Former Treasury Secretary Larry Summers has pulled himself out of the running for Chairman of the Federal Reserve.
While this is likely to dominate headlines Monday, there are some big economic events to watch this week.
Here’s your Monday Scouting Report:
Stand By For The Fed: When the Federal Reserve concludes its two-day Federal Open Market Committee (FOMC) meeting on Wednesday, economists expect to hear that the Fed is tapering its monthly purchases of $US85 billion worth of Treasury and mortgage-backed bonds. This is something that Fed Chairman Ben Bernanke and his peers have been talking about since May.
Economists have long been expecting the taper to be as big as $US15 billion when initially announced. But with economic data deteriorating in recent weeks, those economists have shifted their expectations to “taper-lite,” a total reduction of $US10 billion.
Bank of America Merrill Lynch’s Michael Hanson actually thinks we won’t hear about a taper until December. “While we expect the Fed to taper at one of the next three FOMC meetings, we see good reasons to be patient: recent data have, on balance, underperformed; the Fed needs to reduce its over-optimistic forecasts; and downside risks have re-emerged,” wrote Hanson on Friday.
- Empire State Manufacturing Survey (Monday): Economists estimate that the New York Fed’s business index climbed to 9.0 in September from 8.24 a month ago. “We expect continued modest expansion in the manufacturing sector and look for the Empire manufacturing index to come in basically unchanged at 8.00 in September,” said Bank of America Merrill Lynch’s economics team. “Our forecast is consistent with the August new orders index, which suggested that manufacturing in the NY Fed district would grow at the same pace as in August.”
- Industrial Production (Monday): Economists estimate that production increased by 0.5% in August. “With purchasing managers’ indexes having generally improved in August and employment data showing that aggregate hours worked in the manufacturing sector rose 0.3 per cent last month, we expect industrial production to post a modest gain of 0.6 per cent for August,” said Wells Fargo’s John Silvia.
- Consumer Price Index (Tuesday): Economists estimate that CPI increased by 0.1%, with core CPI advancing 0.2%. The report “will likely be a nonevent,” said Deutsche Bank’s Brett Ryan.
- NAHB Housing Market Index (Tuesday): Economists estimate that the homebuilder confidence index was unchanged at 59. “Given the risks posed by a slowdown in the pace of growth in starts and sales related to higher mortgage rates, however, we look for some modest payback to 58 in September,” said Barclays’ Dean Maki.
- Housing Starts (Wednesday): Economists estimate that housing starts increased to an annualized rate of 915,000 in August, with permits climbing to 950,000. “Total housing starts should decline in August, with the volatile multi-family sector doing the work,” said Credit Suisse’s Neal Soss. “We expect a decline in multi-family starts as furloughs due to the sequester at the Department of Housing and Urban Development (HUD) look to be behind the recent slowing in the multi-family sector. These HUD headwinds could continue through Q3 (special thanks to our Agency CMBS trading desk for this colour).”
- Initial Jobless Claims (Friday): Economists estimate that initial claims rebounded to 341,000 from 292,00 a week ago. “Initial claims probably rose by about 20,000 during the week ended Sep 14, after three weeks of decline, which included potential underreporting by two states during the week ended Sep 7 on computer upgrade issues,” said Citi’s Peter D’Antonio. “There is a risk that the print could exceed our forecast if there are upward revisions to the figures posted by the effected states. Nonetheless, the four-week moving average remained in a low range not seen since October 2007.”
- Existing Home Sales (Thursday): Economists estimate that sales fell to an annualized rate of 5.255 million in August. “The 6.5% surge in existing home sales in July to a four-year high appeared to be driven by a rush to close deals by prospective buyers worried about surging mortgage rates, and the pending home sales index has pulled back 2% in the past two months,” said Morgan Stanley’s Ted Wieseman. “So we look for last month’s jump in closed sales to be mostly reversed with a 5.4% decline in August.”
- Philly Fed Manufacturing Index (Thursday): Economists estimate the Philly Fed index climbed to 10.0 from 9.3 in August. “We expect little change in the level of the Philly Fed index in September,” said BAML. “The new orders component in August fell to a level consistent with continued modest expansion in September.”
“Larry Summers’ withdrawal from the race for Fed chair will likely be interpreted by markets as bullish for US interest rate curve trades, duration more generally, and risk assets (including credit and equities),” wrote PIMCO’s Mohamed El-Erian for Business Insider. “It may also impact the manner in which the outcome of this week’s important Fed policy meeting is interpreted by markets.”