Federal Reserve Chair Janet Yellen heads to the hill this week to give the Fed’s Semiannual Monetary Policy Report to the Congress.
She speaks to the Senate banking committee on Tuesday and the House Financial Services Committee on Wednesday.
“She will want to preserve policy flexibility, keeping the prospect of a mid-year rate hike very much on the table,” Credit Suisse economists said. “Yellen may come across as sounding mildly hawkish, especially in light of the decidedly dovish January FOMC minutes released [last] week.”
These testimonies are likely to serve as a forum for those supporting Senator Rand Paul’s “audit the Fed” movement.
“Yellen will make a strong case for monetary policy independence, firmly resisting calls by some in Congress for more stringent oversight of the Fed’s decision-making process,” Credit Suisse said. “Indeed, we see the building threat of monetary policy politicization as an important motivation for the Fed to initiate lift-off this year from near-zero policy rates.”
Among other things, Yellen will be speaking about the outlook for policy rates in the context of falling unemployment, low inflation, economic growth, a strengthening currency, and what appears to be signs of wage growth.
Meanwhile, we’ll get no less than 15 major economic reports this week.
Here’s your Monday Scouting Report:
500,000 American workers are getting raises. On Thursday, Wal-Mart announced raises for a bunch of employees. From management: “Approximately 500,000 full-time and part-time associates at Walmart US stores and Sam’s Clubs will receive pay raises in the first half of the current fiscal year. Current and future associates will benefit from this initiative, which ensures that Walmart hourly associates earn at least $US1.75 above today’s federal minimum wage, or $US9.00 per hour, in April. The following year, by Feb. 1, 2016, current associates will earn at least $US10.00 per hour.”
Ultimately, Wal-Mart had no choice but to make this cost-raising move considering the tightening labour market. Here’s CEO Doug McMillon: “I think it’s important to remember that we react one store at a time to whatever wage rates we need to attract and retain the talent that is required to run our business … As you think about cities, individual stores, certainly states, we have higher wage rates to make sure that we’re competitive in the marketplace, and of course we’ll continue to do that.”
Rising wages has been the missing ingredient in the US economic recovery. Wal-Mart’s move puts pressure on other low-wage employers, which means this could be the beginning of further wage hikes to come.
- Existing Home Sales (Mon): Economists estimate the pace of sales fell 1.8% in January to a rate of 4.95 million units. “Pending home sales tumbled 3.7% in December, pointing to coming weakness in closed contracts,” Bank of America Merrill Lynch economists noted. “However, the pending home sales data are very noisy and can send misleading signals about existing home sales. Moreover, there are large seasonal factors during this time of year, adding to the volatility. There will also be focus on the inventory figures, which have declined sharply over the past two months even after accounting for seasonality. This has reduced supply to only 4.4 months, the lowest since January 2013. Low months supply puts upward pressure on home prices, suggesting upside risk to our forecast if low supply persists.”
- Dallas Fed Manufacturing Activity (Mon): Economists estimate this regional activity index improved to -4.0 in February from -4.4 in January.
- S&P Case-Shiller Home Price Index (Tues): Economists estimate home prices increased by 0.6% month-over-month or 4.3% year-over-year in December. “Home price appreciation seemed to have accelerated at the end of 2014, which owes in part to poor seasonal adjustments, but also stronger fundamentals, Bank of America Merrill Lynch economists said. “Inventory declined in 4Q with supply of existing homes reaching a recent low of 4.4 months. Moreover, mortgage rates have declined, underpinning housing demand and prices.”
- Markit US Services PMI (Tues): Economists estimate this activity index climbed to 54.5 in February from 54.2 in January.
- Consumer Confidence Index (Tues): Economists estimate the Conference Board’s index of sentiment slipped to 99.5 in February from 102.9 in January. “The preliminary release of the University of Michigan survey showed confidence retreating from elevated levels as the rebound in retail gasoline prices put a damper on further gains in the consumer outlook,” Barclays economists noted.
- Richmond Fed Manufacturing Index (Tues): Economists estimate this regional manufacturing index was unchanged at 6 in February.
- New Home Sales (Wed): Economists estimate the pace of sales fell 2.3% to an annualized rate of 470,000 units. “This time series tends to be noisy and subject to revisions, particularly in the winter,” Bank of America Merrill Lynch economists said. “We therefore expect sales to slip back to 465,000 in January. However, there is a risk that sales remain strong in January given the notable gain in mortgage purchase applications, likely owing in part to lower rates.”
- Initial Jobless Claims (Thurs): Economists estimate the weekly jobless claims climbed to 290,000 from 283,000 a week ago. “The four week moving average remains below 300k and is indicative of labour market conditions that continue to improve,” Nomura economists said.
- Consumer Price Index (Thurs): Economists estimate CPI fell 0.6% month-over-month or 0.1% year-over-year, largely due to plummeting energy prices. Excluding food and energy, core CPI is estimated to have climbed by 0.1% and 1.6%, respectively. “Inflation gauges have been top of mind in recent months as energy prices have pulled headline measures much lower than originally anticipated,” Wells Fargo’s John Silvia said. “More importantly, Fed watchers are concerned whether the disinflation trend will eventually seep into core measures … We do expect that some of the energy price drop will make its way into the core measure this month. However, steadily rising shelter and medical prices could help offset any pass through of energy prices to core consumer prices.”
- Durable Goods Orders (Thurs): Economists estimate orders increased by 1.6% in January. Nondefense capital goods orders excluding aircraft is estimated to have increased by 0.3%. From Morgan Stanley’s Ted Wieseman: “Core nondefense capital goods ex aircraft orders have fallen in five of the past six months, dropping a cumulative 3.2% in the second half of 2014 after a 5.6% rise in the first half. Global uncertainty, the strong dollar, and port disruptions have raised business cautiousness, but surveys we track don’t point to that much softness being sustained. Our MSBCI survey’s capex plans index has slowed but stayed positive, new business formations, a leading indicator for capex, are picking up, and regional manufacturing surveys and the NFIB small business survey show slower but still positive investment plans.”
- Kansas City Fed Manufacturing Activity Index (Thurs): Economists estimate this regional manufacturing index was unchanged at 3 in February.
- GDP (Fri): Economists estimate Q1 GDP growth will be revised down to 2.0% from an earlier estimate of 2.6%. Personal consumption growth is expected to be unchanged at 4.3%. “The details may lean in a positive direction, however, as lower inventories (good for future production) and an upward revision to imports (solid final demand) should be the main factors that lower the top line,” Credit Suisse’s Jay Feldman said. “Underlying domestic demand readings should remain solid.”
- Chicago Purchasing Manager (Fri): Economists estimate this activity index slipped to 58.0 in February from 59.4 in January. “This report on Chicago Business was one of the few positive regional business surveys in January,” said Nomura economists who forecast a reading closer to 59.0. “The new orders and order backlog sub-indexes within this survey both increased in January, and is positive for activity in February. Other regional business surveys released thus far in February as a whole tended to be more positive. ”
- Pending Home Sales (Fri): Economists estimate pending sales increased by 2.0% in January. “Pending home sales are likely to improve 1.0% in January, partly reversing the sharp 3.7% drop in December,” Bank of America Merrill Lynch economists forecast. “This would leave pending sales more in line with mortgage purchase applications. Moreover, housing conditions have improved with lower mortgage rates and improved consumer confidence.”
- U. Of Michigan Consumer Sentiment (Fri): Economists estimate this index of sentiment was climbed to 94.0 from the preliminary reading of 93.6. “Retail gasoline prices have continued to creep higher from the preliminary survey period suggesting risks of a downward revision; however, we look for some payback from the 4.5 point decline in the preliminary release to offset this,” Barclays economists said.
The S&P 500 closed at a record high
More and more experts are warning that stocks are getting expensive and may be due for a sell-off. However, they’re also stopping short of characterising the current bull market as a bubble.
Here’s JP Morgan’s Jan Loeys: “A bubble is an extreme form of expensiveness, typically driven by speculative momentum, easy money, and leverage. Investors are right to be wary of such bubbles given that the past few business cycles each ended in the bursting of an asset bubble, that the global equity rally is now nearly 6 years old, and that money has never before been so easy. We like to argue that the world is not rapidly enough moving to more normal pre-crisis conditions and that financial assets are thus not in a bubble, even as we pinch ourselves that a bubble must be invisible for it to persist (we did not exactly see the previous ones coming either).”
On valuations, here’s FactSet’s John Butters: “The current forward 12-month P/E ratio of 17.1 is now well above the three most recent historical averages: 5-year (13.6), 10-year (14.1), and 15-year (16.0) … In fact, this week marked the first time the forward 12-month P/E has been equal to (or above) 17.1 since December 31, 2004.”
For more insight about the middle market, visit mid-marketpulse.com.