MONDAY SCOUTING REPORT
At this point, the market economists expect the Federal Reserve to announce on September 18 that it will begin tapering its monthly $US85 billion purchases of mortgage and Treasury bonds.
Of course, there will be plenty of economic data before the 18th that the Fed will consider before setting anything in stone.
In particular, there will be a lot of updates on the state of U.S. jobs.
“Between now and the August employment report (released September 6), market participants will be keenly scrutinizing the economic data for clues as to how the labour market performed this month,” said Deutsche Bank’s Brett Ryan in his discussion about Fed tapering. “While we expect the August employment report to be the key determinate, other labour market indicators, such as the jobs plentiful/jobs hard-to-get component of the August consumer confidence report (Tuesday), jobless claims, and the employment component of the Chicago PMI (Friday) take on added significance.”
“The fact that the 4-week moving average on jobless claims is at its lowest level since November 2007 bodes well for a firming tone in other labour market indicators.”
It also bodes well that we may be witnessing synchronised global growth.
- Synchronised Growth: Last week, the Flash, or preliminary, PMI reports from around the world suggested we may be witnessing synchronised global growth. “As we have stressed before, a synchronised pick up in global growth has been a rare phenomenon in recent years,” said UBS’s Andrew Cates. “That this is seemingly occurring according to these important leading indicators in the US, Europe and China suggests – to this economist – that there are upside risks to the global growth outlook in the period ahead.”
Jackson Hole: The Kansas City Fed’s annual Economic Policy Symposium in Jackson Hole came and went this weekend. While there were some thought-provoking and controversial papers presented, there wasn’t much said that has economists rethinking what the Fed and the world’s central banks will do in the near-term.
“The discussion was more about “how” and “hence” than “when” – including how [unconventional monetary policy] works and what that implies for exit strategy rather than when specifically the wind-down process will begin,” said High Frequency Economics’ Jim O’Sullivan who attended the event. “However, there was certainly no suggestion that financial market participants are wrong in assuming a good chance that Fed officials will start scaling down the purchase program as soon as the September 17-18 FOMC meeting – as we continue to forecast.”
- Durable Goods Orders (Monday): Economists estimate orders fell 4.0% in July. “July details should reveal the transportation sector driving the headline decline, as Boeing’s aircraft orders fell (to 90 from 287 in June),” said Credit Suisse’s Neal Soss. “Expected core declines — ex-transportation and core capex — should be the result of lower machinery orders, especially after the big run up in mining/oil & gas equipment in June.”
- Dallas Fed Manufacturing Survey (Monday): Economists estimate that this regional Fed index ticked up to 4.5 in August from 4.4 in July.
- S&P/Case-Shiller House Price Index (Tuesday): Economists estimate that home prices climbed by 12.1% year-over-year in June, and 1.1% from May. “The national composite will also be released for 2Q — we expect a strong 12.2% annualized surge from 1Q to 2Q, translating to a 10.7% yoy gain in prices,” said Bank of America Merrill Lynch’s Michelle Meyer. “Despite rising mortgage rates, demand has remained solid and supply continues to run lean, which support rising home prices.”
- Consumer Confidence (Tuesday): Economists estimate that the Conference Board’s measure declined to 78.0 from 80.3 in July. “Some moderation looks to be in store for August,” said Wells Fargo’s John Silvia. “The recent pullback in the stock market will likely weigh on the most recent reading. Between the beginning of August and the end of the survey period, the S&P 500 slipped 1.8 per cent.”
- Richmond Fed Survey (Tuesday): Economists estimate the regional Fed activity index improved to a breakeven level o f0 from -11 in July.
- Pending Home Sales (Wednesday): Economists estimate pending home sales in July declined by 1.0%. “We saw sales moderate by 0.4% in June, following a strong 6.7% mum jolt in May, and we anticipate some further give back,” said Bank of America Merrill Lynch’s Michelle Meyer who expects a 0.8% decline. “Also, mortgage applications started to pull back during the month, likely in response to higher mortgage rates.”
- Initial Weekly Unemployment Claims (Thursday): Economists estimate jobless claims slipped to 330,000 from 336,00 a week ago. “Initial claims continue to bode well for payroll employment prints ahead, but continuing claims are offering no new information about the unemployment rate,” said Citi’s Peter D’Antonio.
- Q2 GDP (Thursday): Economists estimate the second estimate of Q2 GDP was revised to 2.2% from 1.7% a month ago. “Stepped-up business spending, narrower trade gap point to significant mark-up to Q2 growth,” said Societe Generale’s Brian Jones. “Data released since the Bureau of Economic Analysis’ first pass at Q2 growth suggest that the pace of real business activity was substantially quicker than the 1.7% annualized advance estimate.”
- Personal Income and Outlays (Friday): Economists estimate that income climbed by 0.2% in June and spending grew by 0.3%. “Data from the employment report showed weaker job growth in July,” said Wells Fargo’s Silvia. “Combined with a slightly shorter workweek and a pullback in earnings, take home pay looks to have softened…. Retail sales growth slowed over the month, while a smaller increase in gasoline prices saved consumers from having to step up spending at the pump as much as they did the previous month.”
- Chicago PMI (Friday): Economists estimate that this regional index improved to 53.0 from 52.3 in July. “The Chicago purchasing managers’ index has been all over the map so far this year,” noted Citi’s D’Antonio. “The range of readings has spanned to nearly 59 on the high side and 49 on the low side. So it has not been a particularly useful measure of broader activity.”
- University of Michigan Consumer Sentiment (Friday): Economists are looking for a reading of 80.0 in August, down from 85.1 in July. “Similar to consumer confidence, sentiment should be weighed down further by the fact that stocks have continued to sell off since the preliminary release, as well as mixed economic data,” said the economists at Bank of America Merrill Lynch.
Everyone’s been talking about the cyclically-adjusted price-earnings ratio,the valuation metric that Yale economist Robert Shiller used to predict the dotcom bubble.
Currently, the measure suggests the stock market is a bit expensive.
But in a piece for the Financial Times, UPenn finance professor Jeremy Siegel speculated that the CAPE was biased in its current form.
“Downward biased S&P earnings send average 10-year earnings down and bias the Cape ratio upward,” he wrote. “In fact, when [National Income and Product Accounts] profits are substituted for S&P reported earnings in the Cape model, the current market shows no overvaluation.”