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The Dow closed above 26000 and the NASDAQ finally topped its inflation adjusted high
last week, begging the question: Why don’t investors care about a government
shutdown? The answer may be that they don’t care about lots of risks that exist, but
more specifically, previous periods when Congressional impasses have lead to Uncle
Sam shuttering some of its operations, have not spelled Armageddon for stocks.
There are just three more jobs reports before the December Federal Reserve policy meeting and each one is carries even more weight than usual. The September data are out this Friday and the consensus is for the economy to add 200,000 jobs and for the unemployment rate to remain at 5.1 percent. While the pace of job creation has slowed from last year (it was hard to imagine that we could sustain 300,000 per month), even the Fed had to admit that gains in the labor market have been “solid”. So what are the central bankers looking for to convince them that labor market slack is diminishing? My guess is that high on the list would be to see annual wage growth pick up from the sub-par 2 percent level and move towards 2.5 percent; an increase in the participation rate (the number of people employed or actively looking for a job); a continued drop in part time workers who are seeking full time positions; and a decrease in the number of long-term unemployed.
Although the jobs report is the main focus the week, the Fed is also likely to examine data on manufacturing. And spillover from the slowdown in China and other emerging markets is likely to be seen in that sector. If manufacturing indexes hold steady, it would likely provide some solace to Fed officials concerned about a global economic deceleration.
Meanwhile, last week, Yellen seemed to brush aside the China worrywarts, when she said “we do not currently anticipate that the effects of these recent developments on the U.S. economy will prove to be large enough to have a significant effect on the path for policy.” In that same speech, Yellen also said that she expects “inflation will return to 2 percent over the next few years as the temporary factors that are currently weighing on inflation wane”.
So if the labor market is solid, global slowdown worries are overblown and inflation is likely to gradually increase, why didn’t the Fed raise rates at the last meeting? As Weekend Update’s Emily Litella (Gilda Radner) would say “Never Mind”.
But wait; maybe Congress will trump the Fed’s rate increase mission. Even if lawmakers pass a continuing spending resolution to keep the Federal government open through December 11th, that’s just FIVE days before the last Fed meeting of the year. It could be déjà vu all over again (RIP Yogi), as we hurtle to the end of the year, talking about the raising the debt ceiling and defaulting on our obligations. Isn’t this fun?
MARKETS: The biotech sector is under siege again, as it has been at various times over the past couple of years. The biotech index tumbled 13 percent on the week and is now in bear market territory, off 22 percent from its recent high in July.
THE WEEK AHEAD:
Mon 9/28:
8:30 Personal Income & Spending
10:00 Pending Home Sales
Tues 9/29:
9:00 Case Shiller Home Price Index
10:00 Consumer Confidence
Weds 9/30:
8:15 ADP Private Payrolls
9:45 Chicago PMI
3:00 Fed Chair Janet Yellen speaks at Conf of State Bank Supervisors
Thurs 10/1: 9:45 PMI Manufacturing Index
10:00 ISM Manufacturing Index
10:00 Construction Spending
Fri 10/2:
8:30 September Employment Report
10:00 Factory Orders
The government shutdown was no biggie, at least according to the October jobs report. The economy added 204,000 jobs during the month and the two previous months were revised higher by a total of 60,000. In the blink of an eye, the three-month average increased from a paltry 143,000 to a respectable 202,000. The Labor Department noted that "there were no discernible impacts" of the government shutdown in the survey that measures payroll numbers, wages and hours worked. However, the shutdown impacted the household survey, which showed a 448,000 increase in the number of temporary layoffs, a category under which furloughed government employees fall. (To put that number into perspective, the rise in temporary layoffs in September was just 25,000.) As a result, the civilian labor force tumbled by 720,000 and the labor force participation rate fell by 0.4 percent to 62.8 percent, a rate last seen 36 years ago in 1977.
While the government shutdown negatively impacted the unemployment rate and the participation rate, there is reason to believe that the trend will be reversed in the November report. And there was another positive indicator, buried in the report: the nation’s retailers hired 159,500 seasonal workers in October, the highest number since 1999. (These figures are not seasonally adjusted.)
The better than expected jobs report immediately increased speculation that the Fed will begin to taper its $85 billion monthly bond purchases at the December 17-18 FOMC meeting. Lawmakers will be able to ask the Fed Chairman nominee more about central bank strategy, when Janet Yellen's Senate confirmation hearing begins this week. While it is anticipated that the Committee will approve her nomination, market watchers will be listening for any clues about future policy action (or inaction). She will like quote from the Bernanke playbook: the Fed will begin pulling back from purchasing bonds when the economic outlook improves.
MARKETS: It was another record-breaking week for large stock indexes.
THE WEEK AHEAD:
Mon 11/11: Veteran’s Day: Banks and bond markets closed, stock markets open
Tues 11/12:
7:30 NFIB Small Business Optimism Index
8:30 Chicago Fed National Activity Index
Weds 11/13:
2:00 Monthly Budget Statement
Thurs 11/14:
8:30 Jobless claims
8:30 International Trade
8:30 Non-Farm Productivity and Labor Costs
10:00 Fed Nominee Yellen's Confirmation Hearing
11:00 Report on Household Debt and Credit (Q3)
Fri 11/15:
8:30 Import Prices
8:30 Empire State Manufacturing Index
9:15 Industrial Production
9:15 Capacity Utilization
10:00 Monthly Wholesale Trade
If you want to know how the economy is doing, this is a good week to pay attention. Two important reports will help provide a snapshot of the state of the economy. The first estimate of third quarter growth is likely to show that the economy increased at a 2 percent annualized pace. Since the official end of the recession in June 2009, the US economy has expanded by 2.25 percent -- that’s is a full percentage point less than the post Word War II average. This year’s sluggish growth is partially due to the fiscal drag created by the anxiety over the fiscal cliff, higher payroll taxes and sequestration. Q3 was supposed to be the last quarter that the effects would be felt: Economists were predicting that growth would reaccelerate into the end of the year and then would move even higher in 2014.
That was until the government shutdown put a dent into the rosy picture, but all may not be lost. Most are anticipating a gradual pick-up in 2014, presuming that lawmakers can avoid another battle over a shutdown and raising the debt ceiling. If Washington keeps quiet, a couple of positive trends could continue to improve: (1) Global manufacturing is strengthening. In the US, the ISM manufacturing index reached a two-year high in October, suggesting that manufacturers took the government shutdown in stride. (2) Retail sales growth appears to be picking up.
While is expected to improve, is not happening nearly as fast as anyone would like. The persistent weakness in the recovery is blamed for the nation’s continuing struggle to get more of the 11.3 million unemployed Americans back to work. During the summer months of July through September, job creation averaged just 143,000 per month, lower than the 177,000 per month seen throughout the year. This week’s October jobs report, delayed by a week due to the shut down, is expected to show that just 130,000 jobs were created during the month.
The unemployment rate could be more unpredictable this time around. The two main employment statistics, job creation and the unemployment rate, come from separate reports. The number of jobs added comes from a survey of businesses. For the October report, Federal employees who were not at work during the survey week will be put into the “on temporary layoff” section of the “unemployed” category. So for the jobs created category, furloughed employees will not affect the number.
The unemployment rate is calculated from a survey of households and is based on people who are without jobs, who are available to work and who have actively sought work in the prior four weeks. The “actively looking for work” definition is broad, including people who contacted an employer, employment agency, job center or friends; sent out resumes or filled out applications; or answered or placed ads, among other things. The rate is calculated by dividing that number by the total number of people in the labor force. That’s why sometimes when the unemployment rate drops, it does so for the “wrong” reason: when unemployed leave the labor force.
In the October report, furloughed government employees will be counted as unemployed for the purposes of determining the unemployment rate. That’s why the prediction for the rate ranges from 7.2 to 7.5 percent. Any sharp increase in the rate would likely be reversed in the subsequent November report.
While the nation needs more robust job creation and a lower unemployment, a more virtuous cycle would include middle class wage growth. According to recently released data from the Census Bureau, median household income, income growth, and share of the total national income all continuing to decline. While the Great Recession contributed to the slide, the trend has been forming over a much longer period of time. According to the liberal think tank Center for American Progress, the typical American household’s annual income peaked in 1999 at $56,080 and has since declined by 9 percent to $51,017.
MARKETS: While growth may not be strong enough to create jobs and not weak enough to cause a recession, it’s just right to maintain a year-long Fed induced stock market rally. Investors have jumped back in with gusto: through October 25, $277 billion has flowed into stock mutual funds and exchange-traded funds – the most since the technology stock bubble 13 years ago, according to TrimTabs.
THE WEEK AHEAD:
Mon 11/4:
10:00 Factory Orders (both August and Sep released)
Tues 11/5:
AOL
10:00 ISM Non-Manufacturing Index
10:00 Consumer Confidence
Weds 11/6:
Toyota, Time Warner, Twitter prices IPO
10:00 Leading Indicators
Thurs 11/7:
Disney, Groupon
7:30 Challenger Job Cut Report
8:30 Q3 GDP (1st estimate)
8:30 Jobless claims
3:00 Consumer Credit
Fri 11/8:
8:30 October Jobs report
8:30 Personal Income and Spending
9:55 Consumer Sentiment
10:00 Job Openings and Labor Turnover (JOLTS)
With the government shutdown and debt ceiling debate postponed until after the New Year, the Fed is once again in control of investors’ fate. The central bankers will convene the penultimate policy meeting of the year this week and there is almost a zero probability that the Fed will change either its short term interest policy, which has kept overnight lending rates at 0 to 0.25 percent for nearly five years; or its $85 billion worth of monthly bond purchases, which is intended to keep longer term lending rates low. In just five weeks, investor sentiment shifted from “The Fed will almost certainly taper bond purchases at the September meeting” to “There’s no way that the Fed will change a thing until the March 2014 meeting.” The change of heart resulted from a combination of weaker than expected jobs data, leading up to the Congressional standoff and the government shutdown itself, which likely shaved 0.5 percent from Q4 economic growth. Short of a major growth spurt by the end of the year, it’s hard to see why the Fed would shift policy this year.
The primary issue is that data is likely to be distorted for a couple of months, which makes the Fed’s job pretty tough. And even if there were great year-end progress, Congress may drag us down the fiscal rabbit hole come January, so why mess with policy until Chairman-in-waiting Yellen takes over the reins at her first meeting as Chairman on March 18-19? The folks at Capital Economics have warned, “The Fed has missed its window of opportunity. If it's waiting for some degree of fiscal certainty, this really could turn into QEternity.”
The concept of unending Fed support may create anxiety for those who are worried about future inflation and asset bubbles, but the stock bulls are cheering central banker action. It has been almost exactly a year since the Fed announced this current round of bond buying - “Quantitative Easing” or “QE3” was launched in Q4 2012. Since then, the S&P 500 has soared 25 percent. The rally shows few signs of abating, despite the lackluster recovery, valuations being stretched and revenue growth slowing to a creep, because as every trader knows, one should not fight the Fed.
That said, markets have a funny way of turning when investors least expect it. As Edwin Lefevre reminds us in the 1923 trading classic Reminiscences of a Stock Operator, “There is nothing new in Wall Street. There can't be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again.”
MARKETS:
THE WEEK AHEAD: Reports in BOLD are rescheduled releases of reports that were on hold until the government reopened. Although the October jobs report will be delayed by a week, the ADP private sector employment report is expected to show a drop off in hiring due to a reduction from government contractors.
Mon 10/28:
Merck, Apple
9:15 Industrial Production
10:00 Pending Home Sales
10:30 Dallas Fed Survey
Tues 10/29:
BP, Pfizer, LinkedIn, Yelp
FOMC Meeting begins
8:30 September PPI
8:30 Retail Sales
9:00 Case Schiller Home Price Index
10:00 Consumer Confidence
Weds 10/30:
GM, Facebook, Starbucks, Visa, Kraft
8:15 ADP Private Jobs
8:30 CPI (SS COLA announced)
2:00 FOMC Announcement (No press conference)
Thurs 10/31:
Conocco Phillips, ExxonMobil, Mastercard, AIG
7:30 Challenger Job Cuts
8:30 Jobless claims
9:45 Chicago PMI
Fri 11/1:
Chevron
Motor Vehicle Sales
10:00 ISM Manufacturing
10:00 Construction Spending
After three weeks of political wrangling, the federal government is open and the debt ceiling has been increased. The good news/bad news is that there’s a 90-day grace period before the next potential round of budget/debt ceiling debates recurs. So, now the fun begins: parsing the deluge of delayed economic reports and trying to figure where the economy stands. Global/US Growth: Before the shutdown, there was ample evidence that the global economy was picking up steam. The rebound in China helped alleviate worries over a “hard landing”, the euro zone finally emerged from recession, Japan remains relatively strong and the slow down in emerging markets is picking up as worldwide demand increases.
In the U.S., the recovery was gaining momentum, until the two-headed monster of the government shut down and debt ceiling debate reared its ugly head. Moody's Analytics estimates that the whole fiasco cost $22 billion dollars and Standard and Poor’s estimates that the closure has shaved 0.6 percent from fourth quarter growth. As a result, Q4 should expand by just 2 percent, though analysts are hopeful that the hit to growth will be a blip and 2014 will make up for the short-term damage. That said, if Congressional fighting recurs in January and February, there could be more “blips” on the radar screen. Additionally, if the next round of sequester cuts go into effect, U.S. growth could be hampered in 2014.
Jobs: There will be two employment reports released within a short period of time: September will be released this Tuesday, with expectations that 180,000 jobs were created and the unemployment rate will remain at 7.3 percent. Then just 2 ½ weeks later on November 8th, the October report will be available. Over the first eight months of the year, the economy has added an average of 180,000 non-farm positions per month, but the August and July numbers were weaker than expected. The economy has added 6.8 million total jobs (7.5 million private sector jobs) since employment bottomed in February 2010.There are still 1.4 million fewer private sector jobs now than when the recession started in 2007.
Housing: The increase in mortgage rates combined with rising inventories will likely slow down the sizzling pace of the housing recovery, but should not snuff it out. Housing should continue to be a positive force in the economy.
Consumers: It was hard to hit the stores with gusto when the government was shut down and the U.S. was on the verge of defaulting on its obligations. ShopperTrak said that total retail store shopper traffic during the week of Sept. 29-Oct. 5 decreased 7.5 percent compared to the same time period last year. During the week of Oct. 6-12, foot traffic decreased 7.1 percent compared to 2012. But consumers are a mercurial bunch - visions of sugarplums may help them forget about Washington and engage in a bit of retail therapy during the holiday season.
Federal Reserve: Remember way back in September when Ben Bernanke raised the concern over “fiscal uncertainty”? (See: Congress is the biggest near-term risk to the U.S. economy) Well, that fear was well founded and probably the main reason that the central bank kept its current policies in place, including the $85 billion worth of monthly bond purchases. There are two more policy meetings before the end of the year, in October and December. It is almost a certainty that the Fed will do nothing in October, but if the economy were to pick up substantially, there is a chance of a small pull back in bond purchases at the December meeting. It is more likely that Bernanke would use his last FOMC meeting in January to change course, unless fiscal uncertainty returns to the fore. If things heat up in Congress, Janet Yellen may use her first FOMC meeting to announce the reduction in bond purchases.
Congress: Are we in for déjà vu all over again (h/t Yogi)? The agreed upon three-month time horizon has invoked a chorus of “kick the can down the road”, but wait - it could last even longer! The debt ceiling date of February 7th could be extended when Treasury Secretary Jack Lew invokes extraordinary measures.
MARKETS: Investors typically do not like uncertainty. Except last week, when they brushed aside worries over the debt ceiling and then celebrated when the deal was sealed. With indexes up sharply on the year, optimists are touting a resurgent economy, decent earnings and a Fed policy that will remain market-friendly. Pessimists argue that the bulls are confusing the avoidance of disaster with real economic progress...it is October, after all!
THE WEEK AHEAD: Get ready for a “Jobs Tuesday”! Reports in BOLD are rescheduled releases of reports that were on hold until the government reopened. It is possible additional data will be released later this week by other government entities.
Mon 10/21:
Halliburton, McDonald’s, Netflix, Texas Instruments
8:30 Chicago Fed Nat’l Activity Index
10:00 Existing Home Sales
Tues 10/22:
Coach, DuPont, Kimberly Clark,
8:30 September Jobs Report
10:00 Richmond Fed Manufacturing Index
Weds 10/23:
AT&T, Boeing, eTrade
8:30 Import/Export Prices
9:00 FHFA Housing Price Index
Thurs 10/24:
3M, Altria, Amazon, Ford, Colgate, Palmolive Microsoft, Zynga
8:30 Jobless claims
10:00 Job Opening and Labor Turnover (JOLTS)
10:00 New Home Sales
Fri 10/25:
P&G, UPS
8:30 Durable goods orders
9:55 Consumer Sentiment
Traders seemed convinced that Congress will come to an agreement on the debt ceiling, which propelled stocks higher on Thursday and Friday, and saved what was starting to look like an ugly week. Presuming that the collective wisdom is correct, then fears of financial catastrophe and recession will recede and everyone can start chewing on the boring old stuff: the pace of economic growth and corporate earnings. Of course it’s difficult to analyze the economy while the government is shut down. Menzie Chinn of EconBrowser notes that even the Fed is forced to conduct “macroeconomic policymaking with increasingly sparse or mis-measured data. If one doesn’t believe in expertise and information, then this is not a problem. If one believes that knowledge should inform decision-making, it is.” (You can almost hear Larry Summers saying, “Good luck with the new gig, Janet Yellen!”)
While Wall Street was instantly soothed by the thaw in Congressional relations, Main Street was not yet convinced. Beyond the massive reputational damage lawmakers have inflicted on themselves, many Americans are now worried that the economy will be harmed. Consumer sentiment fell in October to its weakest level in nine months, according to the Thomson Reuters/University of Michigan preliminary sentiment index.
Additionally, a recent Wall Street Journal poll showed that 42 percent of Americans think the economy will worsen over the next year, which is double the amount observed in September, and the number of those surveyed who think the country is on the right track has fallen by half. The WSJ results jibes with Gallup, which showed that consumer confidence now measures at the same low levels as that of the 2008 economic collapse.
Suffice it to say, if political gridlock goes on too long, then consumer confidence could drop, which could lead to slower than expected spending during the holiday shopping season. To underscore the risk of sliding consumer confidence, the Leaders of the National Retail Federation sent a letter to Congress, warning:
“For retailers – who represent the sector of the American economy most closely tied to consumer attitudes – these numbers are deeply disturbing…Moreover, since the very modest growth the U.S. economy has experienced following the 2008 recession has been attributed to the willingness of the American consumer to keep shopping, a lasting decline in consumer confidence is likely to translate into increased unemployment and slower growth in coming months.” The NRF also detailed practical problems the shutdown has created for retailers – from the lack of economic data and reports to concerns over processing of imported merchandise.
If the economy were to slow, it would be bad news for companies, which were at the precipice of doing something that have not done in a while: spending some of the piles of cash they have accumulated. As a reminder, non-financial companies held a record $1.78 trillion in cash and other liquid assets as of the first quarter of the year. Many analysts thought that the companies would start to spend money in order to expand their businesses and drive more sales. If Congressional bickering drags on too long, some companies may rethink those plans.
MARKETS:
THE WEEK AHEAD: Government reports in italics are due to be released, subject to the status of the shutdown. Reports that were delayed over the past two weeks, including the all-important jobs report, could be released this week, if a deal is reached. Q3 earnings season gets into full swing, with a slew of S&P 500 companies reporting this week.
Mon 10/14: Columbus Day: US stock markets open, bond markets and banks closed
Tues 10/15:
Citigroup, Intel, Johnson & Johnson, Coca Cola, Yahoo, Schwab
8:30 Empire State Manufacturing Index
Weds 10/16:
AMEX, Bank of America, BNY Mellon, Pepsi, IBM, eBay
8:30 CPI
10:00 Housing Market Index
2:00 Fed Beige Book
Thurs 10/17: DEBT CEILING D-DAY
Capital One, Goldman Sachs, Verizon, Google
8:30 Jobless claims
8:30 Housing Starts
9:15 Industrial Production
10:00 Philadelphia Fed Survey
Fri 10/18:
GE, Honeywell, Morgan Stanley, Schlumberger
10:00 Leading Indicators
Usually, a jobs report week dominates investor psyche, but this week is different. As traders turn on their computers Sunday night when Asian markets open, they will have to decide whether or not Congressional paralysis will shut down the government as of Monday night at midnight. Most analysts believe that a short shutdown will not derail the economy, unless of course you are not deemed an “excepted” or “emergency” federal worker (note: the word “essential” seems to be very un-PC this time around) and would are put on unpaid leave. If that’s the case, any shutdown will be significant to your life.
If the government were to shut down, here’s what will NOT be immediately affected: Social Security payments, Medicare, air-traffic control, immigration, border security, emergency and disaster assistance, federal law enforcement, IRS processing of electronic returns and payments, mail delivery and active-duty military will keep working, but will NOT get paid until the funds are available.
NOTE: The October 1 roll out of the Affordable Care Act’s Marketplace’s would not be affected by a government shut down. (See Health Care Reform Kickoff: What You Need to Know.)
A government shut down would shutter national parks, federally funded museums (including the Smithsonian), the National Zoo, all federal government websites (including the popular Panda Cam!), research by Health and Human Services, grant applications, new applications for Social Security, IRS walk-in centers, federal loan applications for small businesses, college tuition, or mortgages, Library of Congress buildings, events and web sites and potentially, the government of the District itself.
None of this would deal with the implications of hitting the nation’s borrowing limit - the debt ceiling. We have three weeks to deal with that issue, so don’t fret – here's a cheat sheet “Debt Ceiling, Part Deux,” which will help you brush up on your debt, deficit and debt ceiling facts.
If the government were to shut down, it may delay the Friday release of the September employment report. (Although we think the folks at the Bureau of Labor Statistics are important, Treasury Secretary Jack Lew might not agree.) This report could be pivotal. The big questions is: were the past three punk employment reports, (monthly job creation at just under 150,000, lower than the 180,000 average seen in 2013) a temporary pullback, or the sign of a more worrisome trend?
Economists predict that the September report will be more in line with this year’s 180,000 pace because recent data have shown that the labor market has been improving. (Employment reports from the Institute for Supply Management have gained ground and weekly jobless claims have dropped to the lowest level since June 2007.) The unemployment rate should remain at 7.3 percent.
MARKETS: “October. This is one of the peculiarly dangerous months to speculate in stocks…the others are July, January, September, April, November, May, March, June, December, August and February.” Mark Twain may have be on to something. Five of the 10 worst percentage losses since the Dow’s inception have occurred in October and the month claims the top three worst days ever: 10/19/87 (-22.61%), 10/28/29 (-12.82%) and 10/29/29 (-11.73%). This does not mean that investors should sell everything and run for the hills, but it’s just a reminder that with stock indexes up nearly 20 percent for the year as we enter the spooky month of October, there’s a lot going on that could cause a reversal of fortune for investors.
THE WEEK AHEAD:
Mon 9/30:
9:45 Chicago PMI
10:30 Dallas Fed
Midnight: Government funding deadline
Tues 10/1:
Health Care Marketplaces open (healthcare.gov)
Motor Vehicles Sales
10:00 ISM Manufacturing Index
10:00 Construction Spending
Weds 10/2:
8:15 ADP Private Jobs
Thurs 10/3:
7:30 Challenger Job Cuts
8:30 Weekly Jobless Claims
10:00 Factory Orders
10:00 ISM Non-Manufacturing
Fri 10/4:
8:30 Employment Report
