Last Week Last week was highlighted by lots of “Fed-speak” and important economic data, and the net effect of both was to firmly solidify expectations for a Q1 ‘14 tapering of QE, and to incrementally increase the chances for a January taper (as opposed to March). Despite last week’s good data and “hawkish” Fed-speak, a December taper is still remote (and it’ll take a blowout jobs report next week to move those odds up significantly).
Starting with Fed-speak last week, there were multiple speakers (Chairman Ben Bernanke, Vice Chair William Dudley, James Bullard, etc.) and the result was a slightly “hawkish” tone. Bernanke’s comments went largely as expected (he again stressed that “tapering is not tightening”), but it was Dudley and Bullard’s comments—along with the FOMC minutes from the October meeting—that provided the hawkish tone. Dudley said he was “more hopeful” about the economy accelerating, while Bullard said a December taper isn’t “off the table.” And, although the minutes didn’t reveal much, the market did focus on the FOMC saying tapering would likely occur “at one of the next few meetings.”
Turning to the actual economic data, it continued the recent trend of being better than feared. Retail sales showed the consumer isn’t quite as weak as was feared, as “core” retail sales (which exclude gasoline, cars and building materials) rose 0.52% from September. This was the biggest one-month increase since July (although September was revised lower, so the number wasn’t quite as good as it seemed). But, against a pretty depressed outlook for the consumer, it was a positive surprise.
Jobless claims also dropped to multi-week lows, and the four-week moving average hit its lowest level in a month.
Finally, the most-anticipated number of last week, the November Flash Manufacturing PMIs, beat expectations at 54.3 vs. (E) 53.0, and rose to an eight-week high. Additionally, new orders, the leading indicator of the report, also rose.
Bottom line is the data again was better than feared, and it’s becoming apparent that the government shutdown did not hamper economic growth, and the economy might just be stronger than we all thought. And, that good data is why the “hawkish” tone from the Fed didn’t result in a sell-off in stocks. Keep this in mind over the coming week: The market can rally into Fed tapering as long as the economic data continues to get better (i.e., good economic news is good for the market).
This Week It’s a holiday week here in the States, so data-wise it’s pretty slow (the next major catalyst domestically comes next Friday with the November jobs report). But, although we can expect a slower week, there are a few things to watch.
First, this week is heavy on housing data, and that’s important because the one bad number from last week was existing home sales, which clearly shows the housing market recovery is slowing.
I’ve been saying this for months, but the housing recovery continuing is integral to the economic recovery. But, it’s integral in that the recovery continues (it can be at a slower pace — we just can’t have the housing market start to decline again. That is a big, big problem if it happens). So, given mortgage rates are rising again, housing data will be important to make sure the recovery is still ongoing (even at a slower pace).
Pending home sales (a leading indicator for existing home sales) are released this morning, and Tuesday we get both September and October Housing Starts (September’s report was delayed by the government shutdown), and also the Case-Shiller Home Price Index. Those releases will be the most-watched of the week. The only way they result in a sell-off, though, is if they imply the housing recovery is stalling, not just slowing (and so far the data is implying the latter).
Also this week, October Durable Goods and jobless claims will be released Wednesday, and claims in particular will be watched to see if the downtrend in claims from last week continues.
Outside of a big negative surprise from the housing numbers, though, this week shouldn’t really alter the current market narrative or Fed expectations. Again the next big catalyst is the jobs report on Dec. 6.
Internationally, it’s a busy week in Japan. Wednesday night brings Retail Sales, and Thanksgiving Day we get CPI, household spending, unemployment and industrial production. I’m pointing this out because we’ve seen a big drop in the yen/rally in DXJ, and to a point I think any “good” economic data may already be priced in, in the short term. So, we could see a “sell the news” effect in Japanese stocks/rally in the yen, but I’d use that to add more long exposure to DXJ/short exposure to the yen (via YCS).
Finally, Friday we get EMU Flash HICP for October (HICP is Europe’s version of CPI). I’m pointing that out because it was the weak September HICP that prompted the European Central Bank to cut rates. So, from a “What Will the ECB Do Next?” standpoint, this number will be important. (If it’s still very low, like last month’s 0.7%, expect euro weakness as calls for the ECB to do “more” will get a lot louder.)