Market Focus: WOW! The last full week of the year. The last FOMC meeting for the year. Lots of manufacturing data and a few hosing reports. At the very least the end of the year tapering speculation will end but the predictions for when in 2014 will prevail. I do not expect major changes in the last full week but interest rates have been creeping steadily higher over the lat few weeks.
Empire State MFG: The New York Fed conducts this monthly survey of manufacturers in New York State. Participants from across the state represent a variety of industries. On the first of each month, the same pool of roughly 175 manufacturing executives (usually the CEO or the president) is sent a questionnaire to report the change in an assortment of indicators from the previous month. Respondents also give their views about the likely direction of these same indicators six months ahead. The consensus estimate is that there will be am increase from -2.21 to 4.5. What it means to you: The Empire Manufacturing Survey gives a detailed look at New York State’s manufacturing sector, how busy it is and where things are headed. Since manufacturing is a major sector of the economy, this report has a big influence on the markets. Some of the Empire State Survey sub-indexes also provide insight on commodity prices and other clues on inflation.
Productivity and Costs: Productivity measures the growth of labor efficiency in producing the economy’s goods and services. Unit labor costs reflect the labor costs of producing each unit of output. Both are followed as indicators of future inflationary trends. The consensus is for a 2.9% increase in Productivity (significantly more than last month’s 1.9% and a decrease of -1.4% in Unit Labor Costs. Lower than last month’s -.6%. What it means to you: Productivity growth is critical because it allows for higher wages and faster economic growth without inflationary consequences. In periods of robust economic growth, productivity ensures that inflation will remain well behaved despite tight labor markets. Productivity growth is also a key factor in helping to increase the overall wealth of an economy since real wage gains can be made when workers are more productive per hour.
PMI Manufacturing Index Flash: Purchasing Managers’ Manufacturing Index (PMIs) is based on monthly questionnaire surveys of selected companies which provide an advance indication of what is really happening in the private sector economy by tracking changes in variables such as output, new orders, stock levels, employment and prices across the manufacturing sectors. The flash index, usually released about a week before the final, gives a preliminary reading of conditions for the current month. The consensus estimate is for a slight increase from 54.3 to 55. What it means to you: PMI manufacturing data give a detailed look at the manufacturing sector, how busy it is and where things are headed. Since the manufacturing sector is a major source of cyclical variability in the economy, this report has a big influence on the markets. And its sub-indexes provide a picture of orders, output, employment and prices.
Industrial Production: The index of industrial production is available nationally by market and industry groupings. The major groupings are comprised of final products (such as consumer goods, business equipment and construction supplies), intermediate products and materials. The industry groupings are manufacturing (further subdivided into durable and nondurable goods), mining and utilities. The capacity utilization rate – reflecting the resource utilization of the nation’s output facilities – is available for the same market and industry groupings. The consensus estimate is for an increase of .6% (an increase over last month’s -.1%). What it means to you: Industrial production and capacity utilization indicate not only trends in the manufacturing sector, but also whether resource utilization is strained enough to forebode inflation. Also, industrial production is an important measure of current output for the economy and helps to define turning points in the business cycle (start of recession and start of recovery).
CPI: The Consumer Price Index is a measure of the average price level of a fixed basket of goods and services purchased by consumers. Monthly changes in the CPI represent the rate of inflation. The consensus estimate is for an increase of .0% after last month’s -.1% increase and an increase in the core rate of .1% (same as last month). What it means to you: The consumer price index is the most widely followed monthly indicator of inflation. The CPI is considered a cost-of-living measure since it is used to adjust contracts of all types that are tied to inflation. For monetary policy, the Federal Reserve generally follows “headline” and “core” inflation. This latter measure excludes the volatile food and energy components. The Fed’s preferred inflation measure is not the CPI but the personal consumption price index because it reflects what consumers are actually buying during any given period-the component weights are updated annually while those for the CPI are updated infrequently.
Housing Market Index: The National Association of Home Builders produces a housing market index based on a survey in which respondents from this organization are asked to rate the general economy and housing market conditions. The housing market index is a weighted average of separate diffusion indexes: present sales of new homes, sale of new homes expected in the next six months, and traffic of prospective buyers in new homes. What it means to you: This report provides a gauge of not only the demand for housing, but the economic momentum. People have to be feeling pretty comfortable and confident in their own financial position to buy a house. Furthermore, this narrow piece of data has a powerful multiplier effect through the economy, and therefore across the markets and your investments.
The FOMC Meeting begins: The Federal Open Market Committee meets eight times a year in order to determine the near-term direction of monetary policy. For monetary policy, the FOMC evaluates the relative concerns over the outlook for economic growth (too strong, too weak, about right) and pending inflation (too high, too low, about right). The FOMC then determines whether short-term interest rates should be raised, lowered, or left unchanged to accomplish its objectives of healthy economic growth and low inflation. The FOMC consists of the seven Governors of the Federal Reserve Board (assuming no seats are vacant) and five Federal Reserve Bank presidents. What it means to you: The interest rate set by the Fed, the federal funds rate, serves as a benchmark for all other rates. A change in the fed funds rate, the lending rate banks charge each other for the use of overnight funds, translates directly through to all other interest rates from Treasury bonds to mortgage loans. It also changes the dynamics of competition for investor dollars.
ICSC Goldman Store Sales: This weekly measure of comparable store sales at major retail chains, published by the International Council of Shopping Centers, is related to the general merchandise portion of retail sales. It accounts for roughly 10 percent of total retail sales. What it means to you: Consumer spending accounts for more than two-thirds of the economy, so if you know what consumers are up to, you’ll have a pretty good handle on where the economy is headed.
Redbook: A weekly measure of sales at chain stores, discounters, and department stores. It is a less consistent indicator of retail sales than the weekly ICSC index. What it means to you: The pattern in consumer spending is often the foremost influence on stock and bond markets.
2 Year Note Auction
Housing Starts: A housing start is registered at the start of construction of a new building intended primarily as a residential building. The start of construction is defined as the beginning of excavation of the foundation for the building. The consensus estimate is for a decrease from .952 million annualized units to .925 million units. What it means to you: The housing starts report is the most closely followed report on the housing sector. Housing starts reflect the commitment of builders to new construction activity. The level as well as changes in housing starts reveals residential construction trends. Housing starts are subject to substantial monthly volatility, especially during winter months. It takes several months to establish a trend. Thus, it is useful to look at a 5-month moving average (centered) of housing starts.
FOMC Announcement: The FOMC also determines whether the Fed should add or subtract liquidity in credit markets separately from that related to changes in the fed funds rate. The Fed announces its policy decision (typically whether to change the fed funds target rate) at the end of each FOMC meeting. The consensus estimate is for the Federal Funds Rate to remain the same. What it means to you: Interest rate costs are a significant factor for many businesses, particularly for companies with high debt loads or who have to finance high inventory levels. This interest cost has a direct impact on corporate profits. The bottom line is that higher interest rates are bearish for the stock market, while lower interest rates are bullish.
Chairman Press Conference: The Fed announced on March 24, 2011 that Fed Chairman Ben Bernanke will hold press briefings four times a year to explain the FOMC’s latest quarterly economic projections. According to the Fed, the “introduction of regular press briefings is intended to further enhance the clarity and timeliness of the Federal Reserve’s monetary policy communication.” What it means to you: The chairman’s press conference allows for the financial markets and public in general to learn more about why and how the monetary policy decision was made and to learn more about FOMC views on the direction of the economy including real growth, inflation, unemployment, expected timing of changes in the fed funds rate, and expected levels of the fed funds rate in the near term.
EIA Petroleum Report: The Energy Information Administration (EIA) provides weekly information on petroleum inventories in the U.S. The level of inventories helps determine prices for petroleum products. What it means to you: Petroleum product prices are determined by supply and demand – just like any other good and service. During periods of strong economic growth, one would expect demand to be robust. If inventories are low, this will lead to increases in crude oil prices – or price increases for a wide variety of petroleum products such as gasoline or heating oil.
5 Year Note Auction
Weekly Jobless Claims: New unemployment claims are compiled weekly to show the number of individuals who filed for unemployment insurance for the first time. An increasing (decreasing) trend suggests a deteriorating (improving) labor market. The four-week moving average of new claims smoothes out weekly volatility. The consensus estimate is for a decrease from 368,000 to 337,000. What it means to you: By tracking the number of jobless claims, investors can gain a sense of how tight, or how loose, the job market is. If wage inflation threatens, it’s a good bet that interest rates will rise.
Philadelphia Fed Survey: The general conditions index from this business outlook survey is a diffusion index of manufacturing conditions within the Philadelphia Federal Reserve district. This survey, widely followed as an indicator of manufacturing sector trends, is correlated with the ISM manufacturing index and the index of industrial production. The consensus estimate is for an increase from 6.5 to 10. What it means to you: By tracking economic data such as the Philly Fed survey, investors will know what the economic backdrop is for the various markets. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers more moderate growth so that it won’t lead to inflation. The Philly Fed survey gives a detailed look at the manufacturing sector, how busy it is and where things are headed.
Existing Home Sales: Existing home sales tally the number of previously constructed homes, condominium and co-ops in which a sale closed during the month. Existing homes (also known as home re-sales) account for a larger share of the market than new homes and indicate housing market trends. The consensus estimate is for a decrease from an anemic 5.12 million units to 5.020 million units. What it means to you: This provides a gauge of not only the demand for housing, but the economic momentum. In a more specific sense, trends in the existing home sales data carry valuable clues for the stocks of home builders, mortgage lenders and home furnishings companies.
Leading Indicators: A composite index of ten economic indicators that should lead overall economic activity. This indicator was initially compiled by the Commerce Department but is now compiled and produced by The Conference Board. It has been revised many times in the past 30 years – particularly when it has not done a good job of predicting turning points. The consensus estimate is for an increase from last month’s .2 to .7. What it means to you: By tracking economic data such as the index of leading indicators, investors will know what the economic backdrop is for the various markets. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers less rapid growth and is extremely sensitive to whether the economy is growing too quickly-and causing potential inflationary pressures. The index of leading indicators is designed to predict turning points in the economy — such as recessions and recoveries.
Bloomberg Consumer Comfort Index: A weekly, random-sample survey tracking Americans’ views on the condition of the U.S. economy, their personal finances and the buying climate. What it means to you: The pattern in consumer attitudes can be a key influence on stock and bond markets. Consumer spending drives two-thirds of the economy and if the consumer is not confident, the consumer will not be willing to spend. Confidence impacts consumer spending which affects economic growth.
7 Year Note Auction
GDP: Gross Domestic Product (GDP) is the broadest measure of aggregate economic activity and encompasses every sector of the economy. The consensus Estimate is for 3.6% after last month’s 3.6%. The price component is expected to be 2% (same as than last month). What it means to you: Gross domestic product is the country’s most comprehensive economic scorecard. GDP is the all-inclusive measure of economic activity. The GDP report contains a treasure-trove of information which not only paints an image of the overall economy, but tells investors about important trends within the big picture. GDP components such as consumer spending, business and residential investment, and price (inflation) indexes illuminate the economy’s undercurrents, which can translate to investment opportunities and guidance in managing a portfolio.
Corporate Profits: Corporate profits, as reported by the Bureau of Economic Analysis (BEA), are summarized briefly as the income of organizations treated as corporations in the national income and product accounts. The BEA reports several measures of profits. What it means to you: Corporate profits are the lifeblood of investment spending. Profits are the income of a corporation. When profits are strong, then companies will be able to increase their capital spending. This could allow better growth prospects for a company and is likely to increase its underlying value. When corporate profits decline, then capital spending tends to decline. Without the potential for growth, a company could be at a disadvantage, particularly in our global economic environment.
Kansas City Fed MFG Index: The monthly Survey of Manufacturers provides information on current manufacturing activity in the Tenth District. The accumulated results also help trace longer term trends. The survey monitors manufacturing plants selected according to geographic distribution, industry mix, and size. Survey results reveal changes in several indicators of manufacturing activity, including production and shipments, and identify changes in prices of raw materials and finished products. Answers cover changes over the previous month, changes over the past twelve months, and expectations for activity six months into the future. The breakeven point for each index is zero with positive numbers indicating growth and negative numbers reflecting decline. What it means to you: Investors track economic data like the Kansas City Survey of Manufacturers to understand the economic backdrop for the various markets. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers a moderate growth environment that will not generate inflationary pressures. The survey gives a detailed look at Tenth District’s manufacturing sector, how busy it is and where it is headed.