The Independent Market Observer

Monday Update: Generally Positive, But Concerns Ahead?

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Oct 12, 2015 1:21:00 PM

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monday updateOverall, last week’s data came in generally positive, but in this Monday update, I highlight some economic news in the week ahead that may be cause for concern.

Highlights from last week

ISM Non-Manufacturing. This measure, which covers about seven-eighths of the economy, was the most important release last week. Levels in previous months had been high, and September’s figure—at 56.9—although below the previous month’s 59.0, is still very healthy, one that historically has meant GDP growth of around 3.5 percent, per Capital Economics. We won’t see that growth level, largely due to the poor ISM Manufacturing number, but with 13 of 17 sectors expanding, the service sector is in good shape.

International Trade Balance. This widened sharply, to $48.3 billion from $41.9 billion, as the strong dollar and slowing global growth hurt exports and juiced import levels. The market was already prepared for the decline, as the advance trade report on goods had flagged the higher imports. A significant part of this month’s decline also appears to be due, at least in part, to the launch of the iPhone 6 series, which means the decline should be transitory.

Fed Meeting Minutes. As I read the minutes, I found them to be quite positive overall on the U.S. economy, but the Fed did express concerns on whether inflation might remain below target levels due to weakness elsewhere in the world. The decision to postpone an increase in rates appeared to be due more to an abundance of caution than to any specific concerns. There was very little in the way of real news in the minutes, but they were generally encouraging in tone.

To wrap up, the strong ISM Non-Manufacturing report suggests that most of the economy remains positive, and the Fed’s generally positive take suggests that it sees few real risks. Although the weak trade numbers are a concern, there are some special factors in the data, as noted. In any event, this kind of data is a typical response to stronger U.S. growth.

Concerns ahead in this week’s data?

Wednesday: Consumer Prices

  • Just as the Fed worried, headline prices (including food and energy) are expected to drop for the second month in a row, down by an additional 0.2 percent, which will bring the annual inflation rate down to –0.1 percent (i.e., into deflation).
  • This drop, however, is due entirely to declines in gasoline prices, and core inflation is expected to increase by 0.1 percent for the month and 1.8 percent for the year—very close to the Fed’s target zone.
  • Although the headline numbers are worrying, the core numbers are better indicators of economic risk, and these are much healthier.

Thursday: Retail Sales

  • Headline sales, including autos, are expected to increase by 0.2 percent for the second month in a row, supported by strong gains in auto sales enabled, at least in part, by low gas prices. 
  • Core retail sales, which exclude autos but include gasoline, are expected to decline by 0.1 percent after an increase of 0.1 percent in the previous month, again hit by the decline in gasoline prices. 
  • Netting out autos, gas, and building materials, the control group of retail sales is expected to increase by 0.3 percent, which is within a normal range.

Thursday: Industrial Production

  • In the major negative release of the week, this figure is expected to decline by an additional 0.2 percent after a drop of 0.4 percent in the previous month.
  • There is significant downside risk here, however. While the number of manufacturing jobs remained reasonably stable, the hours worked dropped by 0.9 percent, suggesting that final production might decline at a similar rate. 
  • Declines in both manufacturing and mining should also hit this number, raising the risk of a negative surprise.

Friday: University of Michigan Consumer Confidence Survey

  • This should show a rebound to 88.8 after the previous month’s decline to 85.7.
  • With stock markets stabilizing and gasoline prices dropping, this measure is expected to follow other consumer confidence measures back up.
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