A quick rundown of what I expect from the indicators.
Empire Manufacturing: I expect continued strength as manufacturing continues to carry the US economy thus far. I expect possible weakness next month or April as the inventory replenishment cannot go on forever unless there is a strong resumption of end demand (very weak of this so far).
Housing Market Index: Last month, the housing market indicators started giving whiffs of a double dip. While I am leaning towards a disappointment in this indicator due to homebuilders worrying about the expiration of the tax credit in April, there are substantial risks to the upside as builders show some optimism towards the spring selling season, which would be helped by the tax credit. Regardless, any uptick would be noise in my view as there are “clear and present danger” circumstances in the housing market (MBS program ending, Tax credit expiration, not enough improvement in labor conditions, shadow inventories)
MBA Purchase Applications: Thus far this indicator has underperformed even my low expectations. There is still no strong indication that sales will pick up in February or March. While I do expect an eventual pick up in applications, the pick up might be quite muted as future demand is beginning to get exhausted. If this is indeed the case, we might see a double dip earlier than I though.
Housing Starts: Starts have been flat over the prior 4 months. I expect more of the same as seasonality plays a factor, though there is room for upside surprise as Building Permits” have indeed been increasing over the last 4 months also. For a significant move up in starts, we would need to see a number in the 600K range. I think we’ll have a number in the high 500Ks.
Industrial Production: Business equipment has been carrying this indicator higher while consumer goods have been relatively flat. I expect continued gains as ISM manufacturing index for January was very good with increasing improvement in breadth.
PPI: I expect a continued increase as the great reflation experiment has only resulted in higher commodity prices as investors protect themselves against inflationary conditions in the future.
CPI: I expect this to come in marginally positive on a MoM basis. While the reflation experiment has increased commodity costs, I continue to believe that firms have no pricing power and passing costs over to the consumer will result in lower sales. This phenomenon will eventually bring about problems with regards to margins getting squeezed as companies have no choice but to swallow these higher “backdoor” costs.
Leading Indicators: This indicator has been notorious in my view in that it has been warped by gov’t intrusion. While it has shown improvement in breadth, most of the gains continue to be due to increasing money supply and a very steep yield curve. Stock prices have also had a part in the gains. While a steep yield curve usually indicates a recovery is in the works, I believe it is being influenced more by the large supply of gov’t debt that is being issued to pay for all these programs to prop up the economy. Increases in the money supply, while a bullish indication, are not making their way to the real economy as banks continue to stash all the cash to improve their balance sheets. Because January had one of the more pronounced reductions in the risk trade, we may be in for a flat reading which would surprise the consensus of a 0.5% reading to the downside as stock price gains are no more, and the yield curve flattened a bit.
Philly Fed Index: I expect another strong reading if Factory/Durable Goods Orders provide a accurate glimpse of the future. Manufacturing continues to carry the economy, but this is not sustainable if there is no increase in end demand.
Case Schiller Index: I believe that we will see a negative reading as home values have begun to resume their downward trajectory. This will probably bring out renewed talk of a double dip. While it may also bring about renewed pleas for another tax credit for housing, I think the stimulus train has run out of political gas. I don’t think there will be a renewed tax credit and will pave the way for a double dip in the Fall and winter…perhaps even sooner!
Durable Goods Orders: I’ll be keeping an eye out for possible weakness in this indicator as signs that the inventory restocking phase is nearing an end. While I don’t think it will show up this month, I believe that we’ll begin seeing it come the March or April report.
Consumer Confidence: Will Consumer Confidence fall more inline with what other consumer confidence indicators such as the ABC and Gallup Poll? I think we may be in for a downside surprise here.
New Home Sales: I expect to see a flat to slightly positive reading as January really didn’t result in a bounce from the plunge in December. Mortgage applications continue to show weakness due in part to seasonality and perhaps ominously due to exhausted future demand pulled forward from the initial housing credit.
Well, that’s about it. Have a great week.
Upcoming Key Macro Events
- China: Leadership transition to 19th Congress begins October 18, 2017
- EU summit to decide whether to advance in Brexit talks October 19, 2017 – October 20, 2017
- Czech general election October 20, 2017 On watch: victory for Andrej Babis
- (TENT): Target date for completion of budget w/inx for tax reform October 20, 2017
- Japanese snap election October 22, 2017
- FOMC meets on interest rate policy October 31, 2017 – November 1, 2017
- China's Singles Day November 11, 2017
- Deadline for tariff decision on solar manufacturing November 13, 2017
- Deadline to determine status of Canadian Softwood tariffs announced no later than Nov 14 November 14, 2017
- NAFTA negotiations in Mexico begin November 17, 2017
- (TENT) Debt ceiling deadline December 8, 2017
- FOMC meets on interest rate policy* December 12, 2017 – December 13, 2017 Summary of Economic Projections and a press conference by the Chair.
- Gov't funding deadline (shutdown if not passed) December 15, 2017
- (TENT) Italian National Elections January 1, 2018
- Chair Yellen's term ends (if not reappointed) February 3, 2018
- Fed: Yellen's term expires February 3, 2018
- Fed: Lockhart (Centrist to slighly dovish) retires? February 28, 2018
- D-day anniversary June 4, 2018 at 3:30 pm – 4:30 pm 1944
- Fed: Fischer's term expires June 12, 2018
- Austrian general election due by Sept 2018 September 1, 2018
- (TENT) Xiangshan military forum September 30, 2018
- Draghi term at ECB ends October 31, 2019 ECB ends
- Term of Jean-Claude Juncker, Head the European commission, ends October 31, 2019