US Recovery Continues Against Backdrop of Risk
In the past week, the November index of leading economic indicators beat expectations.
Most barometers of economic activity have been constructive of late, but a recent strengthening of the dollar has impeded the equity market, while also reflecting concern of ever-increasing militancy by Iran. Flaunting an evolving nuclear capability in the face of the US, moving into an Iraqi oil field, and continuing to arm Hamas in Gaza and Hezbollah in Lebanon, are examples of the growing threat from Tehran. Perhaps nothing is more disconcerting than the unabashed threats of President Ahmadinejad.
Against this backdrop of legitimate risk, the US economic recovery continues. In the past week, the November index of leading economic indicators decidedly beat market consensus expectations, as did the November performance of industrial production. A surprising slowing of the December NY Fed Empire manufacturing index to a still-expanding level was at distinct odds with the Fed's Beige Book, and was further countered by an upside surprise in the December Philadelphia Fed general business activity index, driven by a lengthened workweek and a better employment reading.
Rising November housing starts and building permits were countered by a surprising decline in the Wells Fargo/National Association of Home Builders December housing market index. Builder caution was reflected in current sales conditions and the forward-looking expected sales index.
The Mortgage Bankers Association (MBA) reported an underwhelming increase of 0.3% in their broad mortgage applications index in the week ending December 11, as slippage in the purchase application index was offset by a healthy gain in the refinancing application index. In my firm's view, the 0.3% advance in the overall MBA index should be viewed in the context of an unsustainable advance of 8.5% in the prior week.
The November upside spike of 1.8% m/m in the headline finished goods producer price index (PPI) exceeded even our well-above-consensus expectation. The prime factor in the November increase was a 6.9% surge in the energy subcomponent. The PPI has been gaining momentum compared to subdued year earlier levels, and has now turned positive with a 2.4% y/y increase. The reality is that the headline PPI has grown at an 8.3% annualized pace over the past six months of data.
Excluding food and energy, the core PPI advance was also well above market expectations of a 0.2% rise and above our 0.3% estimate. The core PPI rose 0.5% in November and is up 1.2% y/y. This follows an October core PPI that was up 0.7% y/y, the slowest y/y momentum since March 2004.
The November consumer price index (CPI) matched consensus expectations of a 0.4% rise. The headline CPI is now up 1.8% y/y (the first y/y increase since February) and is rising at a 4.2% annualized pace over the last six months through November. Without a 4.1% advance in retail energy prices in November, the headline CPI would have been flat. In our view, many investors are prudently betting on increasing inflation.
The latest Federal Open Market Committee (FOMC) statement on December 16 was cautionary, but spoke to a positive directional tone in the labor markets and improved consumer spending. The Fed retained its language that "economic activity is likely to remain weak for a time" and that economic conditions "are likely to warrant exceptionally low levels of the fed funds rate for an extended period."
If the Fed overstays its monetary largesse, reinforced by the expansionary fiscal follies in Washington, the fear of inflation will be ratified. Dr. Bernanke rightly views risking some inflation over risking deflation consequences via too early a substantive draining of liquidity.
The week ahead will likely contain a number of releases that are stronger than market consensus expectations. These include: November existing home sales and new home sales, December consumer sentiment, November personal consumption expenditures and durable goods orders.
Economic Indicators in the Days Ahead:
Wednesday, Dec. 23 8:30 a.m. Nov. Personal Income & PCE
Personal income (PI) likely rose 0.5% in November from October as aggregate hours worked improved in the latest payroll data. This would be the fifth consecutive monthly advance for PI, with the wage and salary component up a bit faster than PI. Personal consumption expenditures (PCE) we see advancing 0.8%, stronger than the consensus call of 0.7%. We see the PCE deflator rising 0.2% from October.
Wednesday, Dec. 23 10:00 a.m. Dec. (Final) U. Mich. Consumer Sent.
We believe the final December Reuters/University of Michigan Index of Consumer Sentiment will rise to 75.0 vs. the preliminary December reading of 73.4, and the November level of 67.4. Our call is stronger than market expectations of 74.0.
Wednesday, Dec. 23 10:00a.m. November New Home Sales
November new home sales likely rose 3.5% to 445,000 units from the October pace of 430,000. Our estimate is higher than the November consensus view of 440,000. Smaller, less expensive new homes are being sought by the new homebuyer. Our 445,000 estimate would be the strongest pace of new home sales since July 2008
Thurs., Dec. 24 8:30 a.m. November Durable Goods Orders
Manufacturers' durable goods orders in November will likely be up 0.5% vs. the 0.6% decline in October. Our forecast is stronger than market consensus expectations of a more muted 0.3% gain. We'd anticipate an even stronger durable goods orders estimate, except we're not projecting strong orders in the transportation area because of declines in civilian aircraft orders.
Thursday Dec 24 8:30 a.m. Initial Jobless Claims
Initial jobless claims for the week ending December 19 likely fell to 460,000 versus the prior week of 480,000. The consensus expects a smaller decline to 470,000. Continuing claims likely dropped close to 100,000. This is due, however, to an increasing number of workers exhausting their state benefits and rolling onto the extended federal benefit program, which has been steadily rising and is at a record near 4.7 million people.
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