Last week, the Federal Reserve unexpectedly announced that it was tapering its stimulative quantitative easing program, the first step in the long process of unwinding years of easy monetary policy.
Stocks rocketed to all-time highs.
Among other things, the Fed lowered its forecasts for unemployment and raised its forecasts for GDP growth.
It also reduced its expectations for inflation. However, there are signs that a higher rate of inflation may be on the horizon.
Here are three related bullets from UBS’s Friday note to clients: “Around half of core PCE slowdown has reflected what may be just temporary medical cost slowing”; “Shortages of specific labour skills (eg, in manufacturing and construction) spell selective wage hikes”; and “Tighter rental market implying further rent acceleration.”
Inflation is something we’ll have to keep a close eye on.
Here’s your Monday Scouting Report:
Emergency Unemployment Compensation (EUC): The recent federal budget dealings excluded an extension of the EUC program, which has been allowing those unemployed to collect unemployment insurance benefits for 99 weeks instead of the standard 26 weeks. This will obviously be painful for those relying heavily on these checks.
“Unlike previous defunding episodes, should it occur, there would be no phase-out period, and all persons (roughly 1.3 million) on this federal roll will stop receiving benefits immediately,” noted Citi’s Peter D’Antonio. “This event could cause a brief spike in state claims by those confused by the cut-off.”
North Carolina actually pulled the plug on the extension in July. JP Morgan’s Michael Feroli noted that many who lost EUC ended up becoming employed by taking jobs that they were holding off on. However, his research found that North Carolina’s unemployment rate tumbled largely due to a sharp decline in the labour force participation rate during the period. North Carolina could serve as a model for what would happen in the rest of the country should the EUC program not be renewed.
- Personal Income And Spending (Mon): Economists estimate that both income and spending climbed by 0.5% in November. “We are looking for a 0.5% rise in wages and salaries, consistent with the gains in aggregate hours worked and average hourly earnings in the employment report,” said Barclays Dean Maki. “We also expect positive contributions from rental and dividend income but a decline in proprietors’ income.”
- Consumer Confidence (Mon): Economists estimate that the University of Michigan’s confidence index climbed to 83.0 in December from 82.5 a month ago. “Given that equities have continued to rally over the course of the month and lawmakers in Washington were able to agree on a budget for the next two fiscal years, we expect an upward revision to 83.0,” said Bank of America Merrill Lynch economists. “Consumers should also be further encouraged by the Fed’s decision to modestly taper its monthly asset purchases, an indication that the Fed is beginning to see meaningful progress in the labour market and overall economy.”
- Durable Goods Orders (Tues): Economists estimate that orders climbed by 1.8% driven by transportation products. Nondefense capital goods orders excluding aircraft — a measure of business investment – is estimated to have increased by 0.7%. “Industry figures point to a surge in aircraft bookings that should provide a large boost to headline durable goods orders,” noted Morgan Stanley’s Ted Wieseman. “On an underlying basis, nondefense capital goods ex aircraft orders jumped 9.5% in the first six months of the year but then reversed much of that upside with a 4.2% pullback in the past four months. With indications of rising business confidence in the economic outlook and surveys suggesting some firming in business capital spending plans, including our MSBCI survey, we expect nondefense capital goods ex aircraft orders to start getting back on a growth path consistent with stronger equipment investment next year.”
- New Home Sales (Tues): Economists estimate sales fell 0.9% to an annualized rate of 440,000. “New home sales are due for some giveback after a 25.4% jump in October,” said Credit Suisse economists. “But rising building permits limit the downside prospects for the November report.”
- Richmond Fed Manufacturing Index (Tues): Economists estimate this regional activity index fell to 10 in December from 13 a month ago. Here’s UBS’s Sam Coffin on the manufacturing surveys: “The Empire State manufacturing index suggested very slow growth in December, but it has been weak relative to other measures of activity in recent months. The Philadelphia Fed measure was also on the softer side, and the Kansas City Fed measure slipped into contractionary territory. In contrast, the Markit flash PMI, although edging down, held on to healthier levels in December. Its strength has been closer to that of the ISM index in recent months and more consistent with the recent acceleration in manufacturing activity.”
- Markets will close at 1:00 p.m. ET on Tuesday, Dec. 24. They will be closed all day on Wednesday, Dec. 25.
- Initial Jobless Claims (Thurs): Economists estimate claims fell to 347,000 from 379,000 a week ago. “Initial jobless claims likely fell back after two weeks of elevated readings,” said Citi’s D’Antonio. “But the four-week moving average continued to rise. The number of beneficiaries probably remained high given the surge in first filings of late.”
Once Wall Street’s biggest bull, Deutsche Bank’s David Bianco now has the most conservative 2014 target for the S&P 500 of the major strategists followed by Business Insider.
His number: 1,850.
“We think the S&P likely stays within +/- 5% range from 1800 for the next several months as investors watch EPS and interest rate trends,” wrote Bianco in his 2014 outlook. “We expect 2014 to be a year of normal EPS growth, normal PEs, normal total returns, but also normal volatility. Normal volatility includes at least one S&P 500 price dip of 5% -9.9%. Since 1960, the only years when the S&P didn’t suffer a 5%+ dip were 1964, 1993 & 1995.”