On Friday, we got a good US jobs report, and that’s great.
US companies added 211,000 payrolls in November, which was better than the 200,000 expected by economists. Furthermore, October’s number was revised up to 298,000 from 271,000.
For most economists, this is enough to clear the way for the Federal Reserve to raise interest rates for the first time since June 2006. This position was only reinforced by the tone of Fed Chair Janet Yellen when she spoke to the Economic Club of Washington on Wednesday and the Joint Economic Committee of Congress on Thursday.
“The runway has been cleared for liftoff,” Barclays’ Michael Gapen said.
During the darkest hours of the financial crisis, the Fed pulled their benchmark rate down to a range of 0.00% to 0.25% in December 2008 in an effort to stimulate the economy. The Fed meets on December 15 and 16, which is when economists expect the rate hike announcement to happen.
While there are no other major economic events on the calendar between now and then, bad news has a habit of happening unscheduled. So, as we hold our breath until the next Fed meeting, here’s your Monday Scouting Report:
‘No more excuses’. That’s what Renaissance Macro’s Neil Dutta said immediately after Friday’s jobs report was released. He was talking about the Fed and what has been months of delays as the Fed has been reluctant to raise rates amid uncertainty in the jobs and inflation data. Most economists on Wall Street share Dutta’s tone ahead of the Fed’s December 15 and 16 Federal Open Market Committee Meeting.
Here’s some of what the pros are saying: Barclays’ Michael Gapen: “The runway has been cleared for liftoff.” BNP Paribas: “All systems go.” HSBC’s Kevin Logan: “There is nothing in the report, in our view, that would deter the FOMC from starting the so-called “normalization” process with a 25bp rate hike at the 15 — 16 December policy meeting.” UBS’s Sam Coffin: “The momentum in employment support a Dec Fed tightening.” Citi’s Peter D’Antonio: “We believe today’s report solidifies the case for a Fed rate hike later this month.” PNC’s Gus Faucher: “The better-than-expected November jobs report seals the deal!” Bank of America Merrill Lynch’s Ethan Harris: “With a solid November employment report in the bag, a December Fed hikes seems almost certain.” Société Generale’s Aneta Markowska: “Needless to say, there was nothing in last month’s employment report to alter our expectation that the Federal Open Market Committee will begin the liftoff in administered rates at the December 15-16 meeting.” Credit Suisse’s Jeremy Schwartz: “With the FOMC already guiding the market towards a December rate lift-off, these numbers will only increase confidence that zero rate policy will be over before the new year.” Goldman Sachs: “Another month of above-trend job gains should solidify the case for a rate hike at the December 15-16 FOMC meeting.” Pantheon Macroeconomics’ Ian Shepherdson: “More than enough to seal the deal for the 16th.” Deutsche Bank’s Joe LaVorgna: “With a December hike all but sealed at this point, the question is more about the pace of rate hikes next year.”
Federal Reserve speakers
- There’s almost no Fed speakers on the calendar as members enter a blackout period ahead of the December 15-16 FOMC meeting. Here’s Wells Fargo’s Sam Bullard with this week’s Fedspeak: “Squeaking in before the Fed’s media blackout period ahead of the December 15-16 FOMC meeting, St. Louis Fed President Bullard (2016 voter, hawk) speaks Monday in Muncie, IN on the U.S economy and monetary policy (12:30 pm, EST). At a Philadelphia Fed conference last Friday, President Bullard continued to advocate for the beginning of policy normalization — seeing the current level of U.S. monetary policy as “extreme.” President Bullard also stated that the FOMC sees the pace of policy tightening to be gradual, noting, “I think you have to take the committee at its word.” Given last week’s solid November employment report performance and explicit language from Fed Chair Yellen, the case seems to be made that the FOMC will raise interest rates at the December meeting.”
- Consumer Credit (Mon): Economists estimate consumer credit balances increased by $19.0 billion in October. Here’s Nomura: “Consumer credit growth has been robust this year, primarily due to growth in nonrevolving credit, but revolving credit growth has also been holding up well relative to earlier in the recovery. Sustained growth in revolving consumer credit would suggest that consumers are more confident about their finances and could provide more of a boost for spending going forward. ”
- Job Openings & Labour Turnover Survey (Tues): Economists estimate US employers had 5.54 million job openings in October. Here’s Credit Suisse: “Job openings rose sharply in September to 5.5M after falling from a cycle-high level of 5.7M registered in July. The ratio of vacancies to unemployed workers moved up to 0.70 — above the 2006-2007 peak and the highest since the middle of 2001. However, measures of job turnover, which tend to lead wage acceleration, were disappointing. The quits rate was unchanged and has now stagnated for nearly a year. The hires rate declined for the second time to an eight-month low.”
- Initial Jobless Claims (Thurs): Economists estimate initial claims declined to 268,000 from 269,000 a week ago. Here’s HSBC: “Weekly initial jobless claims have trended lower this year, a sign that businesses remain fairly confident about the economic outlook. Last week’s reading was 269,000, and the 4-week average also stands at 269,000. Jobless claims are sometimes more volatile towards the end of each calendar year due to holidays and seasonal fluctuations.”
- Retail Sales (Fri): Economists estimate retail sales increased by 0.3% in November. Excluding autos and gas, core sales are estimated to have increased by 0.3%. Here’s RBC’s Tom Porcelli: “November retail sales will be closely watched as an early read on the holiday shopping season. Reports thus far have been constructive. Despite what was seemingly a deceleration in buyer traffic at brick-and-mortar for the Black Friday weekend, Redbook noted same-store sales jumped to a +3.9% y/y pace for that period (vs. just above a 1% pace earlier in the month). Online sales looked even better for the weekend and estimates ranged from 10- 20% y/y growth.”
- Producer Price Index (Fri): Economists estimate PPI went nowhere month-over-month in November, reflecting a 1.4% year-over-year decline. Excluding food and energy, core PPI is estimated to have increased by 0.1% and 0.2%, respectively. Here’s BNP Paribas: “We expect producer prices to have been flat in November. Services price gains — namely trade services margins — are projected to have increased, following recent weakness. However, food prices were likely soft and energy prices likely declined; we expect both to have weighed on headline inflation. Core producer prices likely posted a moderate gain.”
- U. of Michigan Sentiment (Fri): Economists estimate this index of sentiment improved to 92.0 in December from 91.3 in November. Here’s Wells Fargo’s Sam Bullard: “With gasoline prices continuing to fall, the S&P 500 edging higher and an improving labour market, expectations are for a modest increase in the December reading of the University of Michigan’s consumer sentiment index. If realised, it would mark the third straight monthly increase in confidence, but would also remain below the YTD average.”
As 2015 continues to wind down, more and more of the pros on Wall Street are looking ahead to 2016. Here’s some of what they said last week:
Morgan Stanley (S&P 500 target: 2,175): “We are viewing this as a mid-expansion period where equity returns are not strong (much like 2015 so far), instead of the end of the expansion. Should investors regain confidence that the US economy and corporate behaviours will not lead to a substantial earnings correction, we think the market could begin a more meaningful acceleration path.”
Societe Generale (S&P 500 target: 2,050): “2016: another good year for equities. We expect the global equity market to deliver a good performance in 2016, despite some volatility on the first Fed rate hikes, with an end to the bull market in H2 2017 ahead of the business cycle peak forecast for H2 2018. The S&P 500 should absorb the Fed rate hike and finish the year flat. US dollar strengthening and high bond yields offset the strong US GDP growth already priced in. The presidential election in November 2016 could also be a source of volatility for US equities.”
Credit Suisse (S&P 500 target: 2,150): “We reduce our weighting in equities to a small overweight, our most bearish strategic stance on the asset class in seven years … Our concerns are: increasing macro headwinds (deflation exported by China, the first Fed rate rise in 9.5 years); US equity valuations are now at fair value; there are several warning signals (credit spreads widening, buybacks as a style underperforming, M&A activity reaching problematic levels, a decline in market breadth, earnings momentum at a 4-year low); the shift of power from capital to labour; and conventional business models are being disrupted.”
But before you decide to go all in on any of these calls, we recommend you read the disclaimer provided by Morgan Stanley’s Adam Parker.