Key US data releases and events
The economy contracts as cuts in government spending and inventories offset gains in private spending and housing.
Fed pours water on market sentiment. Despite the Federal Reserve’s fully anticipated decision to leave policy unchanged, equity markets turned lower in the wake of the first Federal Open Market Committee (FOMC) meeting of the year. Likely, it was the statement on the outlook, which could have been, but wasn’t, particularly upbeat. The FOMC noted a “pause” in economic activity lately, although it was attributed to weather and other transitory disruptions. The Fed still sees growth in jobs (but not enough to pull down the unemployment rate) and consumer spending, as well as ongoing improvement in housing. It even acknowledged that business fixed investment “advanced” recently, after it “slowed” prior to the last meeting.
Still, the Fed’s assessment did not match the market’s mood, which has improved recently. We avoided the fiscal cliff, and fourth-quarter corporate earnings are not as bad as initially thought. The Eurozone debt crisis is for now well contained, and economic data have been generally positive. Nevertheless, the payroll tax increase could bite consumer spending this year. Sequester spending cuts need to be dealt with, but one way or another, they will likely hurt growth. And while the trends are favorable, neither Europe nor China is fully out of the woods. Markets apparently did not appreciate the reminder.
GDP contraction no reason to panic. Equity markets took the surprise downtick in fourth-quarter GDP in stride, focusing instead on the details of the report. Defense spending and inventory accumulation—which pushed GDP growth above 3% in the third quarter—cut growth this time. But domestic consumer spending and business fixed investment accelerated, as did housing construction. Meanwhile, markets rallied following a report that the private sector added 166,000 jobs in January. January jobs were nothing special, but the upward revisions to the fourth-quarter history were impressive.
Ultimately, the S&P 500 added 0.6% for the week, thanks to Friday’s rally. The 10-year Treasury rate plummeted following the upbeat employment report on Friday. This is probably because the unemployment rate ticked up to 7.9%, further away from the 6.5% threshold that could trigger a hike in interest rates by the Fed. The dollar continued to fall against the euro, as Eurozone PMI and unemployment data showed some stabilization, and reached a three-year high against the yen. A weaker dollar and improving global data pushed oil and gold prices higher.
Nonmanufacturing industries advance as trade gap shrinks. The data and policy calendars lighten considerably this week. The ISM Non-Manufacturing Index likely inched higher in January, signaling a pickup in the pace of growth. Labor productivity likely fell in the fourth quarter as unit labor costs increased thanks to sizeable gains in labor hours and compensation. And finally, the trade deficit is expected to have narrowed in December after a sharp widening in November. A larger-than-expected narrowing in the gap might push fourth-quarter GDP growth back into the black, but just barely.
Tuesday, 5 February – ISM Non-Manufacturing Index (Jan.)
- IHS Global Insight: 55.9
- Consensus: 55.0
- Last Actual: 55.7 (Dec.)
What to look for
- Small uptick
The ISM Non-Manufacturing Index is expected to edge up from 55.7 to 55.9 in January. This suggests a slightly faster pace of growth in nonmanufacturing industries and, combined with Friday’s stronger ISM manufacturing reading, the overall economy.
Thursday, 7 February – Productivity (Preliminary Q4)
Nonfarm business productivity
- IHS Global Insight: -2.2%
- Consensus: -1.0%
- Last Actual: 2.9% (Q3)
Unit labor costs
- IHS Global Insight: 4.1%
- Consensus: 2.9%
- Last Actual: -1.9% (Q3)
What to look for
- Dropping productivity and rising costs
Labor productivity likely dropped 2.2% in the fourth quarter, on a 2.3% increase in nonfarm hours and a 0.1% increase in nonfarm output. Unit labor costs probably increased 4.1% on strong compensation gains.
Friday, 8 February – Trade Balance (Dec.)
- IHS Global Insight: -$44.7 Billion
- Consensus: -$46.0 Billion
- Last Actual: -$48.7 Billion (Nov.)
What to look for
- Fewer exports and a lower import bill
The trade deficit likely narrowed to $44.7 billion in December, following a sharp widening in November. Imports should reverse their November surge as imports of consumer goods and petroleum decline. Total exports also likely fell within industrial supplies and automotive goods, but by less than imports.
by Nigel Gault and Paul Edelstein
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