The Week Ahead: Inflation Data, Housing Starts, Fed's Credibility in Question

Interest rates rose and equity prices sunk last week as QEII was called into question.

“Traders fretted and stewed about just about every issue that could be conjured up, from doubts and misgivings about the potential impact of the Fed's quantitative easing, to renewed concerns about Chinese growth, debt issues in Eurozone peripheral countries, the sharp rise in commodity prices (until the last few days), and the rather disjointed pronouncements from the Seoul G-20 summit meeting,” said economists at IHS Global Insight.

There’s no shortage of data in the week ahead. Key events include retail sales, industrial production, housing starts, plus key inflation data and a few manufacturing reports. It also looks like the Fed's credibility is under pressure as politcal opposition builds against the Federal Reserve's QEII program. READ MORE

Key Events This Week:

Monday:

8:30 ― Retail Sales, perhaps the most important release this week because more than tw0-thirds of GDP is retail-led, is expected to rise 0.7% in October, building on the 0.6% gain in September. Forecasts from the 67 economists polled by Thomson Reuters range from 0.4% to 1.2%. Excluding auto sales, the index should advance 0.4%, the same pace as a month before.
 
Economists at Deutsche Bank, who believe GDP will rise faster than others are expecting for the next several quarters, say these figures are critical in determining an accelerating pace of consumer spending.

“Given our assumption that the household savings rate is stabilizing and the labor market is getting healthier — we see this in employee tax withholding receipts — we project a noticeable improvement in consumer spending over the coming quarters,” they wrote. “The sequential quarterly annualized changes over the past four quarters were 0.9%, 1.9%, 2.2% and 2.6%. We project 3.0% in the current quarter and 3.3% for 2011.”

Deutsche Bank notes that unit motor vehicle sales showed surprising strength with 12.3 million sales (vs. expectations of 11.8 million), which bodes well for this index. 

“The retail data are additionally important because the composition and level of sales could also shed insight on the outlook for the holiday shopping season,” they added. “As usual, be mindful of revisions, as they can be significant. Retail sales were revised higher in the last report.”

8:30 ― The first regional manufacturing report released each month, New York’s Empire State Manufacturing Survey, is expected to rise at a fairly rapid 14.0 level in November. That score is slightly lower than the 15.7 level a month before, but any score above zero indicates expansion in the sector. Forecasts range from 7.5 to 18.0.

Economists at Nomura Global Economics believe the index will fall to 10.0, but they say even that low forecast reflects a nice rate of expansion.

“Although we think manufacturing firms in the state remain in good health, last month's reading suggests a very rapid pace of growth that we think is unlikely to be sustained,” they wrote. “Watch for further signs of commodity price gains in the report's price paid index.”

10:00 ― Business Inventories, a lagging indicator with little impact on the market, is expected to rise 0.8% in September, following the 0.6% gain in August. Forecasts range from 0.2% to 1.0%.

“Restocking after solid growth in retail sales combined with higher commodity prices ―
which lifts the nominal value of inventories ― likely boosted retailers' inventories by 0.6% m-o-m in September,” said economists at Nomura. “Given that inventories at factories and warehouses increased by 0.7% and 1.5% m-o-m respectively, we expect total private inventories to gain 0.9% m-o-m. Our forecast is in line with what BEA assumed in its Q3 GDP advance estimate.”

Tuesday:

8:30 ― The Producer Price Index, the first of two key inflation reports this week, is anticipated to show prices rising a rapid 0.8% in October, reflecting an annual change of 4.6%. Energy and food costs are the culprits for the rapid rise, as gasoline and heating prices rose sharply in the month, while farm prices jumped 8%. With those items excluded, the “core” index should show prices inch up 0.1% in the month and 2.1% in the year.

“Core inflation is quiet at the producer level, except in energy and agricultural products, but a spike in energy prices should push headline finished goods up 1.2%,” said economists at IHS Global Insight. “Gasoline prices spiked at the wholesale level in October, and fuel oil and propane joined in with large gains.  Natural gas was in retreat again in October, but was swamped by surging oil-based fuels. Food prices climbed again, and a long list of crude materials will show increases as global commodity prices have renewed their advance.

The analysts said vehicle sales offer some unpredictability into the index, as “the model-year changeover introduces an extra element of uncertainty.”

9:00 ― The Treasury International Capital, or TIC Flows, report, offers a monthly look at the inflows and outflows of U.S. Treasuries, corporate bonds, and other financial instruments. The index for September should give the market a better sense of who was buying what in the weeks leading up to the Federal Reserve’s announcement of its $600 billion quantitative easing program. In August, total inflows were a net $128 billion, including $117 billion in foreign purchases of Treasury bonds.

“Foreign inflows into US Treasury securities have remained exceptionally strong, totaling $180 billion over just the past three months,” noted economists at Nomura. “Our focus in this month's TIC report will be whether this appetitive ― particularly from official investors ― holds up. The September figures will include about $20 billion of buying from the Bank of Japan related to its currency intervention. The other interesting element of the report will be whether US investors have increased their allocations to emerging market equity markets in recent months.”

9:15 ― Economists are expecting a turnaround in the Industrial Production report. The index should rise 0.3% in October ― with some forecasts as high as 0.7% ― following a 0.2% slowdown a month before. That decline was only the second in the previous 14 months, a period in which industrial production rose 9.2%. The index rose at an annual rate of 4.8% in the third quarter.

“The mild drop in September was the first sequential decline in 15 months and was not particularly surprising given the air pocket in several production surveys in the prior months,” said the forecasting team at Deutsche Bank.

The ISM’s production component climbed to 62.7 in October from 56.5 previously.

“Industrial output appears to be regaining traction of late,” they said. “The latest jobs report showed a lengthening of the manufacturing workweek, and several key production surveys showed marked improvement in October. Furthermore, the fact that a significant recovery in new orders was a recurring hallmark of the respective headline rebounds last month suggests the production surveys should continue to rise in November.”

7:15pm ― Dennis Lockhart, president of the Atlanta Fed, speaks on the economy before the Alabama World Affairs Council in Montgomery.

10:00 ― The NAHB’s Housing Market Index, a gauge of homebuilder sentiment, is set to increase one point to 17 in November, adding to the two-point increase in the prior month. Any score below 50 indicates general pessimism, so these small fluctuations have little impact until they are sustained for several months.

“Given the index's extremely low level, increases look far more likely than further declines and we expect the index to rise gradually toward 20 by the end of the year, from 16 currently,” said economists at Nomura.

Wednesday:

7:00 ― The MBA Mortgage Applications index has shown purchases on the rise in recent weeks. In the period ending Nov. 5, purchases rose 5.5% to mark their third straight gain, while refinancings took advantage of the 4.28% average 30-year mortgage rate and rose 6%.

“One thing is clear from the last two months of mortgage purchase applications reports: new filings are no longer falling,” said economists at Nomura. “What is less clear is whether home demand has picked up or simply stabilized at a very low level. Applications have risen 11% since mid-October. If this trend continues, it could mean home sales are poised to grow.”

8:20 ― Eric Rosengren, president of the Boston Fed, speaks before a Greater Providence Chamber of Commerce breakfast.

8:30 ― The Consumer Price Index, the more influential of the two inflation reports this week, is expected to show prices rose 0.3% in October, or 1.3% over the past 12 months. The core index, which excludes volatile energy and food prices, is set to rise 0.1%, or 0.7% annually ― well below the Fed’s unofficial 2% target. The annual core index in September was at its lowest level in nearly five decades, but while the level is worryingly low, the Fed’s renewed quantitative easing efforts are meant to be reflationary, so disinflation and deflation concerns have become less pronounced.

“We are not concerned about further disinflation turning into outright deflation, because we believe the economy is currently passing through an inflection point following which inflation will gradually begin to trend higher as economic momentum builds,” said economists at Deutsche Bank. “In turn, policymakers will become less worried over the low level of consumer inflation sometime in 2011.”

Economists at IHS Global Insight said the monthly discrepancy between headline and core prices owes to gasoline, heating oil, and diesel fuel prices ― they all climbed between 3% and 5% in the month.

“Meanwhile, some pass-through of higher food commodity prices should become increasingly evident at the consumer level,” they wrote.

8:30 ― The annualized pace of Housing Starts is predicted to fall to 600k in October from 610k a month before. Building Permits, which anticipate starts by a month or two, are expected to rise to 570k from 547k, suggesting there is at least some momentum in the pipeline. Low prices, improving employment conditions, and extremely low mortgage rates could all entice buyers into the market. 

“The residential construction sector may have hit the bottom of the barrel, but it’s spending a heckuva long time scraping out the residue of a 2004 – 2007 construction boom,” said economists at Janney Capital Markets. “Major homebuilders, once the source of a large percentage of single family construction activity, remain very much on the side-lines and have generally chosen to preserve liquidity rather than jump into cheap (i.e., risky), new projects. That, along with ongoing hesitancy of banks to provide construction loans, leaves a much smaller pool of capital for the housing starts and building permits data to leverage.”

Breaking it down by major components, economists at IHS Global Insight note that single-family housing permits have fallen for six months in a row, which suggests that single-family starts should fall, while multi-family starts have been climbing faster than permits, indicating they won’t be able to keep up this month.

“With the economy adding more jobs, and the payback period from the second tax credit behind us, permits are likely to improve going forward,” IHS said. 

9:15 ― James Bullard, president of the St. Louis Fed, gives welcome remarks before the “Past, Present, and Future of the Government Sponsored Enterprises (GSE's)” in St. Louis.

Thursday:

8:30 ― Initial Jobless Claims could finally begin to show fewer than 450k Americans looking for unemployment benefits on a weekly basis. In the week ending Nov. 6, claims fell 24k to 435k ― the lowest since mid-July ― sending the 4-week average down 10k to 447k. The consensus from Thomson Reuters economists is 440k. Forecasts range from 430k to 457k.

Two of the three lowest readings on initial jobless claims for the recovery period have come in the last three weeks, according to analysts at RDQ Economics.

“We may (and we stress may) be seeing a pickup in the pace of private sector job creation being signaled by these data,” the analysts said. “We think the economy is gaining momentum in the fourth quarter and we look for growth of around 3%.” 

Economists at Nomura add that if claims hold below 440k for a second week, it would be an encouraging sign that the labor market is improving.

10:00 ― Leading Economic Indicators, a composite index meant to signal shifts in the direction of the economy, is forecast to rise 0.5% in October, up from 0.3% a month before. Predictions range from 0.2% to as high as 0.8%.

Economists at Nomura look for a 0.7% gain, which would be the largest monthly increase since March. 

“The strong increase reflects improvements in stock prices, the real money supply and the continued steep level of the yield curve,” they wrote. “A small decline in the ISM's vendor performance measure should subtract from the leading index.”

10:00 ― The Philadelphia Fed Survey, the second regional manufacturing survey released each month, is predicted to be at 5.0 in November, reflecting pretty slow growth in the region. That compares with a 1.0 score a month before, and some forecasts are as high as 9.6, so there is hope for a turnaround. 

“Relative to the nation as a whole, manufacturing activity in the Philadelphia Fed's district has been slow over the past few months,” said economists at Nomura, who said regional activity continues to be soft. 

“The Fed's latest Beige Book said that ‘manufacturing activity continued to expand … The only exceptions were the Philadelphia and Richmond Districts, where activity softened,’ ” they noted. “We therefore expect only a modest improvement to 2.0 for November.”

1:00 ― Kevin Warsh, governor at the Federal Reserve, participates in "The Future of Financial Markets" panel before an Executives' Club of Chicago Global Leaders Luncheon.

1:30 ― Sandra Pianalto, president of the Cleveland Fed, speaks on “Current Economic and Monetary Policy Issues” at an event hosted at Case Western Reserve University.

1:30 ― Narayana Kocherlakota, president of the Minneapolis Fed, speaks on “Monetary Policy Actions and Fiscal Policy Substitutes” before the National Tax 
Association's 103rd Annual Conference on Taxation.

4:30 ― Charles Plosser, president of the Philly Fed, delivers closing address at the Cato Institute's conference on asset bubbles and monetary policy in Washington.

Friday:

No significant data.