In the U.S., all eyes will be focused on the Federal Reserve as it holds its Federal Open Market Committee meeting on Tuesday and Wednesday.
Not much is expected in terms of policy shifts. But with U.S. economic activity picking up, everyone will be parsing the Fed’s words for clues regarding the exact timing of interest rate hikes.
Meanwhile, Scotland has attracted the attention of the world. On September 18, Scots will vote “yes” or “no” to Scottish independence from the U.K.
Here’s your Monday Scouting Report:
Scottish Independence Would Be A Disaster: Wall Street is in broad agreement that Scotland voting for independence from the UK would be a big disaster.
“A ‘Yes’ vote for Scottish independence on Thursday would go down in history as a political and economic mistake as large as Winston Churchill’s decision in 1925 to return the pound to the Gold Standard or the failure of the Federal Reserve to provide sufficient liquidity to the US banking system, which we now know brought on the Great Depression in the US,” Deutsche Bank Chief Economist David Folkerts-Landau wrote. “These decisions — well-intentioned as they were — contributed to years of depression and suffering and could have been avoided had alternative decisions been taken.”
For Scotland, the big issue is how it would unwind and rewind all of its financial obligations. The uncertainty alone threatens to put the country’s financial system into a negative feedback loop of rising risks and costs.
“In our opinion Scotland would fall into a deep recession,” Credit Suisse’s Andrew Garthwaite wrote. “We believe deposit flight is both highly likely and highly problematic (with banks assets of 12x GDP) and should the BoE move to guarantee Scottish deposits, we expect it to extract a high fiscal and regulatory price (probably insisting on a primary budget surplus). The re-domiciling of the financial sector and UK public service jobs, as well as a legal dispute over North Sea oil, would further accelerate any downturn. In our opinion, as North Sea oil production slows, we estimate that the non-oil economy would need a 10% to 20% devaluation to restore competitiveness. This would require a 5% to 10% fall in wages, driven by a steep rise in unemployment.”
It’s Already A Disaster. “Even if it doesn’t pass, people are not going to want to invest there because they might do it again,” economist Ken Rogoff said to CNBC. “People will migrate out of there.”
Furthermore, the whole thing sets a precedent for other parts of Europe like Catalonia in Spain. “Other places in Europe will say, ‘Hey, we can do that too.’ So it’s certainly quite a wild card there,” Rogoff added.
- Empire Manufacturing (Mon): Economists estimate this regional activity index climbed to 16.00 in September from 14.69 in August. “The manufacturing ISM index surged in August, the current activity index in the Empire State factory survey was left behind, and we forecast some catch-up in early September,” UBS’s Sam Coffin said. “Six-month outlook measures in the Empire Survey have also accelerated. The capex outlook bears watching as a signal of faster likely business spending.”
- Industrial Production (Mon): Economists estimate the production climbed 0.3% in August while capacity utilization ticked up to 79.3% from 79.2%. “With regional purchasing manager surveys continuing to firm and the solid jump in the ISM manufacturing index in August, we expect another monthly gain in manufacturing output in August,” Wells Fargo’s John Silvia said. “However, the flat reading in average weekly hours of production workers in the factory sector suggests there could be some downside risks to the forecast. That said, average weekly hours declined in June and July while manufacturing output eked out gains in both months.”
- Producer Price Index (Tues): Economists estimate PPI went nowhere month-over-month in August. Excluding food and energy, core-PPI is expected to have climbed by just 0.1%. On a year-over-year basis, both PPI and core-PPI is expected to have increased by 1.8%. “Farm and energy prices declined in August and should put downward pressure on headline PPI,” Nomura economists said.
- Consumer Price Index (Wed): Economists estimate CPI went nowhere month-over-month in August. Excluding food and energy, core-CPI is expected to have climbed by 0.2%. On a year-over-year basis, both CPI and core-CPI is expected to have increased by 1.9%. “We expect a gradual pickup in core inflation going forward,” Nomura economists said. “Lower seasonally adjusted gas prices should put downward pressure on headline CPI in August. In addition, food prices might provide some additional downside risk.”
- NAHB Housing Market Index (Wed): Economists estimate this homebuilder sentiment index climbed to 56 in September from 55 in August. “The strong incoming economic data are a sign of momentum continuing to build in the economy,which will support the housing market,” Bank of America Merrill Lynch economists said. “However, builder sentiment will be tempered by the recent two-month decline in new home sales as of July.”
- FOMC Statement (Wed): The FOMC statement will be published at 2:00 p.m. ET. Economists estimate the Fed will reduce its monthly asset purchases by $US10 billion (Treasuries by $US5 billion and mortgage-backed securities by $US5 billion). Here’s Barclays: “The statement is likely to be modified to reflect the committee’s view that purchases will end in October. We look for the statement to retain the phrases “there remains significant underutilization of labour resources” and “it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends.” However, the Fed is likely to highlight that monetary policy is not on a preset path; rates could go higher sooner if convergence toward the dual mandate is faster than anticipated. Forecast revisions should lead to steeper median policy path and we look for a median policy rate of 1.25% at end-15, 2.75% at end-16, and 3.5% at end-17. We believe the committee will reach a consensus on exit principles, although this may not be clear until the minutes are released.”
- Initial Jobless Claims (Thurs): Economists estimate claims fell to 305,000 from 315,000 a week ago. “This week’s initial jobless claims data correspond to the survey period for September nonfarm payrolls,” Deutsche Bank economists said. “At their current level, claims are consistent with payroll gains well in excess of 200k per month.”
- Housing Starts (Thurs): Economists estimate starts fell 4.9% in August to an annualized rate of 1.04 million. Permits are estimated to have declined 1.6% to 1.04 million. “On balance, the trend is still positive, as housing starts have run above 1.000mn only two months so far this year,” Bank of America Merrill Lynch economists said. “Building permits likely increased to 1.075mn amid better homebuilder sentiment — the NAHB housing index climbed to 55 over the month from 53.”
- Philadelphia Fed Business Outlook (Thurs): Economists estimate the Philly Fed index fell to 23.0 in September from 28.0 in August. “The current activity index in the Philadelphia Fed manufacturing survey surged in July and August, and we forecast a bit of slowing to a still healthy level in early September,” UBS’s Coffin said.
Deutsche Bank’s David Bianco and Wells Fargo’s Gina Martin Adams came into 2014 betting the S&P 500 would end the year at 1,850. Those calls made them tied for most bearish strategist on Wall Street.
In the past week, both pulled the plug on their calls.
Here’s Bianco, who now sees the S&P at 2,050 by year end and 2,150 in 2015: “We still expect a long lasting economic expansion of moderate growth, which should rival the US record of 10 years with S&P EPS growth averaging 6% until the next recession, on 5% sales growth, flat margins, 1% share shrink. Despite entering the latter years of a typical expansion and high margins vs. history, we now think the trailing S&P PE should average 17 vs. 16 until elevated recession risk returns.”
Here’s Adams, who sees the S&P at 2,100 12 months from now: “Our earnings growth estimates continue to improve given improving domestic economic data and the Fed continues to signal they will tread very carefully in their attempt to unwind accommodative policy… Tactically, we continue to believe that equity investors should be on guard for a more challenging investment climate in the near term, as monetary policy certainty fades to uncertainty this autumn… In sum, we think it wise for investors to remain relatively selective toward stocks in the short term, but buy any policy-related weakness that develops over the next few quarters.”
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