This really will be the last busy week of 2014. The following week comes with Christmas, and the week after will be New Years’.
Unless something really insane happens in the next few days, then 2014 will probably be remembered as one where the world’s economies diverged. Specifically, the US economy heated up as China’s growth decelerated, Europe’s growth grinded to zero, and Japan’s growth reversed.
Meanwhile, we had crashing oil prices, which has been a net positive for the US economy.
However, the US stock market just had its worst week in years.
This week, all eye will be on the Federal Reserve as it holds its two-day Federal Open Market Committee (FOMC) meeting on Tuesday and Wednesday.
Here’s your Monday Scouting Report:
‘Considerable Time’. Back in 2012, the Fed introduced the phrase “considerable time” in its FOMC statement to describe the period between the end of quantitative easing (QE) the beginning of tighter monetary policy via interest rate hikes. In October, the Fed ended QE as the labour market has continued to show improvement. All this suggests the Fed could scrap “considerable time” for some other words to describe a shorter time period.
However, the inflation rate continues to run well below the Fed’s target. And crashing oil prices are only holding prices back more. So it’s not exactly obvious what the Fed will do on Wednesday.
Here’s Goldman Sachs’ Sven Jari Stehn and David Mericle: “We expect the FOMC to modify its “considerable time” forward guidance. One consideration is that the leadership’s own expectations for liftoff are still centered on mid- 2015 judging from NY Fed President Dudley’s speech last week. Given our translation of “considerable time” into about six months — subject to the recovery proceeding broadly in line with expectations — this suggests that the committee would want to change the language before the March meeting. As it might be awkward to modify the language without a press conference in January, a change next week is our baseline expectation … Our forecast for a change in guidance, however, remains a close call. First, while a number of Fed officials have explicitly or implicitly voiced support for switching the forward guidance towards “patience,” others including San Francisco Fed President Williams are comfortable with “considerable time.” Second, the October minutes suggest that some participants worry that the removal of considerable time might be seen as a shift in the stance of monetary policy and therefore tighten financial conditions and the continued decline in market-implied inflation expectations might well have fuelled these concerns. We would therefore expect the committee to indicate that the change in guidance is not meant to convey an expectation of an earlier liftoff than previously communicated, either in the statement itself or in Chair Yellen’s press conference.”
- Empire Manufacturing (Mon): Economists expect this regional manufacturing index to climb to 12.0 in December from 10.16 in November. “The current activity index in the Empire State manufacturing survey fell sharply in October and recovered little in November,” UBS’s Kevin Cummins said. “We forecast a further rise, as the Empire State survey has not been as strong as other, recent factory surveys.”
- Industrial Production (Mon): Economists estimate industrial production climbed by 0.7% as capacity utilization jumped to 79.4%. “We look for IP to post its biggest gain since 2010 and second biggest since 1998,” Morgan Stanley’s Ted Wieseman said. “The employment report showed aggregate hours worked in manufacturing surging 0.7% in November, and industry figures showed motor vehicle assemblies rising 9% after a 14% pullback in the prior three months following a surge to a 14- year high in July. So we forecast a 1.0% rise in manufacturing output, high in nine months. A sharp rise in utility output as the weather turned colder should provide a significant additional boost to headline IP.”
- NAHB Housing Market Index (Mon): Economists estimate this index of homebuilder sentiment climbed to 59 in December from 58 in November. “Homebuilder sentiment has generally trended above the pace of housing construction, revealing a disconnect over the past few years,” Bank of America Merrill Lynch economist said. “We think this is partly due to the shrinking sample of the NAHB survey. However, the direction of the change in sentiment is still relevant for thinking about risks to homebuilding.”
- Housing Starts (Tues): Economists estimate the pace of starts climbed 3.1% in November to an annualized rate of 1.04 million units. Building permits are estimated to have declined 2.5% to 1.065 million. “The gain is likely to be driven by multifamily, which should reverse the decline in October and reach a pace more consistent with the trend in building permits,” Bank of America Merrill Lynch economists said. “Single-family starts were notably strong over the prior two months, implying less scope for further expansion in November. However, we still believe the trend is improving given the gain in the NAHB housing index and new home sales. Poor weather conditions in the Midwest create some downside risk to our forecast.”
- Markit US Manufacturing PMI (Tues): Economists estimate this index of manufacturing activity climbed to 55.5 in December from 54.8 in November.
- Consumer Price Index (Wed): Economists estimate CPI fell 0.1% month-over-month but climbed 1.4% year-over-year. Excluding food and energy, core CPI is estimated to have climbed by 0.1% and 1.8%, respectively. “Lower gasoline prices should depress headline CPI, perhaps shaving about 0.2 ppt. from the monthly change by itself,” Credit Suisse economists said. “Looking ahead, the oil drag should become very large over the next several months, taking headline CPI below 1.0%YoY by January, and possibly as low as 0.3%YoY by spring. The core inflation picture is more stable by comparison.”
- FOMC Rate Decision (Wed): The FOMC will wrap up its two-day monetary policy meeting on Wednesday and release its statement at 2:00 p.m. ET. That will come with its summary of economic projections. All of that will be followed by a press conference with Fed Chair Janet Yellen at 2:30 p.m. ET.
- Initial Jobless Claims (Thurs): Economists estimate the weekly jobless claims climbed to 295,000 from 294,000 a week ago. “The four-week moving average of initial claims has been below the 300k threshold for over three months, a sign that involuntary separations are at their nadir,” Nomura economists said.
- Philadelphia Fed Business Outlook (Thurs): Economists estimate this regional activity index fell to 26.0 in December from 40.8 in November. “We forecast a decline to 31.0 for the Phildalphedia Federal Reserve’s manufacturing business outlook survey in December, after the index surged 20 points in November, to the highest level since 1993,” Barclays economists forecasted. “New orders and shipments had strong readings last month, but the survey derives its estimate of general business conditions from a separate question instead of averaging the survey components. This methodology leads to greater volatility, and we look for payback from November’s strong reading this month.”
Everyone is bullish these days. Barron’s surveyed 10 top Wall Street strategists and not one of them expect the S&P 500 to decline in 2015.
On Thursday, RBC Capital’s Jonathan Golub unveiled his 2,325 year-end forecast for the S&P 500. This call makes him the most bullish strategist followed by Business Insider.
Golub believes corporate revenues will track GDP higher. But earnings growth will accelerate as companies clamp down on selling, general, and administrative (SG&A expenses).
“Going forward, we believe that SG&A will be the most important driver of margins as compensation grows at a slower pace than revenues. In our view, this should provide 1- 2% of upside per year,” Golub wrote.
For more insight about the middle market, visit mid-marketpulse.com.
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