The month and the quarter end on Tuesday, which means we’ve got lots economic data coming.
This week comes reports on US home prices, auto sales, manufacturing and jobs. We’ll also get monthly manufacturing reports from around the world. Economists expect the reports to reflect an ongoing divergence in the world: the US growing at a healthy clip, Europe and Japan stumbling, and the emerging markets decelerating rapidly.
In its new monthly economic report, Citi Research analysts cut their forecast for 2015 global GDP growth to 3.3%, and their adjustments reflect the divergence theme.
“We make notable downgrades this month to 2014-15 growth forecasts for Argentina, Brazil, China, Denmark, Japan, Romania, Russia, South Africa and Switzerland, partly balanced by a 0.2 per cent upgrade to our 2014 US growth forecast (to 2.3% from 2.1% last month),” Citi’s Michael Saunders wrote Wednesday. “In all, we are cutting our EM growth forecast by 0.2 per cent for 2014 and by 0.3 per cent for 2015 — and this is the biggest monthly downgrade to our overall forecast for EM GDP growth in the current year and next year since mid-2011.”
We’ll probably continue to hear a lot about this asynchronous global recovery, especially as the world’s central banks take monetary policy in different directions.
Here’s your Monday Scouting Report:
Thank American Shale: Gasoline prices have been falling in the US, and economists expect that to boost this week’s consumer confidence report. Meanwhile, natural gas prices continue to be much lower in the US than in the rest of the world, which is good news for America’s energy intensive industries. All of this has certainly helped fuel a divergence in global economic growth. US economic growth has been resilient, while Europe, Japan, and even parts of the developing world slow.
Stability in US energy prices is owed to the so-called American energy renaissance. Recent technological developments in hydraulic fracturing which have enabled drillers to extract natural gas from America’s shale basins. “US crude oil output increased last week to 8.86 million barrels per day, the highest production level since March 1986, on the way to 9 million barrels per day by November,” economist Mark Perry wrote Wednesday.
Importantly, the American shale boom has effectively muted the impact Middle East turmoil on oil prices. “Brent crude oil prices have fallen below $US100/bbl despite the extensive list of geopolitical disturbances, many of which have materially impacted global oil supplies,” Citi’s Seth Kleinman wrote on Tuesday. “Adding all of the various outages together brings the total amount of lost crude oil supplies to ~3.5-m b/d. Yet oil prices are softening nonetheless.”
- Personal Income And Spending (Mon): Economists estimate income climbed 0.3% in August while spending rose by 0.4%. Core PCE is estimated to have climbed by 1.4% year-over-year or 0.0% month-over-month. “A solid gain in aggregate wages in the employment report points to decent growth in wage and salary income, which should be added to by gains in dividends and rental income for a moderate gain in personal income,” Morgan Stanley’s Ted Wieseman said. “A surge in auto sales, 0.4% rise in core ex autos and gas retail sales, flattening out in utilities bills after sharp declines in recent months during the mild summer, and a better trend in healthcare services after BEA incorporated upside in the Census Bureau numbers in Q2 should combine for a good gain in personal spending. After the surprisingly weak CPI report, we expect the headline PCE price index to fall 0.1% and the core to tick up 0.03%, leaving both at 1.4% year/year.
- Pending Home Sales (Mon): Economists estimate sales fell by 0.5% month-over-month in August or 1.4% year-over-year. “The pending home sales index tends to lead existing home sales by a couple of months,” Nomura economists said. “This index has increased in four of the five months ending July, as the market for previously owned homes appears to have escaped the doldrums. For the longer trend, we expect to see a gradual pace of improvement, that won’t necessarily follow a straight line.”
- Dallas Fed Manufacturing Activity (Mon): Economists estimate this regional manufacturing index jumped to 10.5 in September from 7.1 in August.
- S&P Case-Shiller Home Price Index (Tues): Economists estimate home prices fell by 0.1% month-over-month in July or 7.35% year-over-year. “This measure of home prices’ year-ago growth rate has slowed every month thus far this year,” Nomura economists said. “The pace of appreciation should continue to moderate as inventory of for-sale homes rises, and the share of distressed sales continues to decline.”
- Chicago Purchasing Manager Index (Tues): Economists estimate this regional activity index slipped to 62.0 in September from 64.3 in August. “The August survey showed the headline index jumping by more than 11 points, indicating strong activity growth after a moderate performance in July,” Barclays economists said. “We expect a small correction after the strong August numbers, consistent with the downward move in the Philadelphia Fed Index for September.”
- Consumer Confidence Index (Tues): Economists estimate the Conference Board’s index climbed to 92.5 in September from 92.4 in August. “We credit lower gas prices and a brightening jobs picture for this index’s recent gains,” Credit Suisse economists said. “Specifically, the Conference Board’s index of “jobs plentiful minus jobs hard to get” measure in August was the least negative since May 2008. Increased stock market volatility may weigh on the September index, but the downside should be limited by continued gas price declines generally positive news on job prospects.”
- Vehicle Sales (Wed): Analysts estimated the pace of auto sales fell to 16.8 million in September. “After surging 6% to an eight-year high of 17.45 million units annualized in August, our AlphaWise team’s data points to a pullback to the mid 16’s in September, and early industry surveys are seeing similar results,” Morgan Stanley’s Wieseman said. “JD Power says sales slowed after a very strong Labour Day weekend (which fell in the August reporting period) but have since picked up again as the month progressed, and they’re seeing a record high average transaction price this month.”
- ADP Employment Change (Wed): Economists estimate US companies added 207,000 private payrolls in September.
- ISM Manufacturing (Wed): Economists estimate this manufacturing index slipped to 58.3 in September. “The August headline printed 59.0, with new orders at 66.7,” Credit Suisse economists noted. “This is usually a level consistent with short-term peaks in new orders, and so our bias is to expect some cooling off. But the message from the early September PMI readings has been one of strength, with Markit, Philly Fed, Empire, and Richmond Fed all in solid growth territory.”
- Construction Spending (Wed): Economists estimate spending increased by 0.4% in August. “Most of the 14% pullback in housing starts in August was in the more volatile and lower value-per-unit multi- family component, and we should see some carryover of the 23% surge in starts in July, so we look for homebuilding activity to be up slightly,” Morgan Stanley’s Wieseman said. “Private nonresidential spending, meanwhile, jumped an outsized 2.1% in July, and we expect to see a bit of pullback after especially large gains in July in power plants (+7.5%) and factories (+4.4%).”
- Initial Jobless Claims (Thurs): Economists estimate claims climbed to 298,000 from 293,000 a week ago. “The four-week moving average of initial claims has drifted in a very narrow range of 295-305k in recent months, suggesting continuing but gradual improvement in the labour market,” Nomura economists noted.
- Factory Orders (Thurs): Economists estimate orders fell by 9.5% in August. “Durable goods orders dropped by 18.2% in August mainly owing to a reversal of the strong gains in non-defence aircraft orders in July and this should push down overall orders for August,” Barclays economists noted.
- The Jobs Report (Fri): Economists estimate US companies added 215,000 nonfarm payrolls, largely on a 210,000 bump in private payrolls. The unemployment rate is estimated to be unchanged at 6.1%. “Payrolls stumbled last month, but the big picture labour market story has not changed materially,” Credit Suisse economists said. “Job growth remains in healthy territory on a trend basis. Income growth is solid. Structural labour market measures continue making progress. Other labour market data (claims, ISM, ADP) are robust. And slack continues to erode steadily.”
- Trade Balance (Fri): Economists estimate the trade deficit increased to $US40.8 billion in August. “Outbound container traffic was flat on the month, while inbound traffic rose about 1%,” Barclays economists said.
- Markit US Services PMI (Fri): The Flash estimate of this services index was 58.5 for September. “The US economy is enjoying its strongest spell of growth since the financial crisis, according to the PMI surveys,” Markit’s Chris Williamson said. “Although the pace of expansion slowed to a four-month low in services in September, the rate remained buoyant and accompanies a similar boom seen in manufacturing. ”
- ISM Non-Manufacturing (Fri): Economists estimate the ISM services index fell to 58.5 in September from 59.6 in August. “This decline would still leave the index consistent with a solid pace of expansion in nonmanufacturing activity,” Barclays economists said.
Wall Street’s equity strategists have been offering guidance on how to invest in advance of the Federal Reserve’s first rate hike. However, they stress that moves in the stock market are much more about other macro factors.
Here’s Deutsche Bank’s David Bianco: “Stocks typically sell-off on the first of a series of rate hikes, but the magnitude and duration of the sell-off depend on conditions. During early cycle hikes the initial sell-off was generally small, quickly recovered and further S&P gains came in next three months and longer (like 2004, 1983, 1972). But many sell- offs on late cycle hikes became corrections or even bear markets. Determining whether it’s early or late in the cycle is subjective, but the shape of the curve, inflation measures, years since the last recession can help. Next year is likely another mid-cycle year and we don’t expect a severe S&P reaction to hikes, but the risk is the Fed hikes too late or too little and inflation accelerates requiring the Fed to hike to levels higher than expected.”
Here’s Fundstrat Global Advisors’ Tom Lee: “Analysis of 14 rates cycles since 1954 argues that markets typically respond to variations in underlying economic conditions and not to the Fed rate hike itself. While market behaviour is overall pretty consistent across the cycles prior to a hike (up 79% of the time), post-hike we saw surprising divergences of market and sector behaviour due to the underlying growth, inflation, and investment conditions that prevailed at the time. The bottom line…nearly best-case conditions for stocks today. To cut to the chase, conditions today are almost optimal (low growth/low inflation/low investment) and suggest a significantly better performing stock market in the upcoming tightening cycle. In other words, do not despair.”
For more insight about the middle market, visit mid-marketpulse.com.
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