Central banks are pumping lots of cheap money into the economy in their efforts to stimulate growth and stoke inflation.
Last Thursday, the European Central Bank announced it would buy up €60 billion worth of bonds each month through at least September 2016 as it battles deflation.
Following the ECB’s announcement, the Danish central bank cut its already negative benchmark interest rate further into negative territory.
On Wednesday before the ECB meeting, the Bank of Canada announced a surprise rate cut in response to the local economic impact of crashing oil prices.
Meanwhile in the US, the Federal Reserve has actually been prepping everyone for tighter monetary policy. Currently, most economists believe that the Fed will begin hiking rates mid-year, probably June. But there’s still a ton of uncertainty regarding that timing.
Here’s your Monday Scouting Report:
What’ll The Fed Say On Wednesday? The Federal Reserve will conclude its two-day Federal Open Market Committee (FOMC) meeting on Wednesday, and update us on its view of the economy and its expectations for monetary policy. On one hand, economic data has been very good, which puts pressure on the Fed to tighten sooner than later. On the other hand, inflation has been very low, which puts pressure on the Fed to keep policy loose to prevent deflation.
Most economists seem to think that latter concern is likely to keep the Fed leaning dovishly. Here’s what Goldman Sachs’ David Mericle said on Friday: “Despite the ongoing improvement in the labour market, inflation has softened further and the below-target miss appears likely to get worse before it gets better. The combination of pass-through from lower energy prices and a stronger dollar, the failure of wage growth to accelerate thus far, and base effects on the year-on-year rate all suggest that core inflation will probably fall further below the Fed’s 2% target by mid-2015 … Consensus expectations for the timing of liftoff remain clustered around June, with most forecasters likely following Fed guidance that the first hike is likely to come in mid-2015. We continue to expect a later-than-consensus first hike, with September remaining our baseline but the risks looking increasingly tilted to the later side.”
But The Fed Could Tilt Hawkishly. In a research note on Friday titled “Fed Now More Likely To Raise Rates,” UBS’s Maury Harris argued that pressure was actually increasing on the Fed to tighten monetary policy sooner than later. His focus was on the unexpected economic boost coming from low gas prices and the increasing demand for US Treasury bonds coming from investors seeking yields higher than those offered in Europe and elsewhere.
From Harris: “In addition to the domestic growth stimulus from lower imported crude oil prices, another factor supporting Federal funds rate tightening this year is the $US1.3 trillion in QE recently announced by the ECB. The related purchases of European fixed-income securities undoubtedly will keep longer-term Treasury note and bond yields and related mortgage rates lower than they would have been otherwise. This should make the Fed less worried about what a higher Federal funds rate and related money market rates could do to mortgage rates for the critical housing sector. In other words, a related flatter-than-otherwise yield curve makes the housing industry less sensitive to Federal funds rate tightening.”
- Dallas Fed Manufacturing Activity (Mon): Economists estimate this activity index fell to 3.2 in January from 4.1 in December. This region is particularly sensitive to oil prices as much of the economy is driven by the energy production industry.
- Durable Goods Orders (Tues): Economists estimate orders climbed by just 0.4% in December. Nondefense capital goods excluding aircraft — or core capex — is estimated to have increased by 0.5%. From Morgan Stanley’s Ted Wieseman: “Industry data point to lower aircraft bookings dragging on overall durable goods orders, but we look for a rebound in core nondefense capital goods ex aircraft orders, which reached a record high in August but have fallen 3.4% in the three months since. Regional Fed surveys showed some slowing in capex plans in December, but after upside into November, recent results suggest softness in the durables report is probably largely a short-term correction after a lot of mid-year strength in equipment investment.”
- S&P Case-Shiller Home Price Index (Tues): Economists estimate home prices climbed by 0.6% month-over-month in November or 4.3% year-over-year. “The pace of home price appreciation slowed significantly during 2014 as adverse weather and the prospect of rising mortgage interest rates worked to dampen price increases, despite support from an improving labour market and household incomes,” Barclays economists said. “However, we have seen prices gather some momentum late in the year.”
- Markit Services PMI (Tues): Economists estimate this services index climbed to 53.8 in January from 53.3 in December. Any reading above 50 signals growth.
- New Home Sales (Tues): Economists estimate the pace of sales increased 2.7% in December to an annualized rate of 450,000 units. “Mortgage applications increased in November, but declined in December, and mortgage rates were relatively flat over that period,” BNP Paribas economists noted. “However, warmer-than-usual weather in December likely brought more prospective home-buyers to the market.”
- Consumer Confidence Index (Tues): Economists estimate the Conference Boards index of sentiment climbed to 95.5 in January from 92.6 in December. “The preliminary January reading from the University of Michigan survey indicated a surge in consumer sentiment from lower gas prices; similarly, we expect the Conference Board’s index to reach a new post-recession high this month,” Barclays economists forecast.
- FOMC Decision (Wed): The Federal Reserve releases its January FOMC statement at 2:00 p.m. ET. Economists expect rates to be unchanged at… From Goldman Sachs’ David Mericle: “We expect only limited changes to the FOMC statement at the January meeting, with an overall dovish tilt likely. We expect the Committee to maintain its current guidance that it ‘can be patient in beginning to normalize the stance of monetary policy.’ But we also expect a modest strengthening of the inflation language, possibly to acknowledge — as indicated in the December minutes — that inflation is likely to continue to decline further in the near-term.”
- Initial Jobless Claims (Thurs): Economists estimate the weekly jobless claims fell to 300,000 from 307,000 a week ago. “Initial claims were choppy during the holiday season due to due to seasonal adjustment issues,” Nomura economists said. “With the holiday season behind us, we expect the data in coming weeks to give us a better read on the labour markets.”
- Pending Home Sales (Thurs): Economists estimate pending home sales increased by 0.5% in December. “After declining for almost 12 months on a year-ago basis, the change in this index has been positive since September, as the market for previously owned homes appears to have escaped the doldrums,” Nomura economists said.
- GDP (Fri): Economists estimate GDP climbed at a 3.1% pace in Q4, driven by a 4.0% bump in personal consumption. From Morgan Stanley’s Ted Wieseman: “A surge in consumption supported by plunging gasoline prices should take the lead from slower business investment after substantial upside in mid-2014 to keep private final domestic demand running near the 4% pace posted in Q3. We see consumption growth accelerating to 4.0% from 3.2% in Q3, boosted by a nearly 5% gain in aggregate real wage and salary income. That would be the largest PCE gain in four years and second largest in eight years, and with the decline in energy prices accelerating in January, strong growth will likely continue in Q1.”
- Employment Cost Index (Fri): Economists estimate the employment cost index climbed by 0.6% in Q4. From Deutsche Bank’s Joe LaVorgna: “For monetary policymakers, the employment cost index (ECI) is one of the most important indicators of wage inflation, more so than average hourly earnings, which are less comprehensive in terms of capturing the underlying trend in compensation growth. Last month, earnings unexpectedly fell two-tenths — the largest monthly decline on record going back to 2006. This was highly unusual, and the figures may ultimately get revised next month when the BLS releases its annual benchmark revisions. However, if our forecast for the Q4 ECI (+0.7%) is on the mark, this would raise its year-over-year growth rate to 2.5%. While tame compared to the 3.5% average in the last business cycle, a clear uptrend in labour costs would be an important signal to monetary policymakers that the process of interest rate normalization should commence later this year.”
- Chicago Purchasing Managers Index (Fri): Economists estimate this regional activity index slipped to 57.8 in December from 58.3 in December. “Businesses seem to have grown less optimistic at the end of last year,” Nomura economists said. “The new orders and order backlog sub-indexes within this survey declined in December, with the order backlog sub-index even entering contraction territory, placing downside risks on future activity. Other regional business surveys released thus far in January have tilted negative.”
- U. of Michigan Sentiment (Fri): Economists estimate this index of sentiment jumped to 98.2 in January from 93.6 a month ago. “Sentiment surged to a new post-recession high in the preliminary reading this month,” Barclays economists said. “Average equity market volatility has remained higher month-to-date, which we expect to soften sentiment in the final January reading.”
Q4 earnings season is heating up. Through Friday, 90 of the S&P 500 companies have announced their quarterly financial results.
“With 18% of the companies in the S&P 500 reporting actual results for Q4 to date, more companies are reporting actual EPS above estimates (79%) and fewer companies are reporting actual sales above estimates (54%) compared to recent historical averages.,” FactSet’s John Butters noted. “The blended earnings growth rate for Q4 2014 is 0.25%. The Telecom Services sector is reporting the highest growth in earnings for the quarter, while the Energy sector is reporting the largest decline in earnings for the quarter.”
So, what have managements been saying about the macro picture?
Linear Technology management summed up everyone’s sentiment when they announced on January 14.
The following factors impact our guidance; on the macroeconomic front, the U.S. economy is strong and is projecting stronger growth than reported in recent years. On the other hand, Europe, China, and Japan are experiencing reductions in growth. The dollar is strong, which has pluses and minuses. Similarly, oil prices are low, which also has positive and negative economic effects.
Onward and upward.
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