have climbed 2.8% to 1.0 million. “Homebuilder sentiment,as measured by the NAHB housing index, rebounded to 53 in July, suggesting summer-time momentum,” said Bank of America Merrill Lynch economists.
- FOMC Minutes (Wed): The minutes of the July 29-30 Federal Open Market Committee meeting will be released at 2 p.m. ET. Here’s Credit Suisse: “We imagine that behind the July 30 FOMC policy statement were two days of spirited debate, fuelled mainly by the fast-improving labour market data. We should get a sense of the vibe at the meeting from the FOMC minutes, but any clarity on the timing of the first rate hike probably is too much to ask. Importantly, the minutes may also describe ongoing discussions related to the exit strategy, and in particular to the planned role of the fixed-rate reverse repo tool in normalizing policy.”
- Initial Jobless Claims (Thurs): Economists estimate weekly initial claims ticked up to 300,000 from 11,000 a week ago. “Although claims ticked up in the latest week, the overall trend appears to be lower, suggesting that the labour market is continuing to improve,” said Nomura economists.
- Markit U.S. Manufacturing PMI (Thurs): Economists estimate this manufacturing index slipped to 55.6 in August, down from 55.8 in July.
- Philadelphia Fed Business Outlook (Thurs): Economists estimate this activity index fell to 19.4 in August from 23.9 in July. “A key indicator of future activity within the survey, the new orders sub- index, jumped by almost 20pts in July and provides support for manufacturing activity in the near term,” said Nomura economists. “It is possible that the recent volatility in markets could weigh on business sentiment this month, providing some downside risk.”
- Existing Home Sales (Thurs): Economists estimate the pace of sales fell 0.8% in July to an annualized rate of 5.00 million. “Leading indicators for existing home sales have been weak, as pending home sales dropped 4.5% in June on a year-ago basis and consumers reporting plans to buy a home dropped a percentage point in July to its lowest level this year,” said Wells Fargo’s John Silvia. “Mortgage rates, which rose in the first half of the year, have moderated slightly and could help fuel demand for existing home sales moving forward.”
In a new 34-page note titled “Transitioning To Lower Returns,” Barclays’ U.S. equity strategist Jonathan Glionna writes that the years of double-digit returns are behind us for now.
“We believe U.S. equities are transitioning out of a recovery rally and into a period of lower returns as the benefits of margin expansion and share repurchases prove to be already priced in and a return of faster revenue growth becomes a prerequisite for another re-rating higher,” he writes. “Sales growth has been less than 3%, and we believe it will remain subdued because of weak domestic economic growth and an inability to restart last cycle’s growth engine: international sales.
“We are setting our price targets for the S&P 500 at 1975 for 2014 and 2100 for 2015.”
For more insight about the middle market, visit mid-marketpulse.com.
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