Last week, Scotland voted to stay with the UK, Alibaba’s massive IPO went off without a hitch, and Fed Chair Janet Yellen reminded us there would be “considerable time” between the end of quantitative easing and the beginning of rate hikes.
“Back to normal now,” JP Morgan’s Jan Loeys said.
Here’s your Monday Scouting Report:
Long Live King Dollar: Despite the endless grumblings of Fed-haters who warned that easy monetary policy would destroy the US dollar and the US economy, the exact opposite has been occurring.
“The USD is up 2% in September, with gains vs. all currencies but CNY and on extraordinary volumes by some measures,” JP Morgan’s Loeys said. “The causes are mostly the same ones that have been in play since early August — a US economic upturn in the context of non-US disappointment (notably China, Japan and the Euro area); widening front-end rate spreads between USD and every major currency but GBP and AUD; and still-large current account imbalances in most of last year’s most vulnerable emerging markets like Brazil, South Africa, Turkey and Indonesia.”
Morgan Stanley’s Vincent Reinhart warns that a prolonged rally could do material damage to US exports. “Our simulations of a sustained, 10% upward shift in the broad trade-weighted USD indicate that relative to our baseline: Real GDP growth four quarters out could be reduced by roughly 0.5 percentage points. Core PCE could be lowered by 0.6 percentage points.”
Charles Schwab’s Liz Ann Sonders notes that there are significant benefits to having a stronger dollar including lower import prices, lower commodity prices, and cheaper foreign travel for Americans. Historical data shows that stocks booked significant gains during dollar bull markets. “In general, a stronger dollar is likely to be both an economic and market positive.”
In Scotland, It’s Not Over: On Thursday, Scottish voters headed to the polls. When the votes were counted, the tally came in 55% “No” and 45% “Yes.”
“But that is not the end of the story,” wrote Societe Generale analysts. “Not only do the details of devolution for Scotland have to be worked out but also the UK government has to address the demands for English devolution and to correct the imbalances of voting rights within the UK parliament. This will remain a challenging time for the government in the run-up to next May’s general election.”
- Existing Home Sales (Mon): Economists estimate the pace of sales climbed 1.0% to an annualized rate of 5.20 million units. “Existing home sales have been on an upward trajectory after falling steadily since the third quarter of last year,” said Bank of America Merrill Lynch economists who forecast a 1.0% decline. “Although pending home sales increased in July, this followed a decline in June, showing signs of weakness. Moreover, mortgage purchase applications declined in July and August. While we are forecasting a decline in sales in August, we think sales will resume an uptrend for the remainder of the year.”
- FHFA House Price Index (Tues): Economists estimate house prices climbed by 0.5% in July. “We look for the FHFA Home Price Index to rise 0.5% m/m in July, consistent with the behaviour of other home price indices during the same time period,” Barclays economists said. “This would translate into a y/y increase of 4.8%.”
- Markit US Manufacturing PMI (Tues): Economists estimate the preliminary read on this manufacturing index will come in at 58.0, up from 57.9 in August.
- Richmond Fed Manufacturing Index (Tues): Economists estimate this regional manufacturing index slipped to 10 in September from 12 in August.
- New Home Sales (Wed): Economists estimate the pace of sales increased 4.4% to an annualized rate of 430,000 units. “The NAHB housing survey reported an improvement in housing demand and buyer traffic in late summer,” Bank of America Merrill Lynch economists said. “This should help to reduce months supply, which popped to 6 months in July — the highest since late 2011.”
- Initial Jobless Claims (Thurs): Economists estimate claims climbed to 298,000 from 280,000 a week ago. “The four-week moving average of initial claims has drifted in a very narrow range of 295-305k over the past nine weeks, suggesting continuing but gradual improvement in the labour market,” Nomura economists said.
- Durable Good Orders (Thurs): Economists estimate orders dropped 18.0% in August after July unusual 22.6% jump. Nondefense capital goods orders excluding aircraft is estimated to have climbed by 0.4%. “A 317% spike in civilian aircraft and parts orders accounted for most of a record 22.6% rise in durable goods orders in July, as Boeing booked a record 327 aeroplane orders,” Morgan Stanley’s Ted Wieseman said. “That will see some normalization in coming months, but the 107 orders Boeing booked in August was actually quite strong for an August, well above 16 in August 2013 and 1 in August 2012, so we look for only a partial pullback this month. Meanwhile, indications for equipment demand have generally remained positive, including upside in regional Fed surveys’ capex plans in August, so we look for renewed upside in core capital goods orders following a bit of a pullback in July (-0.7%) after a sharp gain in June (+5.4%).”
- Markit Services PMI (Thurs): Economists estimate the preliminary read on this services index will come in at 59.2, down from 59.5 in August.
- Kansas City Fed Manufacturing Activity (Thurs): Economists estimated this regional manufacturing index climbed to 6 in September from 3 in August.
- GDP (Fri): Economist estimate Q2 GDP will be revised up to 4.6% from an earlier estimate of 4.2%. “Strong results for healthcare revenues in the Census Bureau’s quarterly services survey (QSS) point to a sizable upward revision to healthcare services consumption in Q2, boosting overall consumption to 3.2% from 2.5% and GDP to 4.8% from 4.2%,” Morgan Stanley’s Wieseman said. “That’s the reverse of what happened after the Q1 QSS, when BEA had to slash real healthcare services consumption to -1% from +9% in the second revision, cutting a point from GDP growth, after a surprising decline in Q1 healthcare revenues in the QSS despite about 9 million more people with health insurance coverage this year.”
- University Of Michigan Confidence (Fri): Economists estimate this index of sentiment climbed to 84.7 in September. “Gasoline prices have decreased in recent weeks, suggesting consumer confidence confidence should continue to advance from a strong preliminary reading to reach a post-recession high,” Barclays economists said.
“Stay bullish into year-end,” Wall Street strategist Tom Lee writes. “We see multi-year gains ahead for US equities, driven by the favourable combination of: (i) pent-up demand; (ii) repaired household, corporate, and bank balance sheets; (iii) attractive relative value for stocks and (iv) low conviction by investors.”
Lee, founder of Fundstrat Global Advisors, told Business Insider that the S&P 500 could got to “2,700 or higher” before the bull market ends.
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