Happy new year!
While you may already be writing 2015 on your checks, the economic data due for release this week is all from 2014.
Here’s your Monday Scouting Report:
Where Are Interest Rates Heading In 2015? A year ago, almost every bond market expert forecast interest rates would rise as the Federal Reserve weened the markets off of quantitative easing. They were wrong.
Now, the Fed’s prepping the markets for tighter monetary policy via fed funds rate hikes. Once again, most experts are expecting long-term interest rates to rise. But not DoubleLine Funds’ Jeffrey Gundlach. From this weekend’s Barron’s: “Where the median economic forecast tabulated by Bloomberg for the 10-year U.S. Treasury Bond yield for year-end 2015 currently stands at 3.24%, Gundlach thinks the 10-year that finished 2014 at 2.17% could potentially take out its modern-era low of 1.38% yield hit in 2012.This would particularly be the case if crude-oil prices keep falling to, say, $US40 a barrel from their 2014 year-end level of about $US55. This further drop from the 46% decline suffered by crude in 2014 would only accentuate deflationary forces he sees at work globally that continue to drop long-bond yields…[W]eighing on U.S. bond yields will be brisk foreign buying from investors in Japan and Europe, where long-term sovereign debt bond yields are mostly lower than U.S. rates and economic growth prospects are less bright.”
- Auto Sales (Mon): Analysts estimate the pace of US auto sales declined to an annualized rate of 16.9 million in December. From Morgan Stanley’s Ted Wieseman: “Sales jumped 4.5% to 17.1 million units annualized in November, second highest since 2006 after 17.4 in August, helped by successful Black Friday promotions. Black Friday weekend has become a big deal for the industry the past couple years after auto dealers previously hadn’t generally been active participants in the post-Thanksgiving sales frenzy. Last year there was some payback in December from sales pulled into late November, but stepped up discounting and support from plunging gasoline prices appear to kept sales elevated this year.”
- Markit US Services PMI (Tues): Economists estimate this index of services industry activity fell to 53.7 in December from 56.2 in November. “A sharp slowing in service sector activity alongside a similar easing in the manufacturing sector takes the overall rate of economic expansion down to the weakest since October 2013,” Markit’s Chris Williamson said.
- ISM Non-Manufacturing Index (Tues): Economists estimate this index of services industry activity declined to 58.0 in December from 59.3 in November. “Pay attention to the ISM employment subcomponent — it fell 0.9 points to 56.7 in November after registering a nine-year high in October (59.6),” Deutsche Bank’s Joe LaVorgna wrote. “Over the past 12 months, this series has averaged roughly 55 so anything near this level can still be considered quite strong. It is doubtful we would adjust our projection for December employment based on the non-manufacturing ISM employment because the series is only loosely correlated with monthly changes in payrolls.”
- Factory Orders (Tues): Economists estimate orders fell 0.4% in November. “Factory orders have been on the soft side in recent months,” Nomura economists noted. “However, in November, a surge in transportation orders should help propel the headline number.”
- ADP Employment Change (Wed): Economists estimate private payrolls increased by 225,000 in December. “Early labour market indicators remain healthy, with improving jobless claims and an increase in the conference board’s labour differential measure,” said Bank of America Merrill Lynch economists who forecast a 260,000 print. “However, there are also some technical factors supporting this move higher. Looking at as-reported data, ADP private payroll growth has tended to accelerate noticeably in December over the last several years. Furthermore, when compared to as-reported BLS data, ADP growth normally outpaces BLS private payroll growth for this specific month. Considering our BLS private payroll forecast of 240,000, we expect this recent historical pattern to repeat once more. Lastly, given the significant 107,000 gap between ADP and BLS in November, we think there is a strong possibility of an upward revision from the initially-reported 208,000 clip.”
- Trade Balance (Wed): Economists estimate the trade deficit narrowed to $US42.0 billion in November. “Inbound and outbound container volumes were both down over 5% on the month, which we see as partially due to ongoing labour disputes and supply chain issues at some West Coast ports,” Barclays economists wrote. “Prices of traded goods also fell in November, with export prices down 1.0% m/m and import prices down 1.5% m/m. On balance, we expect these effects to offset one another and leave the monthly trade deficit in line with recent readings.”
- FOMC Minutes (Wed): The Federal Reserve will publish the minutes from its Dec. 16-17 FOMC meeting. “The December FOMC statement revealed a lack of agreement among Fed officials over communication, and the minutes may give some insight into how extensive these disagreements are,” Bank of America Merrill Lynch economists said.
- Initial Jobless Claims (Thurs): Economists estimate the weekly jobless claims fell to 290,000 from 298,000 a week ago. Deutsche Bank’s Joe LaVorgna warned weekly claims are “notoriously volatile this time of year.”
- Consumer Credit (Thurs): Economists estimate consumer credit balances increased by $US15.0 billion in November. “Non-revolving consumer credit growth has accelerated this year (likely due to an increase in auto loans),” Nomura economists said. “However, revolving credit growth was slow throughout the year, showing some above-trend gains in only a couple of months. More solid growth in revolving consumer credit would suggest that consumers are more confident about their finances and could provide a boost for spending going forward.”
- The Jobs Report (Fri): Economists estimate US companies added 240,000 nonfarm payrolls in December, including 230,000 private payrolls. The unemployment rate is forecast to decline to 5.7% from 5.8% a month ago. Average hourly earnings are estimated to have increased by just 0.2% month-over-month. Here’s Morgan Stanley’s Ted Wieseman who expects a 240,000 print in NFP: “We look for nonfarm payrolls to post a gain in line with the strong year-to-date average. Jobless claims have pointed to a modest pickup in very low firing rates, perhaps with some impact from severe weather in parts of the country in the second half of November, though it was warmer and drier than normal across much of the country in the December survey week. The 4-week average of initial claims rose to 298,750 in the December survey week from 281,250 in October, a record low as a share of the covered workforce. But strong temporary holiday hiring should again provide a boost. In November, retail payrolls jumped 50,000 in seasonally adjusted terms (+435,000 NSA), but jobs at package delivery companies were only up 5,000. Based on company announcements, there should be significantly more upside coming through in the latter this month. A gain in employment in line with our estimate along with a stable labour force participation rate would lower the unemployment rate a tenth to 5.7%…”
Almost every major strategist on Wall Street is telling clients that stocks are going higher in 2015.
That’s not a good thing warns Gluskin Sheff’s David Rosenberg.
“If there is an obstacle, it is that some unwanted complacency has crept back into the market,” Rosenberg wrote on Friday. “The USA Today annual survey of Wall Street strategists shows not one seeing a down-market in 2015 and the average call is for 2,230 for the S&P 500 at year-end — or an 8.3% advance. That is actually not far off my own forecast but I feel more comfortable as a contrarian than as part of the consensus.
“Second, the latest Investors Intelligence poll showed the bull camp has swelled to 56.4% from 52.5% last week and the bear share down to 14.9% from 15.8% — and even those in the correction camp have dwindled to just 28.7% from 31.7% a week ago and 35% two weeks ago. Make no mistake, when the bull-to-bear spread gets this wide historically (41.5% from 36.7%), it is quite common to see the market sputter for a while — until the exuberance subsides.”
For more insight about the middle market, visit mid-marketpulse.com.