U.S. retail sales report expected to show continued strength in consumer spending
U.S. unemployment claims expected to remain in good shape
Markit U.S. manufacturing PMI expected to remain firm
ECB expected to stand pat with QE already set through Sep 2018
BOE policy expected unchanged
U.S. retail sales report expected to show continued strength in consumer spending — The market consensus is for today’s Nov retail sales report to show a solid report of +0.3% and +0.6% ex autos. Retail sales in September soared by +1.9% and +1.2% ex-autos mostly because of the hurricanes seen in Aug/Sep that forced many consumers to buy new cars and home supplies. Retail sales then fell back to +0.2% and +0.1% ex-autos in October on some pay-back after the strength seen in September.
The U.S. retail sales series should now start to settle down as the hurricane effects dissipate, thus providing a better view of underlying trends. U.S. consumer spending in general should remain relatively strong during the current holiday season and into early 2018 due to strong consumer confidence and rising income. Personal income in October was strong at +3.4% y/y, matching the highest level in nearly two years.
U.S. unemployment claims expected to remain in good shape — The unemployment claims data remains in very good shape and indicates that U.S. businesses are holding on tightly to their current employees. Moreover, businesses are hiring new employees at a solid clip as seen by last Friday’s Nov payroll report of +228,000.
The initial claims series is only +13,000 above the 44-3/4 year low of 223,000 posted in October. Meanwhile, the continuing claims series is only +40,000 above its 44-year low of 1.868 million posted in early November. The market consensus is for today’s initial unemployment claims report to remain unchanged at 236,000. The consensus is for today’s continuing claims series to show a small -8,000 decline to 1.900 million, adding to last week’s -52,000 decline to 1.908 million.
Markit U.S. manufacturing PMI expected to remain firm — The market consensus is for today’s Dec Markit U.S. manufacturing PMI index to remain unchanged at 53.9, after Nov’s -0.7 point decline. U.S. manufacturing confidence remains strong in general due to the strong U.S. GDP growth rate near +3.0% seen in the last two quarters and due to substantially better economic growth overseas.
Meanwhile, the consensus is for today’s Dec Markit U.S. services PMI to show a +0.2 point increase to 54.7, recovering some of Nov’s -0.8 point decline to 54.5. Despite Nov’s decline, the index remains in generally strong shape at only -1.5 points below the 2-year high of 56.0 posted in August, illustrating that optimism continues to dominate in the service sectors of the U.S. economy.
ECB expected to stand pat with QE already set through Sep 2018 — The ECB today will leave its policy unchanged since it just recently fixed its QE course through Sep 2018 and since an ECB rate hike is not expected until at least 2019. The ECB at its meeting in October announced that its QE program would be cut to 30 billion euros per month during Jan-Sep 2018, which is half of this year’s QE pace of 60 billion euros per month.
The markets were encouraged that the ECB at its October meeting did not say that its QE program would definitely end in September 2018. That left open the possibility for an extension of the program for at least the remainder of 2018 at a lower level of perhaps 15 billion euros per month. The open-ended nature of the ECB’s QE announcement in October helped to undercut the euro.
The ECB today will update its economic forecasts and will release its first forecasts for 2020. The ECB may revise its inflation forecasts slightly higher, putting them more in line with market expectations. For 2018, the ECB is forecasting an inflation rate of only +1.2% y/y, which is -0.2 points below the market consensus of +1.4%. For 2019, the ECB is forecasting an inflation rate of +1.5%, which is -0.1 point below the consensus of +1.6%. The 2018-2019 inflation forecasts are below the ECB’s inflation target of just under +2.0%. The Eurozone Nov CPI was at only +1.5% y/y and the core CPI was even weaker at +0.9% y/y.
Regarding interest rates, the ECB’s guidance states that the ECB will not raise interest rates until well past the end of its QE program. That indicates that the ECB does not believe it will be raising interest rates until at least 2019. The market at present is discounting the odds at only about 30% that the ECB will raise interest rates before the end of 2018.
BOE policy expected unchanged — The Bank of England at its meeting today is expected to leave its policy rate unchanged, holding steady after the +25 bp rate hike seen at its last meeting in November. With its November rate hike, the BOE reversed the -25 bp rate cut to 0.25% implemented in August 2016 as a means to support the economy after the Brexit vote two months earlier in June 2016.
The BOE in November raised its base rate by +25 bp to 0.50% mainly to address the high level of inflation that has resulted from the sharp drop in sterling that ensued from the June 2016 Brexit referendum vote. The UK CPI in Sep-Oct rose to a 5-1/2 year high of +3.0% y/y and the core CPI in Aug-Oct rose to a 5-3/4 year high of +2.7% y/y.
The Bank of England is now expected to leave rates unchanged through early 2018 as it waits to see if inflation will cool and how Brexit negotiations will fare. If the Brexit negotiations proceed well, there is a chance of another BOE rate hike later in 2018. The market is current discounting about a 70% chance of a BOE rate hike by the end of 2018.