Economists, analysts, and investors have had a tough time digesting the disappointing U.S. economic data, which have all been touched by the unusually cold winter weather.
The weather is expected to appear as a negative in this week’s retail sales report, but as a positive in the industrial production report (Don’t forget about heating utilities).
While it’ll be a relatively quiet week for economic data, it’ll be a huge week for the Federal Reserve as new Chair Janet Yellen heads to Washington.
Here’s your Monday Scouting Report:
Fed Chair Janet Yellen: Newly anointed Fed Chair Janet Yellen will give her first semiannual testimony on monetary policy to Congress this week. (She meets with the House Financial Services Committee on Tuesday and the Senate Banking Committee on Thursday.) “Traditionally, these events are the peaks in the landscape of Fed communication,” said Vincent Reinhart, Morgan Stanley’s chief U.S. economist and former Fed insider. “Her predecessor, Ben Bernanke, was the most self-effacing person conceivable ever to hold that job and perhaps flattened the terrain via his testimony. Yellen, if not exactly marking a tectonic shift, will elevate the summit.”
“Prior chairs used the opportunity to also include a more personal assessment of the outlook and the prospects for policy, usually toward the back of the book,” Reinhart added. “Expect Yellen to go back to that time, supporting her view on policy with the optimal projections from the Board staff’s model. With the weak data backdrop, she will have to talk up the outlook for growth and explain that low inflation justifies policy accommodation for a considerable period.”
- Job Openings & Labour Turnover Survey (Tues): U.S. companies had 4.0 million job openings in November. “Labour turnover remains low, but it has been edging up,” noted High Frequency Economics’ Jim O’Sullivan.
- Monthly Budget Statement (Wed): Economists expect the Treasury Department to report a $US9.6 billion budget deficit in January. “This would be about $US7bn larger than the surplus recorded in January 2013 and bring the deficit to $US163bn for the first four months of the fiscal year,” noted Barclays’ economists.
- Retail Sales (Thurs): Economists estimate sales were flat in January. Excluding autos and gas, sales are estimated to have climbed 0.2%. “Consumer spending appears to have been significantly disrupted by harsh weather late in January,” said Morgan Stanley’s Ted Wieseman. “Mid-month industry survey pointed to a good gain in auto sales in January, but instead they fell slightly, with most of the major companies blaming weather late in the month and remaining optimistic about underlying trends. Early month indications for ex auto sales were also better, but then our AlphaWise team picked up late month weakness that was probably also weather related. So we look for soft overall and ex auto sales in January, but if weather really was to blame, there should be a good rebound once recent weather extremes in much of the country are past.”
- Initial Jobless Claims (Thurs): Economists estimate claims ticked down to 330,000 from 331,000 a week ago. However, Citi’s Peter D’Antonio thinks the number actually moved up to 335,000. “Initial jobless claims probably edged up following a sizable decline,” he wrote. “If correct, the four-week moving average also crept higher, but nonetheless remained in the low range that prevailed over January.”
- Industrial Production (Fri): Economists estimate production climbed 0.2% in January with capacity utilization rising slightly to 79.3%. “[U]tilities likely bounced back in January, given the cold weather that traversed much of the nation,” said Wells Fargo’s John Silvia. “This time, manufacturing ought to be the weight on total production. The ISM Manufacturing Index took two big steps back in the month, though managed to remain in expansionary territory. Overall, the factory sector has been making only modest gains, a trend that looks likely to continue in the near term.”
- Univ. Of Michigan Confidence (Fri): Economists estimate this index of sentiment slipped to 80.5 in February from 81.2 in January.”In the past year, gains in consumer sentiment have been concentrated among the wealthiest households and reflected equity market activity,” said Citi’s D’Antonio. “The recent decline in stocks will likely bring down upper income sentiment, while having a limited impact on the rest of the survey population.”
In a note to clients on Friday, JP Morgan’s Tom Lee reiterated his 2,075 year-end target for the S&P 500.
“For the past few weeks, we have written about how we believed that much of the weakness in equities YTD stemmed from “position squaring” by funds that were uncomfortably long (rather than markets anticipating impending weakness),” he wrote.
“We now believe that hedge funds have de-risked sufficiently,” he added. “This, coupled with the fact that mutual fund managers appear to be working with lower-than-typical beta, suggests that there is ample firepower to lift equities at the proper juncture.”
“What could go wrong?” Lee asked rhetorically. “The biggest risk, to our view, is that EM stress broadens to a banking crisis. Or that China, which remains a notable concern, sees widening stress on its shadow banking system. All of this would likely result in greater derisking and potentially push market to a deeper correction.”