Here's Your Complete Preview Of This Week's Key Economic Events

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Last Thursday’s massive U.S. jobs report was so unexpectedly robust that some economists have warned that tighter monetary policy could come much sooner than expected.

And while there isn’t much on the economic data calendar this week, we will be hearing from a lot of Federal Reserve officials who may be able to shed more light on the path of monetary policy.

“This week’s data docket will focus mainly on Fed-related headlines as five regional Fed presidents will be speaking: They are Lacker and Kocherlakota (Tuesday), George (Thursday), followed by Lockhart and Evans (Friday),” said Deutsche Bank economists.

Here’s your Monday Scouting Report:

Top Story

  • Jobs So Good We Have To Rethink Monetary Policy: Economists found it challenging to poke holes in the June jobs report. “We see no chinks in the armour of this report, and the broad-based nature of the jobs gains along with the improvement across a broad swathe of labour market indicators causes us to give this report and A+,” said TD Securities Millan Mulraine.

    Instead, some began warning that the strength of the jobs recovery increased the odds significantly that the Federal Reserve would begin tightening monetary policy sooner than later.

    “All things considered, there is now an increased risk of an earlier first rate hike, though Fed officials are not prone to changing their outlook dramatically on one report alone and will likely take some time to reassess,” said Bank of America Merrill Lynch’s Ethan Harris.

    JP Morgan’s Michael Feroli bumped up his forecast for the first interest rate hike to Q3 2015 from Q4 2015, while warning that a Q2 2015 rate hike was plausible.

    It’s important to note that an improving unemployment rate, which is one of the Fed’s mandates, has implications for rising inflation, which is the other of the Fed’s two mandates.

    “We suspect that Fed officials will continue to cling to the view that there is still plenty of slack in the labour market,” said Capital Economics’ Paul Ashworth. “We are not convinced, however, and expect wage growth to accelerate in the second half of this year. As a result, we believe the Fed will halt its quantitative easing this October and that it will first raise rates in March next year. The eventual pace of tightening will need to be quicker too, with rates rising to 1.25% by the end of next year and to 3.0% by late 2016.”

Economic Calendar

  • Job Openings And Labour Turnover Survey (Tues): According to the most recent JOLTS report, there were 4.455 million jobs openings in April. This report comes with updated stats on hirings, firings and quits. “Fed officials frequently highlight the depressed hiring and quits rates as signs of labour market weakness,” noted Goldman Sachs’ David Mericle. “The conventional view is that measures of gross turnover matter mainly through their impact on net job creation. But the combination of a depressed hiring rate and a yet- more-depressed separations rate has produced healthy net employment gains in recent years.”
  • Consumer Credit (Tues): Economists estimate consumer credit balances increased by $US20.00 billion in May. “Despite soft retail sales in May, we expect another strong gain in revolving credit, as consumers become more confident,” said Bank of America Merrill Lynch economists. “Vehicle sales were strong in the month, which suggests that non-revolving credit is likely to continue to expand. The extension of student loans by the federal government also should boost non-revolving credit, although at a slower pace than the prior month.”
  • FOMC Minutes (Wed): The Federal Reserve will publish the minutes from its June 17-18 Federal Open Market Committee meeting at 2:00 p.m. ET. From Barclays: “The June FOMC minutes should give more insight into the changes to the Committee’s forecasts, which included slower real GDP growth, a faster decline in the unemployment rate, a modest increase in 2014 inflation, and a faster pace of fed funds rate increases. The minutes are likely to indicate that the Committee is not putting a great deal of weight on the recent weakness in real GDP growth, and that it is putting more weight on the ongoing tightening in the labour market. The minutes are also likely to highlight the ongoing debate about the extent of remaining labour market slack.”
  • Initial Jobless Claims (Thurs): Economists estimate weekly initial claims came in at 315,000, which would be the same level as last week’s 315,000 print. “Initial jobless claims continue to linger below 320k,” said Nomura economists. “This suggests that layoffs have bottomed out and also corroborates the strong payroll growth and declines in the unemployment rate we‟ve seen this year.”
  • Monthly Budget Statement (Fri): Economists estimate the Treasury will report a monthly budget surplus of $US79.0 billion. Here’s Morgan Stanley’s Ted Wieseman: “We estimate the federal government a $US78 billion budget surplus in June, down significantly from a $US117 billion surplus a year ago on a 14% year/year rise in receipts and 45% increase in spending. The spike in spending is exaggerated by the large one-off dividend Fannie Mae paid Treasury last June when it revalued its deferred tax assets. Excluding GSE dividends (which are counted as negative spending by the Treasury Department), we estimate outlays rose 9% on higher healthcare spending. Upside in revenues was driven by an estimated 13% gain in withheld income and payroll taxes, 15% rise in individual nonwithheld taxes, and 11% gain in corporate taxes. For all of fiscal year (September) 2014, we see the budget deficit on track to narrow to $US508 billion (2.9% of GDP) from $US680 billion (4.1%) in 2013 on a 7.8% risen in receipts and 1.3% increase in outlays.”

Fedspeak Calendar

  • Tues, 1:00 p.m. ET: Richmond Fed President Jeffrey Lacker speaks on the economic outlook.
  • Tues, 1:45 p.m. ET: Minneapolis Fed President Narayana Kocherlakota speaks on monetary policy and the economy.
  • Thurs, 1:15 p.m. ET: Kansas City Fed President Esther George speaks on monetary policy and the economy.
  • Thurs, 4:30 p.m. ET: Fed Vice Chair Stanley Fischer speaks on financial sector reform.
  • Fri, 11:15 a.m. ET: Philly Fed President Charles Plosser moderates a panel on entrepreneurship.
  • Fri, 2:00 p.m. ET: Chicago Fed President Charles Evans and Atlanta Fed President Dennis Lockhart speak on a panel at the Rocky Mountain Economic Summit in Jackson Hole, Wyoming.

Market Commentary

The S&P 500 continues to climb to new all-time highs. However, earnings growth expectations are lagging, causing valuations to become less attractive.

Currently, the price-to-forward earnings ratio of the S&P 500 is at 15.7, which is above historical averages.

FactSet’s John Butters offers some context:

The current forward 12-month P/E ratio is above both the 5-year average (13.3) and the 10-year average (13.8). The P/E ratio has been above the 5-year average for more than a year (since January 2013), while it has been above the 10-year average for the past ten months (since August 2013). With the forward P/E ratio well above the 5-year and 10-year averages, one could argue that the index may now be overvalued.

On the other hand, the current forward 12-month P/E ratio is still (slightly) below the 15-year average (15.8). During the first two years of this time frame (1999 — 2001), the forward 12-month P/E ratio was consistently above 20.0, peaking at around 25.0 at various points in time. With the forward P/E ratio still below the 15-year average and not close to the higher P/E ratios recorded in the early years of this period, one could argue that the index may still be undervalued.

Keep in mind, this ratio is based on analysts’ forecasted earnings, which are often very inaccurate and could eventually prove to be to optimistic. Assuming the latter, stocks may actually be much more expensive than they appear.

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