This week markets will probably be quiet again as many investors and traders will likely be preparing for and recovering from New Years Eve festivities.
However, there is a lot of economic data coming to kick off 2014.
Here’s your Monday Scouting Report:
Is Inflation Coming?: There has been some chatter recently that inflation might be on the horizon, largely due to a tightening labour market which should drive wages higher.
“We disagree and argue that this is just the latest false alarm on inflation,” said Bank of America Merrill Lynch’s Ethan Harris. “Judging the amount of slack in the labour market requires looking at both the structural damage to the market and the amount of hidden unemployment. A reasonable weighing of the evidence suggests there is still anywhere from 1pp to 2.5pp of slack in the labour market. The pockets of wage pressure are just that: labour compensation is weak by almost any measure. Moreover, even if wages do inch higher, we are a long way from the normal 3 or 4% rate that could start to create serious pricing pressure.”
- Pending Home Sales (Mon): Economists estimate sales climbed 1.0% month-over-month in November. “After five consecutive declines in the pending home sales index, cumulating to 8.3%, we project a partial rebound in November,” said UBS’s Sam Coffin. “The mortgage applications purchase index leveled out, and some initial signings slowed by income- verification delays during the government shutdown in October may have trickled into November.”
- Dallas Fed Manufacturing Activity (Mon): Economists estimate that this regional activity index ticked up to 2.0 in December from 1.9 in November.
- S&P Case-Shiller Index (Tues): Economists estimate home prices climbed 0.9% month-over-month in October, or 13.45% year-over-year. “Home prices have continued to increase at a solid pace despite the weakening in demand during the summer and early fall,” said Bank of America Merrill Lynch economists. “Part of the strength in recent home price statistics is due to the lagged nature of the data. The last report showed September data which is reflective of prices from July to September (since Case Shiller is a three-month moving average). Prices are documented at the point of the closing and therefore represent market conditions a few months prior when the contract is signed. We think that price appreciation will slow into the New Year and continue to decelerate in 2014. We forecast prices to end this year up about 10% and next year up 5%.”
- Chicago Purchasing Managers Index (Tues): Economists estimate this regional PMI fell to 60.5 in December from 63.0 a month ago. “The Chicago index jumped in October and held those levels last month, after some volatile lower readings earlier in the year,” said Citi’s Peter D’Antonio. “We think the increase in the Chicago index is consistent with better news from activity measures such as industrial production and manufacturing employment.”
- Consumer Confidence Index (Tues): Economists estimate the Conference Board’s sentiment index jumped to 76.3 in December from 70.4 a month ago. “The Univ of Michigan sentiment readings for late November and early December signal an increase in the Conference Board’s December confidence measure,” said Credit Suisse economists. “Falling unemployment rates and rising stock prices strengthen the likelihood that consumer attitudes brightened going into year end.”
- Markets will be closed on Wednesday, Jan. 1.
- Initial Jobless Claims (Thurs): Economists estimate claims climbed to 345,000 from 338,000 a week ago. “The recent volatility in the claims figures appears to be related to issues seasonally adjusting the data during the holiday season,” said JP Morgan’s Michael Feroli. “The pattern in claims in recent weeks has been very similar to the pattern during the related weeks in 2002 which was the last year in which Thanksgiving fell as late as it did this year. We think the similarities between 2002 and 2013 will continue in the upcoming report and look for an increase in claims.”
- Markit US PMI (Thurs): Economists estimate PMI came in at 54.7 in December. “We look for the Markit manufacturing PMI to be revised up slightly from 54.4 in the flash December report to 54.5 in the final report for the month,” said JP Morgan’s Feroli. “In general, most of the recent manufacturing data have been upbeat, and we see little rea son to expect much change in activity between the sampling periods for the flash and final reports.”
- ISM Manufacturing (Thurs): Economists estimate the ISM index slipped to 56.9 in December from 57.3 a month ago. “The index has been out of step with actual factory activity repeatedly during this expansion,” said Citi’s D’Antonio. “This has been true of most survey based business barometers. We, therefore, have downplayed the importance of these measures. However, at this point in time, the recent run-up in ISM and other regional measures have coincided with better news on production and manufacturing payrolls. With surveys and hard data pointing in the same direction, we see this as a clearer signal of stronger growth leading into the new year.”
- Construction Spending (Thurs): Economists estimate construction spending climbed by 0.6% in November. “The largest rise in single-family housing starts since 1991 should drive a big gain in overall construction spending,” said Morgan Stanley’s Ted Wieseman. “We expect the homebuilding component to be up 6% and look for private nonresidential activity to rebound 0.5% after pullbacks in power plant and telecom infrastructure caused declines the past two months. Meanwhile, state and local government spending seems to have turned the corner, rising at 15% annual rate in the past six months, and we look for a further 0.3% gain in November.”
- Vehicle Sales (Fri): Economists estimate vehicle sales fell to an annualized rate of 16.00 million units. “After a strong end to November over Black Friday weekend lifted sales for the month to six-year high of 16.3 million units annualized, initial mid-month industry surveys observed some slowing in sales in the first half of December, reflecting the pull forward into November as well as a drag from December winter storms,” said Morgan Stanley’s Wieseman.
One thing that has the market’s bulls and bears split is the direction of corporate profit margins, which are near all-time highs.
“Will profit margins contract?” asked Goldman Sachs’ Jan Hatzius rhetorically. “No.”
“[T]he most important driver of profit margins is the gap between price inflation and unit labour cost inflation,” said Hatzius. “When prices grow faster than unit labour costs, firms typically manage to raise their profit margins, and vice versa. In our view, the price/ULC gap is likely to move back into slightly positive territory in 2014. …[T]he underlying trend calculated from the three primary measures of hourly wages — average hourly earnings, the employment cost index, and compensation per hour — is still only growing 2%. Going forward, we expect only a modest acceleration to perhaps 2.5%. Meanwhile, we expect productivity growth to reaccelerate to 1.5%-2%. Together, these numbers imply unit labour cost growth of 0.5%-1%, which would be slightly below the rate of price inflation of 1%-1.5%.
“Of course, the price/ULC gap is not the only driver of margins. But other factors are also likely to look reasonably friendly. We expect foreign profits to improve in 2014 as the global economy gathers some momentum, and see no major changes in corporate income taxes or financial profits.”