Another year, and another Jackson Hole conference has come and gone.
But it was Federal Reserve Chair Janet Yellen’s opening remarks that were most-anticipated by economists and traders around the world.
Unfortunately, her speech was less a main event and more a non-event.
The good news is everyone can refocus on the economic data, which we’ll get a lot of this week.
Here’s your Monday Scouting Report:
- Jackson WHole Lot Of Nothing: “Give me a one-handed economist!” exclaimed President Harry Truman. “All my economists say, ‘on one hand … on the other.'” Indeed, at least three top economists used this joke to describe Yellen’s remarks at Jackson Hole. “It seems harder to write a more neutral (and nuanced) speech than the one Yellen delivered,” said JP Morgan’s Michael Feroli. Indeed, Yellen’s talk sparked no fireworks in the markets, where stocks barely budged.
Pent-Up Wage Deflation: Why haven’t we seen a material pick up in wages? “The evidence suggests that many firms faced significant constraints in lowering compensation during the recession and the earlier part of the recovery because of ‘downward nominal wage rigidity’ — namely, an inability or unwillingness on the part of firms to cut nominal wages,” said Yellen, discussing the idea of pent-up wage deflation. “If pent-up wage deflation is holding down wage growth, the current very moderate wage growth could be a misleading signal of the degree of remaining slack. Further, wages could begin to rise at a noticeably more rapid pace once pent-up wage deflation has been absorbed.”
UBS’s Drew Matus believes the Fed will likely be confronted by some unwanted rapidly accelerating prices.
Yellen Still Cool On Inflation: However, “there is scope for nominal wages to accelerate from their recent pace without creating meaningful inflationary pressure,” added Yellen.
“Earlier this year, Chair Yellen dismissed three consecutive surprises in core CPI as statistical ‘noise’,” noted Societe Generale’s Aneta Markowska. “[On Friday, Yellen suggested] that there is scope for some wage acceleration without triggering inflation pressure. All of this hints that she is unlikely to react to any improvement on the wage front until the upward trend is well established.”
- Markit U.S. Services PMI (Mon): Economists estimate this index of services slipped to 58.0 in August from 60.8 in July.
- New Home Sales (Mon): Economists estimate the pace of sales jumped 5.7% to an annualized rate of 429,000 units in July. “The NAHB homebuilder sentiment index improved as buyer traffic edged up while current conditions increased,” noted Bank of America Merrill Lynch economists. “New home sales have essentially been moving sideways since the middle of next year with strength at the end of 2013 offset by weakness in the first half of this year. While sales have been soft, single family starts have recently increased, translating to a pickup in months supply.”
- Dallas Fed Manufacturing Activity (Mon): Economists estimate this regional activity index ticked up to 12.8 in August from 12.7 in July. “Manufacturing surveys so far reported for early August have suggested continued strength in activity,” said UBS’s Kevin Cummins.
- Durable Good Orders (Tues): Economists estimate that an unusual month for aircraft orders caused durable goods orders surged 7.1% in July. Nondefense capital goods orders excluding aircraft is estimated to have increased by 0.2%. “To say that the value of orders for Boeing aircraft surged may be an understatement,” said Wells Fargo’s John Silvia. “There were 270 orders recorded for the 777x and another 26 orders for its 787s.”
- S&P/Case-Shiller Home Price Index (Tues): Economists estimate prices went nowhere month-over-month in June (+0.0%), or+ 8.24% year-over-year. “We think there are seasonal distortion issues related to the shrinking share of distressed sales which the seasonal factors are not capturing,” said Bank of America Merrill Lynch economists. “Home price appreciation is slowing, but we don’t think this is the beginning of persistent outright declines.”
- Consumer Confidence (Tues): Economists estimate this index of confidence slipped to 88.5 in August from 90.9 in July. “After a stronger-than-expected 4.5-point jump higher in July, the Conference Board’s measure of consumer confidence probably fell back somewhat in August,” said Credit Suisse economists. “A bounceback in equity prices, brightening employment prospects, and falling gasoline prices may limit the magnitude of an August index decline to about a point.”
- Richmond Fed Manufacturing Index (Tues): Economists estimate this regional activity index ticked down to 6 in August from 7 in July.
- Initial Jobless Claims (Thurs): Economists estimate weekly initial claims ticked up to 300,000 from 298,000 a week ago. “Initial claims have hovered around 300k for the past few weeks and should continue to do so as labour markets tighten,” said Nomura economists.
- Q2 GDP (Thurs): Economists estimate GDP growth will be revised down to 3.9% from 4.0% a month ago. Personal consumption is estimated to have slipped to 2.4% from 2.5%. Here’s Morgan Stanley’s Ted Wieseman: “Lower inventories partly offset by higher net exports should result in a downward revision to the 4.0% advance GDP estimate but with a better demand/inventories mix, a positive for the Q3 outlook. June results for nondurable manufacturing, wholesale, and retail ex auto inventories all came in well below elevated BEA assumptions, pointing to the +1.7pp contribution to Q2 growth from inventories being revised down to +1.1pp. The surprising $US3 billion narrowing in the June trade deficit to a five-month low, however, points to the net exports contribution being revised up to -0.4pp from -0.6pp.”
- Pending Home Sales (Thurs): Economists estimate the pace of pending sales climbed 0.5%. “Since pending home sales track signed contracts, this suggests continued improvement in existing home sales,” said Bank of Ameria Merrill Lynch economists.
- Personal Income And Spending (Fri): Economists estimate income jumped by 0.3% while spending climbed by 0.2%. “Weekly earnings for production and nonsupervisory employees from the BLS employment report increased in July,” noted Nomura economists. “As for personal spending, core retail sales hit a soft patch, increasing by only 0.1% in July as most categories showed a decline or lackluster growth. Moreover, energy spending likely slowed in July as the weather was more moderate than usual, leading to less demand for air conditioning.”
- Chicago Purchasing Managers Index (Fri): Economists estimate this regional activity index jumped to 56.5 in August from 52.6 in July. “This would be a rebound after a sharp fall in July and consistent with the upward move in the Philadelphia Fed index in August,” said Barclays economists.
- Univ. Of Michigan Confidence (Fri): Economists estimate this index of sentiment to registered at 80.2 in August, down from 81.8 in July but up from a preliminary estimate of 79.2. ” If [79.2] sustained for the month as a whole, this would be the lowest level on the consumer sentiment index since November 2013,” noted Credit Suisse economists. “But if equity markets continue to recover from their early-month swoon and geopolitical fears stabilise, we may see a slightly higher final sentiment reading for August. Lower gasoline prices probably are still helping to boost sentiment, as well.”
Corporate profit margins hit new highs during the second quarter. However, this average has been driven by gains among large cap companies.
UBS’s Julian Emanual noted that margins for small cap stocks have actually been falling and are set to continue falling.
“Small Cap stocks’ margins — and relative price performance – have begun to slip as a result of the same strength in wages and the tightening labour situation,” wrote Emanual on Friday. “We expect Small Caps to continue to face headwinds in the months ahead as the Fed’s favoured measure of inflation, PCE, is forecast by UBS to rise to 2.0% by year end 2014 driven largely by evolving labour market dynamics.”
For more insight about the middle market, visit mid-marketpulse.com.
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