MONDAY SCOUTING REPORT
This week brings the August jobs report, the last jobs report before the September Federal Open Market Committee (FOMC) meeting.
This is important because economists currently expect the Fed to begin tapering its $US85 billion monthly purchases of mortgage and Treasury bonds. But the decision to taper hinges on the health of jobs and the direction of inflation.
This is just one of the many things investors need to worry about as September unfolds.
Syria: The escalating conflict in Syria has investors both concerned and confused. While Syria is not a major player in oil, the market is pricing in a risk premium. Brent crude oil has jumped to $US116 per barrel from an average $US107 in July. Societe Generale’s Mike Wittner expects it to go to $US125 and possibly as high as $US150.
“A short-lived increase might add a few tenths to the CPI but the real danger comes from the widening of the conflagration in the Middle East and the damage it would do to business confidence,” warned SocGen’s Brian Hilliard. “We have already seen oil prices respond in anticipation of some form of attack on Syria but little evidence of effects in the real economy. The business surveys due for release this week will have been canvassed too early to capture any nervousness about the economic impact.”
September: September is expected to be much busier than August. Congress comes back from vacation, and they’ll have to deal the debt ceiling, the expiring continuing resolution, the Fed taper, and the nomination of the next Fed Chair.
Economist Nouriel Roubini warns that it’s a mistake to take all of this lightly. “So far, investors have been complacent about the risks posed by the looming budget fight,” he wrote in a piece for Project Syndicate. “They believe that — as in the past — the fiscal showdown will end with a midnight compromise that avoids both default and a government shutdown. But investors seem to underestimate how dysfunctional US national politics has become. With a majority of the Republican Party on a jihad against government spending, fiscal explosions this autumn cannot be ruled out.”
- Labour Day (Monday): U.S. markets are closed.
- U.S. PMI (Tuesday): Economists estimate that PMI climbed to 53.9 in August from 53.7 in July.
- ISM Manufacturing (Tuesday): Economists estimate that the widely followed ISM index fell to 53.8 in August. “Last month’s 4.5 point surge (to 55.4) was exaggerated by a particularly aggressive seasonal adjustment in the new orders and production components,” said Credit Suisse’s Neal Soss. “The July adjustments for both components were the most positive in the entire post-war history of the ISM Manufacturing report.”
- Construction Spending (Tuesday): Economists estimate spending climbed by 0.3% month-over-month in July. “July’s increase is partly a payback for the unexpected 0.6% mum drop in the prior month,” said Bank of America Merrill Lynch’s economics team. “In the June report, we saw mum declines in structures spending (-0.9% mum) and state & local construction (-1.1% mum). In July, we are forecasting both to grow at a 0.5% mum pace.”
- Vehicle Sales (Wednesday): Economists estimate the pace of total vehicle sales climbed to an annualized rate of 15.8 million. “Stepped-up demand for trucks and crossover vehicles, combined with improved financing availability, likely propelled light vehicle sales 2.3% higher to a seasonally adjusted annual rate of 16.1 million in August — the strongest unit-purchase level since November 2007,” said Societe Generale’s optimist Brian Jones.
- Trade Balance (Wednesday): Economists estimate the U.S. trade deficit widened to $US39.0 billion.
- Beige Book (Wednesday): “We will be looking for any indications that the tighter financial conditions seen since late May are hurting business sentiment. Such anecdotes may prompt some push-back from the Fed,” said Credit Suisse’s Soss. “In the case of the September 17-18 meeting, pushing back may entail sugarcoating any QE3 tapering by extending the forward guidance on the fed funds rate target.”
- SG ADP Employment Report (Thursday): Economists estimate that the ADP will report 177,000 private payrolls for August. “Despite its spotty track record as an augur of prospective changes in nonfarm payrolls, the ADP National Employment Report will undoubtedly colour expectations heading into the following morning’s official government release,” said SocGen’s Jones.
Initial Weekly Unemployment Claims (Thursday): Economists estimate jobless claims slipped to 330,000 from 331,00 a week ago. “[T]he fact that jobless claims have been consistently below 350k — a key level that has been commensurate with 200kplus
nonfarm payroll growth in the past — also bodes well for Friday’s report,” said Deutsche Bank’s Brett Ryan.
- ISM Non-manufacturing (Thursday): Economists estimate the ISM services index slipped to 55.0 from 56.0 in July. “In August, we expect the index to hold on to its July gain and remain at 56.0,” said BAML’s economists. “The new orders index spiked to a five-month high in July’s release, suggesting that the strength would continue for at least another month.”
- Employment Situation (Friday): Economists estimate that U.S. companies added 175,000 nonfarm payrolls in August. They also expect the unemployment rate to be unchanged at 7.4%. “We expect nonfarm payrolls to show modest gains in August,” said Wells Fargo’s John Silvia who expects a 185,000 print. “The reference week of initial jobless claims rose slightly over last month and the employment components of regional purchasing manager surveys were positive.”
Chaos in the Emerging Markets has Societe Generale’s Albert Edwards warning that we have heard “the final tweet of the canary in the coal mine.”
“The emerging markets ‘story’ has once again been exposed as a pyramid of piffle,” wrote Edwards. “The EM edifice has come crashing down as their underlying balance of payments weaknesses have been exposed first by the yen’s slide and then by the threat of Fed tightening.”
“At the risk of being called a crackpot again, I repeat my forecasts of 450 for the S&P, sub-1% US 10y yields and gold above $US10,000,” he added.