The stock market ended last week at
a record high, even as the economy continues to be anemic.
“From the perspective of central banks in most advanced economies, neither inflation rates nor activity indicators are at desired levels, though they are closer in the US and UK than in the euro area,” said Barclays’ Julian Callow on Friday.
“Suppressed inflation spells easy policy.”
But not everyone agrees with Callow’s assessment of inflation. (See below.)
“Thirteen economic reports will be released next week, as government agencies work off the shutdown-induced data backlog,” noted Credit Suisse’s Neal Soss. “The highlights: Retail sales should post a moderate gain, as flat auto sales intersect with a decent Halloween selling season. CPI should touch a four-year low in year-on-year terms and existing home sales are projected to fall.”
Here’s your Monday Scouting Report:
Inflation: Inflation, or the lack of inflation, may be the biggest story in the global economy. Low inflation has given the world’s central banks the flexibility to keep monetary policy loose and easy. Indeed, earlier this month the ECB cut rates pointing to falling inflation among other things.
“However, it seems unlikely that inflation will remain this low much longer,” said UBS’s Drew Matus. “The y/y percentage change in the core PCE deflator has decelerated by 52bps through September. That deceleration has been the result of sharp drops in medical goods, health care services and financial services inflation. Combined, these account for almost all the deceleration witnessed over the last year. However, these now seem to be showing signs of re-acceleration. From June to September, the 3-month annualized rate of change for medical goods inflation has jumped from -0.4% to +4.8%, healthcare services have risen from -0.5% to +1.3%, and financial services inflation has bounced from +0.2% to +2.6%. We expect core PCE inflation will end 2014 at 1.9%, almost on the FOMC’s target.”
- NAHB Housing Market Index (Monday): Economists estimate that the homebuilder sentiment index was unchanged at 55 in November. “While much of the housing data were delayed due to the government shutdown, the most recent Case-Shiller home price report was very strong,” said the economists at Bank of America Merrill Lynch. “Furthermore, job growth in October exceeded expectations, which should bolster optimism about future sales. Disappointing pending home sales offset some of this good news, but optimism should improve on net.”
- Retail Sales (Wednesday): Economists estimate no sales growth in October and 0.2% growth excluding autos and gas. “[O]ur retail equity analysts saw soft mall sales trends continuing in October, though, similar to auto sales, there were signs of improvement later in the month after the shutdown ended following a weaker start to the month,” said Morgan Stanley’s Ted Wieseman.
- Consumer Price Index (Wednesday): Economists estimate CPI was flat month-over-month and up 1.0% year-over-year. Excluding food and energy, they estimate core CPI was up 0.1% and 1.7%, respectively. “Dropping energy prices should offset a slight increase in food prices,” said Bank of America Merrill Lynch.
- Existing Home Sales (Wednesday): Economists estimate existing home sales fell 2.7% to an annualized rate of 5.15 million units. “Pending home sales have declined for four consecutive months and, based on the lag between pending home sales, which track signed contracts, and existing home sales, which are counted at the time of close, we see the latter as falling in October,” said Barclays’ economists. “The main culprit behind the softness in existing home sales is the rise in mortgage rates that occurred over the summer months. We believe the recovery in US housing will prove resilient to higher rates, but we are likely to see volatility in the data in Q4 as a lagged response to market moves from June through September.”
- FOMC Minutes (Wednesday): Here’s Deutsche Bank’s Brett Ryan: “Regarding the FOMC minutes, market participants will be keen to see where the Fed is on the timing of tapering and whether there is anything on strengthening forward guidance. As Ms. Yellen reiterated last Thursday, forward guidance will be a critical tool for the Fed to employ in order to achieve their policy goals. Presumably, they would want to strengthen such guidance alongside a potential tapering of asset purchases in order to counteract any undesired tightening of financial conditions. Keep in mind 30-year mortgage rates have already retraced a little over 30% of the roughly 120 bps move off their intrayear low leading up to the September meeting and December 2015 eurodollar futures now stand at roughly the same level prior to Chairman Bernanke’s May 22 testimony. With market expectations recalibrated — i.e. tapering does not bring forward the timing for rate hikes, the Fed may feel modestly more comfortable with slowing asset purchases — if the data warrant it.”
- Initial Unemployment Claims (Thursday): Economists estimate claims fell to 335,000 from 339,000 a week ago. “Initial jobless claims probably continued to decline,” said Citi’s Peter D’Antonio. “However, the holiday shortened week and revisions to the previous week after five states were estimated pose risks to our forecast. Separately, continuing claims and the insured rate likely remained stable.”
- Producer Price Index (Thursday): Economists estimate PPI fell 0.2% month-over-month and climbed 0.3% year-over-year. Excluding food and energy, they estimate core PPI climbed 0.1% and 1.3%, respectively. “Inflation at the producer level has been remarkably subdued this past year and our forecast looks for no change in that trend,” said Citi’s D’Antonio. “This report will be released the day after CPI and so will attract much less attention than usual.”
- Markit US PMI Preliminary (Thursday): Economists estimate flash PMI registered at 52.3. Any reading above 50 signals expansion. “The Markit PMI has been signaling slower growth than has been borne out in actual manufacturing output figures,’ noted UBS’s Sam Coffin. “It contrasts with the greater strength of the manufacturing ISM.”
- Philadelphia Fed Business Index (Thursday): Economists estimate the Philly Fed index fell to 16.0 in November from 19.8. “We expect the Philly Fed index to remain unchanged in November at October’s level of 19.8,” said Bank of America Merrill Lynch. “Forward-looking components in last month’s report were very strong. For example, the new orders index hit its highest level since June. Overall, this suggests that manufacturing activity in the Philly fed district will remain robust.”
- Job Openings and Labour Turnover (Friday): Economists estimate there were 3.83 million job openings in September. “Job openings, separations, and hirings continue to move sideways,” noted UBS’s Coffin. “Labour market turnover does not appear to have picked up significantly, suggesting continued labour market strains. (For the most part, employees cling to the jobs they have, although the quits rate has risen somewhat.)”
JP Morgan’s Tom Lee just raised his year-end target on the S&P 500 to 1,825: “In our view, the case for continuing to maintain a positive stance on equities remains in place given: (i) improving economic momentum to support upward EPS revisions (pent-up demand in U.S. housing, autos, construction, capex and a recovery in the euro area); (ii) attractive relative value (particularly vs. corporate bonds), (iii) supportive monetary policy and (iv) sentiment that is not excessively bullish. We continue to believe that the U.S. is in a secular bull market and that remaining constructive on equities is warranted.”
One has to wonder if all of this bullishness is actually bearish.