Prior to today’s downward revision to 3rd quarter GDP, the recent US economic data stream has been a generally positive one, with the last two weeks seeing data surprising mainly to the upside including:
- better-than-expected retail sales,
- improvement in consumer confidence via the University of Michigan consumer sentiment index for November,
- a stronger-than-expected rise in industrial production,
- better housing data in the form of a sharp increase in building permits and existing home sales,
- as well as seeing jobless claims falling in holding below the 400 K level for two weeks straight.
Thinner Liquidity During Holiday Hours Can Sometimes Create Increased Volatility
Because it’s a shortened week for the US due to the Thursday Thanksgiving holiday, stock market in the US will be closed as will almost all banks. Therefore liquidity should drop off the end of the week, which can make one of two things happen.
1. You have dull sideways markets, with tight ranges, that don’t really move much until liquidity returns the following day. Even Friday however we may see a lack of activity as most people will be enjoying the holidays.
2. However it is during these times, when in liquidity is thinner, that you need less big market participants to move currencies one where the other. price can more easily move away from its mean level of supply and demand during these types of times. Therefore sometimes less liquidity means you have more volatility.
Where to Next for the US Economy? Wednesday’s Data Drop
The GDP data, while disappointing, shows that inventories were the main culprits for the downward revision, and now that where halfway through the fourth quarter, the data seems a little stale. Well, we have a decent potpourri of news tomorrow to help see where the US economy may be headed. The list of releases tomorrow includes durable goods orders, personal spending and incomes figures, our latest reading on jobless claims (released on Wednesday and not the usual Thursday), as well as our final version for University of Michigan consumer sentiment index.
Here’s the data:
- Core Durable Goods Orders (Oct), forecast 0.1%, pr. 1.8%
Durable Goods Orders: forecast: -1.1%, pr. -0.6% - Personal Spending (Oct), forecast: 0.4%, pr. 0.6%
Personal Incomes, forecast: 0.3%, pr. 0.1%
Core PCE Price Index: forecast: 0.2%, pr. 0.0% - Jobless Claims (Nov 18th), forecast: 387K, pr. 388K
- UMich Cons. Sentiment (Nov – final) forecast: 64.6, pr. 64.2 ( prelim.).
FOMC Minutes Show A Fed That’s Ready To Act
Consideration of US economic data will be important for whether the Federal Reserve decides to conduct another round of quantitative easing. That is the main concern when we look at the US dollar for instance – what the Fed will do. The FOMC meeting minutes give the impression that the Fed is ready to act, but may want to unveil the next round of quantitative easing around a new communication strategy.
From Forbes - Fed Minutes: Bernanke Firmly In Control Of FOMC, QE3 Coming: “This was made very clear when a few members asked for further accommodation at the last meeting. It was also made clear that Bernanke is firmly in control, from the statement:
“It was noted that any such accommodation would likely be more effective if it were provided in the context of a future communications initiative, and most of these members agreed that they could support retention of the current policy stance at this meeting. […]
With the Committee in the process of reviewing its monetary policy strategies and communication, and no additional accommodation being provided at this meeting, a few members indicated that they could support the Committee’s decision even though they had not favored recent policy actions.
In other words, those who favored further monetary stimulus in the last meeting accepted that QE should be unveiled in the context of a “communications initiative,” which means making sure that market expectations are aligned with the Fed’s.
As we examine the data the Minutes may create a high hurdle for US data to meet in order to keep the Fed on the sidelines. In any case, the data on its own will show us some interesting clues about demand, jobs, and confidence.
Durable Goods: Headline Reading Expected to Decline, Core Flat
Durable goods orders are a key measure for manufacturing demand as these are larger items such as cars, appliances, and computers, and within the report we get a read on business investment – their spending on machinery and other capital equipment.
Durable goods orders tends to be a volatile indicator, and because the number can surprise on either side in any given month it can sometimes have an out-sized impact on the market and is close to a top-tier release, perhaps near the top of the list of second-tier releases.
Expectation this month is for the headline reading to decline 1.1%, following a 0.6% decline in September.
However if we take out the transportation sector out of the equation, which can skew the headline reading, orders are expected to be relatively flat or slightly positive. That follows a 1.8% increase in September. Companies have ran down their inventories GDP data showed, so it will be an important test to see what the demand for new orders, as new orders act as our leading indicator for considering manufacturing production.
Personal Spending to Rise, But Incomes Are Not Catching Up
When we look at personal spending for the month of November, we start by looking at our retail sales figures that comes out a week before, as retail sales make up about 30% of overall personal spending.
Retail sales rose 0.5% in October. Personal spending, therefore is expected to have increase 0.4% during the month, following a 0.6% reading in September.
The image on the right shows a problem for US consumer spending currently, while retail sales have climbed year-over-year, average earnings have not. In fact they have been flat to trending negative over the last year. That’s it unsustainable situation. We know the importance of consumer spending on the overall health of the economy as that’s is the primary driver of economic activity.
Personal incomes in October are expected to increase 0.3%, following a 0.1% increase in September.
That helps balance out spending and incomes, as the situation in September with a modest rise in spending (0.6%) was matched by a very small rise in incomes (0.1%). We see the same phenomenon in the above to charts where personal spending year-over-year has averaged between 2% and 3% over the last year, wages have dropped from an annual increase of 3% down to 0%.
Let’s see if tomorrow’s figures on spending or incomes hold any surprises. Weaker spending, or spending that’s not matched by climbs in incomes, we may way on the fundamental picture for the US and therefore stocks and risk sentiment, but if personal spending comes in a bit stronger than expected that could be a risk positive fundamental factor.
Seeing as how we have both durable goods and personal spending we get a pretty nice picture of demand in the US economy from tomorrow’s data.
Jobless Clams Forecast to Keep Below 400K
US jobless claims are expected to show a 380 7K reading for the week ending November 18th. That would make it the third straight week in which jobless claims would be below the 400K area, as you can see from the chart the four-week moving average is moving in a downward sloping trend currently.
While companies may be firing less workers, the question then is are they hiring more new workers. Or have companies which have become very lean and have shed payrolls over the last few years, finding equilibrium in which they may not be taking on new workers, but also are not laying off further workers. A level below 400K and especially below 375K has historically been consummate with nonfarm payroll gains of around 125K plus.
If jobless claims holds to its forecast then we would be in our third week below that key level.
UMich Consumer Sentiment – Dead Cat Bounce Turns to Extendion
For the University of Michigan consumer sentiment index we saw already a move upward to 64.2 in the preliminary reading for November compared to Octobers 60.9.
That is the third month in a row of improvement following the steep plunge seen in August when we had the debt ceiling debate drama that led to the US losing its AAA credit rating with S&P.
Confidence is tentatively returning, which means this may be more than just a dead cat bounce in confidence, but there is still an area of pressures on the US consumer – persistently high unemployment rate, stagnant wages, and uncertainty with the state of global financial markets because of the European sovereign debt situation.
The UMich index tends follow labor market conditions, as well as price of gasoline and other goods. So we’ll see if consumers feel a bit more confident about the jobs picture and where they see inflation and their personal finances. The 1-year inflation expectations sub-gauge was at 3.2% in October.
Nick Nasad
Chief Market Analyst
FXTimes
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