This is a nice rundown of the week ahead in terms of data releases. While the Fed meeting in March is still a long way away the data released this week is considered to be very important to what is announced in March. Clearly the most important points will be the jobs and jobless claims numbers (Friday and Thursday release dates) as well as the PMI number which will be released on Wednesday. I am not expecting any shocks in the data to the upside but who knows…
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January was a tough start to the year for the markets, but in some ways Monday marks the true start to 2016’s main event: the US presidential election.
On Monday the Iowa caucuses will take place and the final polls from of the Des Moines Register show Donald Trump with a lead over Ted Cruz on the Republican side while Hillary Clinton holds a slim lead over Bernie Sanders on the Democratic side.
Friday will also see the release of the jobs report from the first month of 2016, which was certainly a forgettable one for the markets.
The S&P 500 fell about 5%, the Dow Jones Industrial Average lost about 5.5%, and the Nasdaq lost nearly 7% to start the year.
And while rally in the final week of the year salvaged what was a historically bad first three weeks of the year, the market really remains all about one thing: oil.
As Bespoke Investment Group wrote on Friday, “Whether it’s a cause or coincident, the trend has been as goes oil, so goes the market … Up until the last couple of days, crude oil and equities have been moving in lock step with each other on an almost tick for tick basis.”
This is the trend to watch.
Top Stories
- We just finished the busiest week of earnings season. Last week, reports from Apple, Amazon, Microsoft, and Facebook all crossed the tape, with disappointing results and bearish commentary on the global economy from Apple taking center stage. “We’re seeing extreme conditions unlike anything we have ever experienced before,” Apple CEO Tim Cook said on the company’s earnings conference call following the results. Cook added: “Major markets, including Brazil, Russia, Japan, Canada, Southeast Asia, Australia, Turkey and the eurozone, have been impacted by slowing economic growth, falling commodity prices and weakening currencies … Notwithstanding these record results, we began to see some signs of economic softness in Greater China earlier this month, most notably in Hong Kong.
- Companies are beating expectations. “With 40% of the companies in the S&P 500 reporting actual results for Q4 to date, more companies are reporting actual EPS above estimates (72%) compared to the 5-year average, while fewer companies are reporting sales above estimates (50%) relative to the 5-year average,” FactSet’s John Butters wrote in a note to clients. “In aggregate, companies are reporting earnings that are 1.7% above the estimates. This percentage is below the 5-year average (+4.7%). The blended (combines actual results for companies that have reported and estimated results for companies yet to report) earnings decline for Q4 2015 is now -5.8%. At the sector level, the Energy and Materials sectors are reporting the largest year over-year decreases in earnings, while the Telecom Services sector is reporting the largest year-over-year increase in earnings.”
- Negative rates have gone mainstream. On Friday, the Bank of Japan shocked markets by taking interest rates into negative territory. The BoJ announced that some reserves held at the bank by commercial institutions will be subject to a 0.1% charge, though the amount of cash actually subject to this charge is likely to be negligible for the near future. But as Deutsche Bank’s George Saravelos wrote in a note to clients following the announcement: “The BoJ has not only demonstrated that there is no lower bound, but also signaled that negative rates are now mainstream policy […] In sum, the BoJ provides the strongest signal to date that the previously assumed zero lower bound on rates is no longer valid. Markets should now be pricing that global rates across global fixed income can sustainably and substantially trade below zero in the current (and future) easing cycles.”
Economic Calendar
- Personal Income and Outlays (Mon.): Economists expect personal income rose 0.2% in December while spending increased 0.1%, both declines from November’s 0.3% increase. “Core” PCE — the inflation reading preferred by the Federal Reserve which strips out the more volatile cost of food and gas — is expected to show a 1.4% increase over the prior year in December, below the Fed’s 2% target. “Even as the core CPI and some alternative inflation measures from the Fed’s regional banks have shown signs of accelerating in recent months, the core PCE deflator has risen 1.3 percent on a year-over-year basis in each of the first 11 months in 2015,” notes Wells Fargo.
- Markit US manufacturing PMI (Mon.): This measure of manufacturing activity in January is expected to come in at a reading of 52.7, indicating expansion in the sector which has been the focus of fears about the US economy entering recession.
- ISM manufacturing (Mon.): Economists expect this measure of manufacturing activity to come in at 48.5, indicating continued contraction in the manufacturing sector. Typically, ISM readings below 45 have been associated with a recession. “The early January survey measures all point to a modest improvement in the ISM,” according to Capital Economics. “In particular, the regional survey evidence suggests a slight rebound in the ISM index to 49, from 48.2. The modest increase in the ISM new orders index in December is encouraging, and further supports our view that activity in the factory sector improved slightly in December.”
- Construction spending (Mon.): Construction spending is expected to rebound 0.6% in December after falling 0.4% the previous month.
- Auto sales (Tues.): The pace of auto sales is expected to increase in January to an annualized rate of 17.34 million. Auto sales, which hit a post-recession high in 2015, are expected to continue to be a major bright spot in the economy in 2016. January, however, will likely be a little disappointing. “Blame it on the weather,” writes Bank of America Merrill Lynch. “Vehicle sales likely dipped to a rate of 17.1 million in January, driven in part by the Northeast/Mid-Atlantic storm. An entire weekend of auto sales was lost in affected regions, suggesting a decline on the month. Looking ahead, consumers continue to benefit from low gasoline prices and robust hiring, suggesting we should see a pick-up in coming months.”
- ADP private payrolls (Weds.): The latest private payrolls data from research institute ADP is expected to show payrolls rose 190,000 in January, down from December’s 257,000 job adds, which was the most of the year.
- Markit services PMI (Weds.): The final reading on activity in the services sector — which accounts for the vast majority of GDP in the US — is expected to come in at 53.7, indicating expansion the sector. This would match the preliminary reading from January 26, which was the lowest reading since December 2014.
- ISM non-manufacturing (Weds.): The Institute for Supply Management’s latest reading on activity in the services sector, like that from Markit Economics, is also expected to show continued expansion in the sector. January’s reading is expected to come in at 55.2, slightly below December’s 55.8 number. “While we expect to learn that the ISM non-manufacturing index declined modestly in January, fears that weakness in the factory sector will eventually lead to a collapse in the broader economy are misplaced,” writes Capital Economics.
- Initial jobless claims (Thurs.): The latest weekly report on initial jobless claims will likely show claims totaled 280,000 last year, still below the crucial 300,000 level and further indicating that the last few weeks’ trend towards a higher claims number is not the sign of a turning point in the labor market. “The trend for claims has picked up marginally over the last two months, but we are not alarmed by this development,” writes Bank of America Merrill Lynch.
- Factory orders (Thurs.): Factory orders in December are expected to show a 2.8% decline from the prior month.
- Trade balance (Fri.): The US trade balance for the month of December is expected to come in at a deficit of $43.2 billion, slightly wider than the $42.4 billion seen in November.
- January jobs report (Fri.): Expectations are that nonfarm payrolls grew by 190,000 in January, about 100,000 less than the blockbuster report seen in December but still indicating solid expansion in the US labor market. Credit Suisse, which expects nonfarm payroll gains to total 190,000 in January, wrote in a note to clients: “Given the weakness seen in other US data around year-end, financial markets will be particularly sensitive to any hint of a crack in the country’s heretofore robust jobs market. While a January payrolls print below, say, +150,000, certainly would spook the markets, we would caution in that scenario against jumping to dire conclusions. We estimate that monthly job gains over roughly 100K are sufficient to keep eating into any residual slack in the labor market. At some point this year, as we edge closer to that nebulous state of ‘full employment,’ we’d expect these monthly payroll gains to start moderating toward +150,000 anyway.”
The unemployment rate is expected to remain steady at 5% and average weekly hours worked is also anticipated to remain at 34.5 hours. Average hourly earnings growth is expected to pick up over last month, rising 0.3%. Over the prior year, however, average hourly earnings are expected to rise 2.2%, down from December’s 2.5% year-on-year increase, which was owed in part to a calendar quirk from 2014.
- Consumer credit (Fri.): Consumer credit balances are expected to show an increase of $16 billion December, more than the $13.4 billion expansion seen the prior month.
Market Commentary
There’s no way around it: the next two weeks are huge for the economy.
Based on market pricing, the chances the Federal Reserve raises rates in March are looking remote. Currently the market thinks there’s about a 35% chance the Fed raises its benchmark rate in six weeks, about half of what was priced in ahead of December’s move.
Tom Porcelli and the team at RBC Capital Markets note that in addition to Friday’s jobs report, Fed Chair Janet Yellen’s testimony on February 10-11 on Capitol Hill is huge.
“The first two weeks of February will either leave the possibility of a March hike firmly on the table, or fully extinguish the notion,” Procelli writes. “The latter is probably easily achieved if we get a dismal employment report in the week ahead, but barring that, we will likely have to wait until Yellen’s semi-annual testimony on Feb 10-11 before we get some real clarity. There are some important points to consider when thinking about the likelihood that March is still in play: the worst could be over for manufacturing, economic fundamentals remain solid, and the Fed did not ‘blink’ in their Jan statement despite the recent turmoil in the markets.”
But in thinking about the Fed does next, it’s worth really consider what this business cycle has been about: modest growth. “The Fed is not hiking to slow down the economy or fight high inflation,” writes Bank of America Merrill Lynch’s Michael Hanson.
“Rather, Fed officials plan to normalize policy as the economy normalizes. The labor market is already close to, if not at, full employment. This is the crux of the FOMC’s rationale for beginning to remove accommodation: not only does it mean that the employment side of the Fed’s dual mandate is largely satisfied, but tighter labor markets should eventually lead to inflation returning to target — if history and theory are any guide. Thus, any sign that the labor market was starting to cool significantly would almost certainly shift the Fed onto an extended hold.”