Quiet week just gone, busy one to come

Week ending Friday December 8th 2017

Little market excitement this week as the S&P500 consolidated the strong 3% upward move to record levels that occurred over the prior two weeks. An impressive performance given the USD was steadily strengthening. At one point, a fall in the 10yr yield squeezed the 10yr-2yr spread to a 10-year low of 50bps, before ending the week where it started.

New FOMC Projections out on Thursday with 25bps rate rise

There is little interest in next week’s FOMC meeting where a 25bps rise is certain. The statement could provide some interest of course, but most focus will be on the Projection Materials for 2018 and beyond. Will the FOMC raise its 2018 rate rise projections or the end-point rate level? Expectations remain everything, as always.

Those high projections and the Fed’s determination to actually hit them have continued to act as a massive drag on nominal and therefore real growth for over eight years. The FOMC push for normalization, even at lower levels of “normal” rates than they initially envisaged, continually runs the risk of causing a recession. Such a result will still not be the Fed’s fault merely the mythical “business cycle” and no, no, no, not at all the result of unnecessary monetary policy tightening.

Payrolls dull

Although there was little news in the jobs report  about unemployment there was a jump in the YoY growth to 3.1% in Average Weekly Earnings for the broad “All Employees: Total Private” category. The six-year high does make it look like a modest upward trend might be occurring, fitting with the slightly higher rate of NGDP Growth we are also expecting.

Two caveats are: (1) that the rate of new job creation continuous to fall, meaning that the better total wage growth does not come that strongly through to NGDP.

(2) the longer running date series for the Average Weekly Earnings of “Production and Nonsupervisory Employees: Total Private” is not showing a similar upward trend and remains stuck around 2.5% YoY growth. The Labor Force Participation remains in the doldrums below 63%.

Surprisingly, other data during the week was weak, after a few weeks of strong surveys and figures.

The ISM Non-Manufacturing PMI came sharply off two strong monthly readings confirming the downward trend seen in the Markit Services PMI.

Although the early December Michigan Consumer survey of Current Conditions was good, the Expectations index for future conditions was much worse than recent readings, dragging down sharply their most widely followed Consumer Sentiment index. Maybe Trump’s growing unpopularity, not just with the Dems, is having an impact.

At least the bigger trade deficit was driven by stronger than expected imports, not exactly what Trump has called for, but a positive sign for the economy as a whole.

What to expect

At the end of the day, the FOMC will see whatever it wants to see from the data. It can’t lose, or can’t be seen to lose.

The CPI for November will be released on the first day of the two-day FOMC meeting. We predict that a weak reading will be seen as a temporary blip, and a high reading as the coming inflation-Armageddon.

November retail sales released on the second day will be treated likewise. Industrial production for November comes out on Friday and has been reasonable over several months now, so helping the Fed’s case to bring to an end the very modest growth recorded. How sad.

Apart from the FOMC meeting next week, we may also see some more developments in Trump’s great tax reform. The lack of any meaningful spending cuts to balance the tax cuts remains a challenge, either for Congress or for the Fed.


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