It was a relatively quiet week economically speaking, and the “highlight” was the Yellen testimony before the Senate Banking Committee. She was more “dovish” on the margin than generally was expected, although it’s safe to say nothing really new came from the testimony.
Perhaps most importantly, if you only read the transcript or her prepared remarks and the Q-and-A, you might have thought it was Bernanke giving the testimony.
That’s important (and an underappreciated positive) because, from a policy-continuity standpoint, we know what we’re getting with Yellen (Bernanke part two). We’re in uncharted waters with how the Fed is going to unwind all this stimulus, and it was comforting to the markets last week that Yellen sounded so “Bernanke-like.”
Turing to actual data, we didn’t get much, and what we got was mixed. The Empire State Manufacturing Survey was a big miss Friday and caused a bit of a “dovish” response in the markets (bonds up, dollar down), although I think that was more trading noise than anything. The Empire State survey did turn negative for the first time since May, and new orders also fell into negative territory. But, while that is a bit disconcerting, we need to keep in mind that Empire State has been one of the softer regional surveys and hasn’t been very correlated to national manufacturing activity. So, it really isn’t going to shift any “tapering” expectations.
Also softening the blow of the big Empire State miss was the October industrial production report, which missed on the headline number because of a reduction in utility output, but the more-important manufacturing component met expectations, rising 0.3%. So, it confirms the good manufacturing PMIs from October, and implies the economy really didn’t take much of a hit from the government shutdown.
Finally, jobless claims missed expectations, and continue to send a “non-confirmation” signal with regard to the labor market. (Claims aren’t falling the way they should be, given the improvement in the monthly jobs report.)
Bottom line is the economic data last week didn’t change the outlook for Fed tapering (January-March) or alter people’s perception of the economy (still slow growth). But, importantly, it didn’t give any reason to think the recovery is stalling, either. So, bottom line is the data and Yellen were a tailwind for stocks last week.
This week will be much-busier than the past few weeks from an economic-data standpoint. The date that the Fed starts to taper QE remains the dominant question for the markets, and we should get some further insight this week.
First, Bernanke speaks Tuesday night. He will comment on the economy, so there’s the potential for him to be “dovish” or “hawkish.” Additionally, we get the Fed minutes from the October meeting. Remember, this was the meeting that first caused the tapering expectations to shift back from June to the January-March ‘14 time frame—and that was mostly due to the fact that the FOMC didn’t really downgrade its assessment of the economy (which was taken as “hawkish”). Obviously, the Fed’s outlook for the economy is critical to when they taper QE, so the minutes will be important to getting more insight into the committee’s opinion of the economy.
There’s a lot of important hard data, too. The global “flash” manufacturing PMIs for November come Wednesday night (China) and Thursday morning (EU and U.S.). There’s been some concern the global recovery has been stalling lately, so these PMIs will offer more insight into the state of the world economy.
Domestically, we also get retail sales (Wednesday), and they’ll be watched to gauge the state of the consumer heading into the holiday shopping season. (Keep in mind the retailers are at all-time highs, and M earnings last week resulted in an uptick of expectations for holiday spending.)
It’s fair to say that over the past few weeks domestic data has implied the economy may be a bit better than we think, and international data has implied the global economy may not be as healthy as first thought. Data this week will go a long way toward confirming or rejecting that sentiment.