(Bloomberg Economics) — Fed policymakers face an important decision at the September meeting: whether to retain optionality around a potential fourth an interest-rate increase at the December meeting. Markets are already assigning a probability of more than 75% for such a move. If the Fed’s dot plot shows support from the vast majority of officials, markets will firm further around this expectation. Policy makers may wish to avoid painting themselves into a corner for December amid political uncertainty and recent downside surprises on a number of inflation metrics.
Evidence of fallout from Hurricane Florence is likely to begin to materialize in this week’s economic data. Bloomberg Economics does not expect the hurricane to have much impact on third-quarter GDP, but it will distort an array of indicators in the near term, including Thursday’s report on initial jobless claims. The scale of an increase in claims will provide some insight into whether there will be an impact in the monthly jobs report.
Monday, Sept. 24
Chicago Fed National Activity Index
In July, the Chicago Fed National Activity Index was reported at 0.13 vs. est. 0.45; June’s print was revised to 0.48 from 0.43. Led by slower growth in production-related indicators, Chicago Fed National Activity Index sees a moderation in economic growth in July. 36 of the 85 monthly individual indicators made positive contributions while 49 indicators affected the index negatively. To Wit: a reading below 0 indicates below-trend growth in the national economy.
Dallas Fed Manufacturing Outlook Level Of General Business Activity
(SOURCE: Federal Reserve Bank of Dallas)
Tuesday, Sept. 25
FHFA US House Price Index Purchase Only MoM% SA
S&P CoreLogic Case-Shiller
We expect the S&P CoreLogic Case-Shiller Index to decline in July from the prior month, but on a year-over-year basis, the index should to continue to run above 6%. Despite seasonal adjustment, the monthly Case-Shiller data exhibit a clear seasonal pattern, with price increases troughing in July Discontent about high property prices is the key reason behind the recent slump in the University of Michigan’s measure of consumer buying conditions for homes, which has weighed on the pace sales as of late.
S&P CoreLogic Case-Shiller 20-City Composite City Home Price NSA Index YOY%
S&P CoreLogic Case-Shiller 20-City Composite City Home Price SA Index MOM%
S&P CoreLogic Case-Shiller 20-City Composite Home Price NSA Index
S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index
Richmond Manufacturing Survey Current Manufacturing Composite SA
|Consumer Confidence (Sept.)||132.0||134.0||133.4|
Consumer confidence should edge higher in September after exceeding even the most optimistic forecasts last month. Conditions in the labor market are robust — initial jobless claims recently hit their lowest point since Nixon was president — and wage gains on a 12-month basis reached an expansion high in August. Additionally, the University of Michigan survey in September remained near historic highs, signaling another strong reading for the headline consumer confidence index.
Conference Board Consumer Confidence Present Situation SA 1985=100
Conference Board Consumer Confidence Expectations SA 1985=100
Five-Year Treasury Note Auction
The U.S. Treasury will sell $38 billion of five-year notes.
Wednesday, Sept. 26
MBA US US Mortgage Market Index Weekly % Change SA Old Meth
New Home Sales
|New Home Sales (Aug.)||630k||610k||631k|
New homes sales likely popped in August due to a robust rebound in single-family housing completions. The data published in the housing starts and permits report showed an 11.6% jump in completions in August — the strongest since April 2015. Elevated demand for new housing and low inventory levels have led to new homes being snatched up quickly as they become available.
- New home sales should exhibit increased volatility in the aftermath of Hurricane Florence akin to fluctuations seen in the aftermath of 2017 storms.
- Home sales are poised to rise in the fourth quarter as storm-displaced property owners in North and South Carolina boost demand for housing.
US New One Family Houses Sold Annual Total SAAR
US New One Family Houses Sold Annual Total MoM SA
|Fed Funds Upper Bound||2.25%||2.25%||2.00%|
The focus on the September FOMC meeting will be more directed toward signals regarding the future course of policy — specifically the December rate decision — rather than an almost certain rate increase at the current meeting. The actual tone of the meeting statement is likely to be little changed from the prior gathering.
Bloomberg Economics believes that the decision regarding the fourth hike of 2018 will need not be cast until much more is known about activity in the second half, including trade tariff impacts, third-quarter GDP results and even midterm election outcomes. As such, officials may wish to avoid nudging market expectations for December even higher.
- Fed officials will raise rates by 25 basis points.
- Chairman Powell will hold a post-meeting press conference.
- The Fed will release updated economic projections, extend their forecasts through 2021 and also produce an updated dot plot of interest rate projections.
- This will be the first FOMC meeting for Vice Chair Richard Clarida.
- Any discussion about the ongoing balance-sheet unwind will warrant heightened attention — the reduction reaches maximum speed next month.
Federal Funds Target Rate – Upper Bound
Federal Funds Target Rate – Lower Bound
Interest Rate on Excess Reserves – IOER rate
Thursday, Sept. 27
Durable goods orders are set to rebound in August after posting their second worst reading of 2018. Aircraft orders — an important input into overall orders — rose strongly in August, portending an increase in the headline number. New orders in the ISM manufacturing survey advanced in August, a sign that durable goods orders ex. transportation should climb. Yet the decline in new orders in regional Fed manufacturing surveys suggests that the increase in August is likely to underwhelm market expectations.
US Durable Goods New Orders Industries MoM SA
US Durable Goods New Orders Total ex Transportation MoM SA
Capital Goods New Orders Nondefense Ex Aircraft & Parts MoM
Capital Goods Shipments Ex Air %
Second-Quarter GDP (third print)
|GDP (% Q/Q, AR)||4.2%||4.2%||4.2%|
The third print on second-quarter GDP is unlikely to show a significant deviation from the previously reported growth rate of 4.2%, and therefore is unlikely to move the markets.
GDP US Chained 2012 Dollars QoQ SAAR
US GDP Price Index QoQ SAAR
GDP US Personal Consumption Chained 2012 Dlrs % Change from Previous Period SAAR
Merchant Wholesalers Inventories Total Monthly % Change
US Trade in Goods Balance Total Census Basis SA
Initial Jobless Claims
|Claims (Sept. 22)||210k||220k||201k|
This week’s initial jobless claims correspond to the week following the September employment survey period, but they could still be instructive regarding the degree to which Hurricane Florence may impact nonfarm payrolls. Last week’s drop in claims may have been partly due to closed filing offices and reduced filing periods related to the storm.
- Bloomberg Economics expects most of the post-storm spike in claims to be reported on Sept. 27. Following past storms in the Carolinas — Matthew (2016), Charley (2004) and Hugo (1989) — initial claims increased by roughly 17k, 13k and 73k, respectively. The magnitude of the increase in claims over the next few weeks should be commensurate with the initial drag on nonfarm payrolls, reported Oct. 5.
- Initial claims descended to a new, post-recession low of 201k in the previous week. A spike toward 230k is probable in the near term, but hardly reason for concern with respect to the broader labor outlook.
- Bloomberg Economics initially projected September payrolls at 190k. The risks are now skewed to the downside due to Hurricane Florence — probably toward 175k.
US Initial Jobless Claims SA
US Continuing Jobless Claims SA
Pending Home Sales
|Pending Home Sales (July)||-0.2%||-0.8%||-0.7%|
Pending home sales will likely fall in August, in-line with a drop mortgage applications.
- Housing demand appears to be slowing, as reflected in recent data on new and existing home sales.
- An estimated temporary pop in fourth-quarter home sales will likely be modest and fail to push the overall pace of residential investment for the year into positive territory.
US Pending Home Sales Index MoM SA
US Pending Home Sales Index YoY NSA
Dallas Fed President Robert Kaplan (non-voter) will lead a discussion on leadership in Charlotte, North Carolina. He is unlikely to address monetary policy.
- Last month, Kaplan said that he viewed the Fed as meeting its dual mandate and deems it appropriate to continue to remove accommodation.
- Kaplan is rated as neutral (0) on the Bloomberg Economics Fed Spectrometer.
Seven-Year Treasury Note Auction
The U.S. Treasury will sell $31 billion of seven-year notes.
Fed Chairman Jerome Powell will make brief remarks on the U.S. economy and answer audience questions at a Senate event in Washington.
- His remarks are unlikely to differ from those made at his post-FOMC press conference a day earlier.
- In a speech in August at the Fed’s annual Jackson Hole Symposium, Powell explained the uncertainty of measuring equilibrium “star” variables that provide insight into the amount of slack in the economy. Without a clear estimate of those underlying relationships it is hard to calibrate monetary policy. Thus, he believes the current pace of gradual pace of interest rate hikes is appropriate, and the best way of to mitigate immeasurable risks.
- Powell is rated as neutral (0) on the Bloomberg Economics Fed Spectrometer.
Friday, Sept. 28
Richmond Fed President Thomas Barkin (voter) will give a keynote speech in Charlotte, North Carolina.
- In early August, Barkin said that slow productivity and labor-force growth will likely put a ceiling on economic growth for the foreseeable future.
- He also noted that high levels of debt will be a serious headwind to counter-cyclical fiscal policy during the next downturn.
- Barkin is rated as being modestly hawkish (+1) on the Bloomberg Economics Fed Spectrometer.
Personal Income & Spending
|Personal Income (Aug.)||0.4||0.5||0.3|
|Core PCE Deflator||0.1||0.1||0.2|
Consumption growth is estimated to slow in the third quarter from 3.8% in the second quarter. August’s personal spending data will likely indicate that growth decelerated in the beginning of the quarter.
- Retail sales retraced significantly in August from July’s robust pace.
- Some of the weakness in retail sales was likely attributed to falling prices in certain categories, such as apparel. The PCE report will be more informative as to whether real consumer activity in the first month of the third quarter.
- Personal-income growth should come in on the stronger side. A steady workweek, solid payrolls and a pop in average hourly earnings led to a 0.6% increase in aggregate income growth in August.
- Core CPI, which fell to 2.2% in August from 2.4% prior, is not consistent with the Fed’s preferred inflation gauge — the core PCE deflator — holding at 2%.
US Personal Income MoM SA
US Personal Consumption Expenditures Nominal Dollars MoM SA
US Personal Consumption Expenditures Chained 2012 Dollars MoM SA
US Personal Consumption Expenditures Chain Type Price Index MoM SA
US Personal Consumption Expenditure Core Price Index MoM SA
US Personal Consumption Expenditure Core Price Index YoY SA
Market News International Chicago Business Barometer SA
- Michigan Sentiment (Final)
|U Mich Sentiment (Sept.)||100.5||99.5||100.8|
Consumer sentiment will likely fall at the end of September, giving up a part of the strength exhibited at the beginning of the month.
- The preliminary reading was the highest since March and, before that, since January 2004. The survey for the second half of the month should cover the period when Hurricane Florence hit the Carolinas.
- Inflation expectations deserve heightened attention, as the Fed watches the gauge very closely. They remain well anchored but have been hovering near the low end of the range. The preliminary September report indicated inflation expectations five-to-10 years ahead dropped to 2.4%, matching the lowest readings of the cycle, with an exception of December 2016, when they fell to 2.3%.
University of Michigan Consumer Sentiment Index
U. of Michigan Sentiment Conference Call
Click here to listen to the University of Michigan and Bloomberg post-release conference call conducted by Professor Richard Curtin, director of surveys of consumers at the Survey Research Center at the University of Michigan, and Bloomberg Senior U.S. Economist Yelena Shulyatyeva. They will discuss the results of the University of Michigan’s final indicators for September. Participants may submit their questions anonymously to: email@example.com.
New York Fed President John Williams (voter) will give a keynote speech on financial markets and monetary policy in New York.
- Williams is at the center of the recent debate on the natural rate of interest. He has said he believes the rate is very low, implying that the Fed does not have far to go before it reaches equilibrium.
- However, Williams believes that monetary policy works with “long and variable lags,” meaning that policy needs to be forward looking with respect to inflationary pressures.
- Williams is rated as a modest hawk (+1) on the Bloomberg Economics Fed Spectrometer.
U.S. Equity Market Outlook:
Trade War May Result in 80-Bp S&P 500 Margin Hit in Year Ahead
By Gina Martin Adams
Existing tariffs in the U.S.-China trade war could cost S&P 500 companies $112 billion of Ebit and 80 bps of gross margin in the next 12 months. Revenue may be largely out of harm’s way, due to China’s small share of sales for index constituents, but margin compression from trade duties could exact a relatively heavy toll on earnings.
While the destruction unleashed by Hurricane Florence is still being evaluated, a wide range of economic indicators will be distorted over the next few months. This will complicate Fed policy makers’ ability to read the “economic tea leaves” for a while, but not enough to shake their confidence in a continued path of gradualism. Florence could drive a spike in jobless claims, weigh on the pace of job creation in September, disrupt international trade flows, and artificially boost ISM indices and residential investment. However, there will be little sustained economic impact and virtually no consequence for monetary policy.
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