Good afternoon,
Fed Funds Futures Point to Quicker Rate Increase
by Craig Dismuke
The only economic report this morning is the Fed’s Labor Market Conditions index, an aggregation of 19 monthly labor market indicators. Increasingly, the Fed does not need to rely on the aggregated index to affirm that the jobs market is getting stronger (more on this below). Thursday will bring the most important release of the week, November’s Retail Sales report. November’s sales data is likely to be held back at the headline level because of less spending on gasoline. What will be more important to watch will be the core sales data, which is expected to show 0.5% MoM growth. With a lot of the holiday sales being pulled forward, November’s sales data will take on more importance this year.
Last Friday’s labor data has re-established the flattening-curve tone for the bond market. The report was very strong across-the-board with another 321k payrolls added in November, 44k added to the September and October figures, the best pace of annual job growth since 1999 through only 11 months of the year, an increase in hours worked, a 0.4% MoM increase in wages, and a 177k drop in those employed-part-time-for-economic-reasons. Certainly there are concerns about the structural shift that has taken place in the labor market with fewer and fewer people participating in the labor force, which has been largely attributable to the aging population. But for Fed policy purposes, the biggest question is the cyclical dynamic of wage inflation. With the unemployment rate dropping 1% per year, wage inflation appears to be on the horizon. It may still take some time to materialize, but the markets try to respond to things on the horizon. The expectation from the markets after such a strong batch of labor figures will be for a future rate hike by the Fed. Whether that is March, June, or July of next year is less relevant than the fact that there will likely be one (or at least the data supports there being an increase). This will push short yields higher in anticipation of a hike. Already on Friday, the 2-year Treasury yield rose from 0.55% to 0.64% as the market priced in a 70% chance for a rate hike in June. Recall that the 2-year had dropped all the way back down to 0.27% in mid-October. This is likely to be one of the themes of 2015, a flattening yield curve with short yields leading the curve higher.
Japan’s economy fared worse than initially expected in 3Q, contracting 1.9% versus initial estimates of a 1.6% contraction. According to Bloomberg, “Japan's recession was deeper than initially estimated, a blow to Prime Minister Shinzo Abe as he campaigns for re-election ... Weaker-than-expected business investment sapped the world's third-biggest economy, compounding damage from a slump in consumer spending after a sales-tax rise in April. With the main opposition party caught unprepared, Abe is on-track to win the Dec. 14 election, even as a decline in the yen cuts into people's spending power.”
WSJ: “Many of the world's top policy makers are rewriting their economic forecasts for the U.S., Europe, Japan and elsewhere, betting plummeting oil prices will lead to an overall boost in the global economy by delivering a windfall to consumers and manufacturers. Officials at the [IMF] ... U.S. Federal Reserve and [ECB] have in recent days shrugged off concerns that the tumbling cost of crude signals a global slowdown. … Instead, they project cheaper oil will be a shot in the arm for the world economy overall, especially countries with high energy tabs. Stanley Fischer , vice chairman of the U.S. Federal Reserve, called it a 'supply shock' that will help the U.S. 'It's more likely to increase GDP than reduce it,' he said. 'The effect is unambiguously positive,' [ECB] President Mario Draghi declared after the bank's monthly meeting last week. Some economists warn that the nearly 40 percent plunge in crude-oil prices in recent months is more a harbinger of gloom ... This time, though, a range of supply-boosting factors is shifting the calculus for many officials and economists - from advanced drilling techniques to a revival in Libyan oil supply and a bid by some Middle Eastern producers to price competitors out of the market.”
Last Friday’s labor data has re-established the flattening-curve tone for the bond market. The report was very strong across-the-board with another 321k payrolls added in November, 44k added to the September and October figures, the best pace of annual job growth since 1999 through only 11 months of the year, an increase in hours worked, a 0.4% MoM increase in wages, and a 177k drop in those employed-part-time-for-economic-reasons. Certainly there are concerns about the structural shift that has taken place in the labor market with fewer and fewer people participating in the labor force, which has been largely attributable to the aging population. But for Fed policy purposes, the biggest question is the cyclical dynamic of wage inflation. With the unemployment rate dropping 1% per year, wage inflation appears to be on the horizon. It may still take some time to materialize, but the markets try to respond to things on the horizon. The expectation from the markets after such a strong batch of labor figures will be for a future rate hike by the Fed. Whether that is March, June, or July of next year is less relevant than the fact that there will likely be one (or at least the data supports there being an increase). This will push short yields higher in anticipation of a hike. Already on Friday, the 2-year Treasury yield rose from 0.55% to 0.64% as the market priced in a 70% chance for a rate hike in June. Recall that the 2-year had dropped all the way back down to 0.27% in mid-October. This is likely to be one of the themes of 2015, a flattening yield curve with short yields leading the curve higher.
Japan’s economy fared worse than initially expected in 3Q, contracting 1.9% versus initial estimates of a 1.6% contraction. According to Bloomberg, “Japan's recession was deeper than initially estimated, a blow to Prime Minister Shinzo Abe as he campaigns for re-election ... Weaker-than-expected business investment sapped the world's third-biggest economy, compounding damage from a slump in consumer spending after a sales-tax rise in April. With the main opposition party caught unprepared, Abe is on-track to win the Dec. 14 election, even as a decline in the yen cuts into people's spending power.”
WSJ: “Many of the world's top policy makers are rewriting their economic forecasts for the U.S., Europe, Japan and elsewhere, betting plummeting oil prices will lead to an overall boost in the global economy by delivering a windfall to consumers and manufacturers. Officials at the [IMF] ... U.S. Federal Reserve and [ECB] have in recent days shrugged off concerns that the tumbling cost of crude signals a global slowdown. … Instead, they project cheaper oil will be a shot in the arm for the world economy overall, especially countries with high energy tabs. Stanley Fischer , vice chairman of the U.S. Federal Reserve, called it a 'supply shock' that will help the U.S. 'It's more likely to increase GDP than reduce it,' he said. 'The effect is unambiguously positive,' [ECB] President Mario Draghi declared after the bank's monthly meeting last week. Some economists warn that the nearly 40 percent plunge in crude-oil prices in recent months is more a harbinger of gloom ... This time, though, a range of supply-boosting factors is shifting the calculus for many officials and economists - from advanced drilling techniques to a revival in Libyan oil supply and a bid by some Middle Eastern producers to price competitors out of the market.”
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Economic Calendar
Date/Time(Central)
|
Indicator
|
Period
|
Est.
|
Actual
|
Prior
|
Revised
|
12/9/2014 9:00 AM
|
Wholesale Inventories
|
OCT
|
0.1%
|
0.3%
| ||
12/9/2014 9:00 AM
|
Wholesale Trade
|
OCT
|
--
|
0.2%
| ||
12/10/2014 6:00 AM
|
MBA Mortgage Apps.
|
5-Dec
|
--
|
-7.3%
| ||
12/11/2014 7:30 AM
|
Retail Sales Ex-Autos
|
NOV
|
0.1%
|
0.3%
| ||
12/11/2014 7:30 AM
|
Import Price Index (MoM)
|
NOV
|
-1.7%
|
-1.3%
| ||
12/11/2014 7:30 AM
|
Initial Jobless Claims
|
6-Dec
|
297K
|
297K
| ||
12/11/2014 7:30 AM
|
Continuing Jobless Claims
|
OCT
|
-1.6%
|
-0.5%
| ||
12/11/2014 7:30 AM
|
U of Mich. Consumer Confidence
|
29-Nov
|
2362K
| |||
12/11/2014 9:00 AM
|
Business Inventories
|
OCT
|
0.2%
|
0.3%
| ||
12/12/2014 7:30 AM
|
PPI (MoM) Ex. Food & Energy
|
NOV
|
0.1%
|
0.4%
| ||
12/12/2014 7:30 AM
|
PPI (YoY) Ex. Food & Energy
|
NOV
|
1.8%
|
1.8%
| ||
12/12/2014 8:55 AM
|
U of Mich. Consumer Confidence
|
Dec P
|
89.3
|
88.8
|
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