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!
- DJIA: 15,399 up 1% on week, up 17.5% on year
- S&P 500: 1744, up 2.4% on week, up 22.3% on year (new all-time closing high)
- NASDAQ: 3914, up 3.2% on week, up 29.6% on year
- 10-Year Treasury yield: 2.59% (from 2.68% a week ago)
- Nov Crude Oil: $100.83, down 1.2% on week
- Dec Gold: $1314.60 up 3.6% on week
- AAA Nat'l average price for gallon of regular Gas: $3.36
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.
Halliburton, McDonald’s, Netflix, Texas Instruments
8:30 Chicago Fed Nat’l Activity Index
10:00 Existing Home Sales
Coach, DuPont, Kimberly Clark,
8:30 September Jobs Report
10:00 Richmond Fed Manufacturing Index
AT&T, Boeing, eTrade
8:30 Import/Export Prices
9:00 FHFA Housing Price Index
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
8:30 Durable goods orders
9:55 Consumer Sentiment