It’s a holiday-shortened week in the US as Americans take Thursday off to get together with their families, play some football, and stuff their faces with turkey in celebration of Thanksgiving.
But for those keeping tabs on the economy, it’d be a mistake to take the whole week off as the first three days are loaded with data on housing, sentiment, income, spending, durable goods, and GDP.
Indeed, the folks at the Federal Reserve will be watching the data carefully as they count down the days to their December 15-16 Federal Open Market Committee meeting, which could be the day they lift interest rates for the first time since June 2006. During the darkest hours of the financial crisis, the Fed pulled their benchmark rate down to a range of 0.00% to 0.25% in December 2008 in an effort to stimulate the economy.
“The data I think have been overall encouraging, especially on the labour market,” San Francisco Fed President John Williams said on Saturday. “Assuming that we continue to get good data on the economy, continue to get signs that we are moving closer to achieving our goals and gaining confidence getting back to 2% inflation… If that continues to happen there’s a strong case to be made in December to raise rates.”
Here’s your Monday Scouting Report:
Is inflation on the horizon?. At the end of the day, the Federal Reserve is out there to achieve two things: maximum employment and stable prices. With the unemployment rate having tumbled to a 7-year low of 5.0%, the employment factor is not the concern. It’s price stability that is on everyone’s minds as the Fed has struggled to stoke a moderate pace of inflation, or at least the expectation for a little bit of inflation.
But the latest round of data suggest inflation is picking up. First, consider the October’s 2.5% year-over-year jump in average hourly earnings, the biggest jump in wages since the recession. Second, consider the consumer price index, which climbed 0.2% in October, after two months of negative prints. Core services prices excluding shelter increased by a healthy 0.39%. Excluding food and energy, core CPI is increasing at a 1.9% pace.
Importantly, some of the biggest drags on inflation, including low commodity prices and the strong dollar, have been around long enough that the pace of inflation may accelerate from low base effects. Here’s UBS’s Drew Matus: “Headline inflation fell sharply between November 2014 and January 2015 as energy prices plunged. Absent a similar move this year, those sharp price declines will drop out of the year-over-year data resulting in a rapid, technical, acceleration in overall inflation measures. The next CPI report, due out December 15th, the day before the December FOMC meeting, could see a sharp jump in the year-over-year rate of inflation even if there is no month-on-month increase (with a modest monthly increase, a 50bp acceleration is possible). This jump should provide support for a December rate hike as the optics of that jump are working in favour of such a move.”
For what it’s worth, the cost of Thanksgiving dinner jumped to $US50.11 this year, up from $US49.41 a year ago.
- Markit US Manufacturing PMI (Mon): Economists estimate this manufacturing index slipped to 54.0 in November from 54.1 in October. Here’s UBS’s Sam Coffin: “The Markit PMI has detached itself from the near-zero growth in factory output and the manufacturing ISM. However, there is no particular reason to expect a re- alignment in November. We expect a normalizing inventory position to boost factory measures. Because of a smaller weight in the Markit measure than the ISM measure, inventories dragged less on the Markit in recent months and should add less in coming months.”
- Existing Home Sales (Mon): Economists estimate the pace of sales fell 2.7% in October to 5.4 million units.Here’s Bank of America Merrill Lynch: “Pending home sales have softened over the past three months, suggesting a slowdown in signed contracts. Moreover, given how strong existing home sales have been throughout the first half of the year, we would expect some moderation. On the inventory front, we look for supply of about 5 months, as it has been trending, suggesting a roughly balanced market.”
- Q3 GDP (Tues): Economists estimate the government’s second estimate of GDP growth will be revised up to at 2.1% from 1.5% a month ago. Personal consumption growth is expected to unrevised at 3.2%.Here’s Nomura: “We expect the upward revision to be primarily due to stronger-than-assumed inventory investment. Domestic demand in the aggregate should remain roughly unchanged, as upward revisions to government spending and residential fixed investment were likely countered by weaker-than-expected business investment.”
- S&P Case-Shiller Home Price Index (Tues): Economists estimate home prices increased at a 0.3% month-over-month in September or 5.15% on a year-over-year basis. Here’s Bank of America Merrill Lynch: “There has been a fairly steady gain in home prices throughout this year, as demand continues to outpace supply for housing. As a result, housing is already slightly overvalued relative to income, in our view.”
- Consumer Confidence (Tues): Economists estimate the Conference Board’s index of sentiment climbed to 99.5 in November, up from 97.6 in October. Here’s Barclays: “The preliminary estimate of the University of Michigan survey showed a healthy increase in November, with broad-based support from current conditions and consumer expectations. We look for a similar move in the Conference Board’s index to be driven by solid October job gains and cheaper retail gasoline.”
- Richmond Fed Index (Tues): Economists estimate this regional activity index improved to +1 in November from -1 in October. Here’s UBS’s Sam Coffin: “The current activity index in the NY Fed manufacturing survey showed little improvement in early November; the Philadelphia Fed measure was a little more positive. These surveys should be an early signal of an end to the inventory correction that began in Q3.”
- Initial Jobless Claims (Wed): Economists estimate initial claims sat at to 271,000. “Jobless claims are sometimes more volatile towards the end of each calendar year due to holidays and seasonal fluctuations,” HSBC said.
- Personal Income And Spending (Wed): Economists estimate income increased by 0.4% in October as spending grew by 0.3%. Core PCE inflation is expected to pick up to 0.2%. Here’s Nomura: “Nonfarm payroll growth bounced back in October after faltering in August and September. In addition, average hourly earnings posted a robust increase on the month. Both movements suggest that personal income probably grew at a strong pace in October after a muted 0.1% increase in September. As such, we forecast that personal income rose by 0.6%. As for personal spending, the 0.2% increase in core retail sales points to steady growth in consumer activity at the start of Q4. We forecast that personal spending rose by 0.3% in October.” Here’s Credit Suisse: “The monthly PCE price index probably rose 0.2% (+0.3% yoy) in October after a 0.1% decline in September. Headline PCE inflation is poised to accelerate in coming months as last year’s energy price collapse ages out of the yoy calculations. Excluding food and energy, we estimate the core PCE price index edged up 0.1%, the same as in September, and rose 1.4% in yoy terms.”
- Durable Goods Orders (Wed): Economists estimate orders increased by 1.6% in October. Nondefense capital goods orders excluding aircraft — or core capex — is estimated to have climbed by 0.3%. Here’s Wells Fargo’s John Silvia: ” Many of the headwinds facing the U.S. economy impact the factory sector particularly strongly, including the stronger dollar, slower global growth and soft commodity prices. New orders fell on a year-over-year basis in September and shipments were barely in positive territory. That said, much of the negative impact from these headwinds might be behind us. Although we expect continued dollar appreciation, our currency strategy team expects a more measured pace of gains moving forward. In addition, much of the cutbacks in the commodity space has already occurred, and should be less of a drag on the manufacturing sector moving forward.”
- Markit US Services PMI (Wed): Economists estimate this services index climbed to 55.1 in November from 54.8 in October.
- New Home Sales (Wed): Economists estimate the pace of sales jumped 6.8% in October to 500,000. Here’s Bank of America Merrill Lynch: “According to the NAHB housing survey, demand for new homes was robust in October. Moreover, the trend has been solid for mortgage purchase applications.”
- U. of Michigan Sentiment (Wed): Economists estimate this index of sentiment slipped to 93.0 in November from 93.1. Here’s Barclays: “We expect the final November estimate of the University of Michigan index of consumer sentiment to be little changed from the mid-month print at 93.0. We view the mid-month increase in the current conditions index and rebound in expectations as consistent with other high-frequency indicators that suggest consumption growth remains solid.”
- Markets will be closed on Thursday for Thanksgiving Day. On Friday, stock markets will close at 1:00 p.m. ET.
As 2015 continues to wind down, more and more of the pros on Wall Street are looking ahead to 2016. Here’s some of the 2016 stock market commentary that came out last week.
RBC’s Jonathan Golub sees the S&P 500 going to 2,300: “2015 was marked by falling oil prices, a diminishing global growth outlook, and flat rates. Our constructive 2016 outlook is predicated upon stabilizing commodity prices, and an incrementally higher dollar and rates. All of this should result in a substantially higher earnings trajectory as well as a modest re-rating of stocks.”
Deutsche Bank’s David Bianco sees the S&P 500 going to 2,250-2,300: “We reduce 2016E S&P EPS from $US128 to $US125. We’re unsure of the tone of language appropriate to describe this reduction. Slashing or even cutting is too harsh as our new estimate is merely 2.5% lower. This trimming shouldn’t surprise investors given recent commodity and currency markets. So is $US125 good S&P EPS in 2016? Is it bullish or bearish? It’s only 5% growth, subnormal mid-cycle real EPS growth, but 10x better than 2015. Thus, S&P EPS growth is set to surge in 2016! But is there an objectively healthy S&P EPS growth rate? … Our 1 year target of 18x trailing S&P EPS uses a 5.5% real and 7.5% nominal [cost of equity].”
Barclays’ Jonathan Glionna sees the S&P 500 going to 2,200: “Our macro narrative is simple, if obvious. We believe U.S. interest rates will go up leading to a stronger U.S. dollar. This should cause earnings per share growth and returns to remain subdued. We forecast 4% EPS growth and a 5% gain for the S&P 500.”
Goldman Sachs sees the S&P 500 going to 2,100: “Their framework assumes that 1) earnings per share will rise 10.1%, driven partly by ‘base effects’ in the energy sector and partly by improvements in global growth more generally, but that 2) the price-earnings multiple will fall approximately 5% (to 16.3x from 17.1x), as typically happens during rate-hike cycles … We also see a risk that the ‘Bernanke put’ will gradually be replaced by the ‘Yellen call’. The ‘Bernanke put’ captured the intuition that when the risks to growth, inflation and market sentiment are skewed to the downside and the Fed has an easing bias, monetary policy reacts aggressively to bad news. Now that these risks have receded, we expect the Fed will shift to an easing bias, implying that monetary policy will likely begin to react more aggressively to good news. The inflection point for this shift to an easing bias will arguably arrive in 2016, beyond which rallies in risk sentiment may be met by less accommodative monetary policy — the ‘Yellen call’.”
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