Economists and investors are still digesting the Federal Reserve’s shocking decision to not taper its stimulative large-scale asset purchase (LSAP)program, which consists of the monthly purchases of $US85 billion worth of Treasury securities and mortgage-backed bonds.
For now, the market’s focus will likely shift back heavily to the next two to four months worth of economic data, which will be the same data the Fed mulls over as it plans to taper the LSAP.
Here’s your Monday Scouting Report:
- We’re Still Talking About Last Week’s Federal Open Market Committee Announcement: Morgan Stanley’s Ellen Zentner identified some nuance in the Fed’s message: “While financial markets were busy absorbing the Federal Open Market Committee’s (FOMC) surprising decision to delay its foray into paring back accommodation, an important one-liner in the policy statement was overlooked. Despite direct discretionary fiscal consolidation that we estimate at 1-3/4 per cent of nominal GDP this year, “the Committee sees…growing underlying strength in the broader economy.” This assessment is important because it underscores that the decision to forego tapering at the September meeting was not the result of deterioration in the outlook for the economy. To be sure, the Committee’s markdown of real GDP growth in 2014 (from a mean of 3.25% to 3.0%) generated much chatter, but still looks particularly rosy and remains above our own forecast of 2.7%.”
- U.S. Flash Manufacturing PMI (Monday): Economists estimate that preliminary U.S. PMI climbed to 54.0 from 53.9 in August. “Although clearly limited, data in hand from the Federal Reserve Banks of New York and Philadelphia would be consistent with a modest uptick in the Markit gauge to 53.5 in next week’s report,” said Societe Generale’s Brian Jones.
- S&P Case-Shiller Home Prices (Tuesday): Economists estimate that home prices climbed 0.8 % month-over-month and 12.4% year-over-year in July. “Home prices have been supported by strengthening demand, limited inventories, and a falling distressed share of total sales,” said the economists at UBS.
- Consumer Confidence (Tuesday): Economists estimate the Conference Board’s measure of sentiment slipped to 80.0 in September from 81.5 in August. “On the plus side, August’s unemployment rate (reported in September) ticked down, stocks have moved higher, and it does not look like the US is gearing up for military operations in Syria,” noted the economists at Credit Suisse. “However, households appear worried about the back up in mortgage rates. Hence, the outlook for housing and business conditions has become less favourable. Other confidence surveys have been mixed in September.”
- Durable Goods Orders (Wednesday): Economists estimate that orders fell 0.5% in August. “We expect that orders remained relatively weak into August and ticked up by 0.3 per cent,” said Wells Fargo’s John Silva. “Aircraft is likely to be a sore spot again as Boeing’s orders fell considerably. Excluding transportation, we expect durable goods orders increased a more respectable 1.2 per cent. Previously released data all point to a rise in orders, including the ISM manufacturing index, industrial production and capacity utilization.”
- New Home Sales (Wednesday): Economists estimate that new home sales increased to an annualized rate of 425,000 in August. “New home sales should rise 8% in August, but this would only partially reverse July’s 13% decline,” said Credit Suisse. “Housing data will be of particular interest as we head into the final two FOMC meetings of the year — October 29- 30 and December 17-18. The behaviour of interest-rate sensitive sectors will help dictate when the tapering train gets back on track.”
- Initial Jobless Claims (Thursday): Economists estimate that initial claims rebounded to 330,000 from 309,o00 a week ago. “Initial jobless claims probably rose by another 10,000 after computer upgrades in California and Nevada created a tremendous amount of volatility in the data over the prior two weeks,” said Citi’s Peter D’Antonio. “If correct, the level would be similar to that posted just ahead of the technical issue, and would denote some fundamental improvement in first filings in September relative to August.”
- Q2 GDP (Thursday): Economists estimate that Q2 GDP growth will be revised up to 2.7% from last month’s estimate of 2.5%. “Final revisions to Q2 real GDP (3.0% vs. 2.5%), released on Thursday, could show the best quarter of growth since Q1 2012 — despite the fact that government spending significantly weighed on output,” said Deutsche Bank’s Brett Ryan.
- Pending Home Sales (Thursday): Economists estimate that sales fell by 1.0% in August. “The pending home sales index probably slipped in July, in line with slower applications for mortgages,” said UBS. “The implication is some pullback in existing home sales, which appear to have outrun the pending home sales index in recent months.”
- Personal Income And Outlays (Friday): Economists estimate that income growth accelerated to 0.4% and spending growth picked up to 0.3%. “The employment situation continues to improve with more workers, slightly higher wages and longer hours,” noted Wells Fargo’s Silvia. “Financial markets also remained strong. In addition, we suspect that spending perked up to a 0.3 per cent gain, after July’s disappointing performance. Consumer confidence and retail sales climbed higher as prices advanced.”
- Reuters/Michigan Sentiment (Friday): Economists estimate that the University of Michigan’s sentiment index was revised up to 78.0 in September. “The decline in sentiment in early September was concentrated among home owners, with fewer reporting that the value of their home had recently risen,” said Citi’s D’Antonio. “This trend is unlikely to have reversed in the second half of the month as mortgage rates have remained near recent highs.”
“Sometimes bull markets have a mind of their own, and this one is no different,” said BMO Capital’s Brian Belski. “[L]ackluster bond market performance, coupled with expansive equity gains, will likely spur renewed fund flows into equities, especially as the calendar flips to 2014. Thus, we believe the S&P 500 could reach a potential peak of 1,900 before the economy catches up.”