As we venture into another week of economic developments and policy decisions, it’s crucial to arm ourselves with insights that can help us navigate the ever-evolving financial landscape. The U.S. economy, in particular, presents events and factors that could shape the weeks and months to come. Let’s delve into some of the key insights that have emerged recently.
The near-term U.S. economic outlook is shrouded in a mist of uncertainty. Several elements are clouding our vision of the future, with the looming shadow of a potential government shutdown in November being a significant concern. While Congress has managed to avert crises in the past, the unpredictability of political decisions means that businesses and investors must remain on their toes.
Another significant event on the horizon is the UAW strike. While its economic impact has been milder than anticipated so far, the situation remains fluid. The duration of the strike and the speed at which operations might ramp up post-strike are variables that introduce a degree of unpredictability. Current projections suggest that if the strike persists for another four to six weeks, we could see a reduction in the 4Q GDP by 0.2-0.3 percentage points.
Turning our attention to the Federal Reserve, the September minutes are eagerly awaited by many. Analysts and investors are keen to understand the factors that have buoyed the Fed’s optimism, especially in light of their apparent confidence in avoiding not just a recession but even a significant economic slowdown. Additionally, there’s a palpable interest in any commentary the Fed might offer around the level of neutral rates, especially since several participants have recently adjusted their longer-run rate forecasts.
On the consumer front, sentiments offer a mixed bag. The University of Michigan’s consumer sentiment index is expected to show a slight dip in October, coming down to 67.5 from 68.1 at the end of September. While the sentiment had seen a recent decline, there are silver linings. The successful averting of a government shutdown and a cooling of long-run inflation expectations to 2.8% in September from 3.0% previously are positive signs. However, underlying concerns persist, especially regarding personal finances, indicating that while the sentiment has seen some improvement, there’s still a considerable path to recovery.
Investors will be asking. How will the potential leadership changes in the U.S. House and the anticipated economic data, especially the PPI announcement, impact the broader market sentiment and investment strategies in the short to medium term?
As we step into the week ahead, these insights will be instrumental in shaping our understanding and responses to the unfolding economic events. Stay informed and stay ahead!
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The Hot Zones this Week
Each week there are zones where trading can get wild. I call these the hot zones.
Monday, October 9th
Columbus Day Holiday – Columbus Day celebrates Christopher Columbus’s arrival in the Americas on October 12, 1492. It honors his voyage from Spain and the onset of transatlantic exploration.
Fed Policy Speakers:
08:00 am: Fed’s Barr speaks at the American Bankers’ Association Conference.
09:00 am: Fed’s Logan discusses the US outlook and monetary policy.
12:50 pm: Fed’s Jefferson speaks at the NABE conference.
And several other Fed officials have speaking engagements throughout the day.
Tuesday, October 10th
6:00 am: NFIB Small Business Optimism for September.
10:00 am: Wholesale Inventories for August (Final).
Wednesday, October 11th
7:00 am: MBA Mortgage Applications for the week ending October 6th.
8:30 am: Producer Price Index (PPI) for September. The consensus is a 0.2% month-over-month increase.
2:00 pm: FOMC Meeting Minutes.
Additional Insights:
The headline PPI is projected to have increased by 0.2% month-over-month in September. This rate of growth is a deceleration from the previous month, but it aligns closely with the average growth observed over the past three months. If this forecast holds true, the year-over-year rate would decrease slightly to 1.5%. When food and energy are excluded from the calculation, the core PPI is expected to rise by 0.3% month-over-month. Furthermore, when considering the core-core PPI, which excludes food, energy, and trade services, a similar increase of 0.3% month-over-month is anticipated.
Thursday, October 12th
8:30 am: Initial Jobless Claims for the week ending October 7th. The estimate is 210k.
8:30 am: Consumer Price Index (CPI) for September. The year-over-year estimate is 3.6% and the month-over-month estimate is 0.3%.
2:00 pm: Monthly Budget Statement for September.
Additional Insights:
Consumer Price Index (CPI): Inflation is expected to moderate over the forecast horizon due to expectations for restrictive monetary policy and a soft landing. For September, core inflation is expected to be 0.2% month-over-month, with the year-over-year rate falling to 4.1%. Energy prices are anticipated to increase by 0.4% month-over-month.
Friday, October 13th
8:30 am: Import Price Index for September. The import prices are likely to have risen by 0.8% month-over-month in September, primarily due to higher petroleum prices as crude oil prices moved higher because of supply-side factors. Excluding petroleum, the import prices are expected to fall by 0.1% month-over-month.
10:00 am: Import Price Index for September. The import prices are likely to have risen by 0.8% month-over-month in September, primarily due to higher petroleum prices as crude oil prices moved higher because of supply-side factors. Excluding petroleum, the import prices are expected to fall by 0.1% month-over-month.
*Note: All times mentioned are in Eastern Time.
Macro Market
Growth: The U.S. economy is anticipated to experience a soft landing, where growth will dip below the trend in 2024 but will remain positive throughout the forecasted period. The U.S. GDP growth is projected to be 2.0% (4Q/4Q) for the current year, 0.7% in 2024, and 1.8% in 2025. These figures represent an upward revision from previous assumptions, with growth rates being about 0.5 percentage points and 0.7 percentage points higher in 2023 and 2024, respectively.
Inflation: The PCE inflation rate is expected to decline to 2.2% year-over-year in the second half of 2025, which is a delay of about two quarters from the previous mild recession baseline. The forecast for the four-quarter change in core PCE inflation is set at 3.8% in 2023, 2.8% in 2024, and 2.2% in 2025.
Federal Reserve: After the pause in September, there’s an anticipation of one more 25 basis point rate hike in November, leading to a terminal target range of 5.50-5.75%. The first-rate cut is expected in June 2024, followed by quarterly 25 basis point reductions in the policy rate. This would total 75 basis points of rate cuts in 2024 and 100 basis points of cuts in 2025.
Economic Calendar
Briefing.com has a good U.S. economic calendar for the week. Here are the main U.S. releases.
Briefing.com
Last Week’s Numbers
Review Last week’s numbers here.
Earnings
Source I/B/E/S data from Refinitiv
Aggregate Estimates and Revisions
- 23Q3 Y/Y earnings are expected to be 1.3%. Excluding the energy sector, the Y/Y earnings estimate is 6.2%.
- Of the 20 companies in the S&P 500 that have reported earnings to date for 23Q3, 85.0% have reported earnings above analyst estimates. This compares to a long-term average of 66.5% and prior four quarter average of 73.6%.
- During the week of October. 9, 11 S&P 500 companies are expected to report quarterly earnings.
Global Spotlight
The U.S. House’s Leadership Shuffle
The U.S. House of Representatives is in the midst of a leadership transition, with voting for a new speaker set to commence on October 11. This follows the unexpected removal of Rep. Kevin McCarthy, a decision driven by a faction within the Republican party unhappy with his collaboration with Democrats on a government funding bill. As the race for the speaker’s position heats up, prominent Republican figures like Steve Scalise, Jim Jordan, and Kevin Hern are emerging as contenders. Their conservative leanings, combined with the demands of the far-right faction, could increase the likelihood of a government shutdown in November, a move that might backfire on the Republicans in the 2024 elections.
Tensions Rise in Australia’s LNG Sector
Chevron’s liquified natural gas (LNG) facilities in Australia, Gorgon and Wheatstone, are on the brink of another potential strike. Workers at these facilities have signaled their intent to resume strikes, despite a mediated agreement just last month. If unresolved, the strikes could recommence by October 16. Given that these facilities contribute to a significant 5-7% of the global LNG supply, extended disruptions could lead to supply chain issues and price surges. While Chevron has strategies in place to maintain supply, the longer the conflict persists, the higher the risk of significant disruptions.
Liberia’s Electoral Landscape
Liberia is gearing up for a pivotal general election, with President George Weah vying for a second term on October 10. The political atmosphere is charged, with allegations of electoral meddling and the potential for post-election violence. Dissatisfaction with Weah’s governance, particularly concerning inflation and corruption, has bolstered the opposition. If no candidate secures a majority, a runoff will be inevitable, heightening the chances of clashes between rival supporters. The eventual victor will likely grapple with a fragmented legislature, posing challenges for reform implementation.
German State Elections: A Litmus Test
Bavaria and Hesse, two influential German states, recently held their parliamentary elections on October 8. The elections serve as a barometer for the national political climate. Key issues like migration and climate change took center stage, with the far-right Alternative für Deutschland (AfD) gaining traction. Nationally, the AfD’s popularity is surging, even surpassing the Social Democrats in some polls. The Christian Social Union, traditionally dominant in Bavaria, has seen its influence diminish, leading to a coalition with the Free Voters. This election will be instrumental in assessing the balance of power between centrist and right-leaning factions.
U.S.-U.K. Data Pact Comes into Play
October 12 marks the commencement of the U.S.-U.K. data transfer agreement, streamlining the digital data exchange between the two nations. This follows a similar, albeit more contentious, agreement between the U.S. and the European Union. The U.S.-U.K. pact promises to simplify business operations and clarify data transfer regulations, offering potential economic boons, especially in burgeoning sectors like artificial intelligence. However, with the EU-U.S. agreement facing legal scrutiny over data protection concerns, the U.S.-U.K. deal might encounter similar challenges down the line.
Stratfor.com
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