A Look Ahead To Fed Week

From Deutsche Bank’s resident weatherman Joseph LaVorgna:

As we have repeatedly warned, much of the normally important economic data we receive is backward looking, because it does not pick up what we sense is a noticeable shift in household and business sentiment following the US Election.

November headline retail sales are expected to rise modestly (+0.3% forecast vs. +0.8% previously), while retail sales excluding autos (+0.4% vs. +0.8%) should perform slightly better. The November producer price index (PPI) is expected to rise marginally (+0.1% vs. Unch.), while the core PPI is set to rise a shade more (+0.2% vs. -0.2%).

On Wednesday afternoon at 2PM EST, the Fed will release its FOMC statement, which will most likely announce a 25 basis-point increase in the funds rate. The tone of the release is expected to remain cautiously optimistic. The Fed’s GDP, unemployment and inflation forecasts will probably not change in any meaningful way. More importantly, we do not expect the Fed’s dots to change either. Fed Chair Yellen will hold a post-meeting press conference along with Q&A. Our best guess is that all of this will be a nonevent for financial markets, which have fully discounted a rate increase.

The November headline CPI (+0.2% vs. +0.4%) will be lifted partly by an increase in energy prices; we expect the core CPI (+0.2% to +0.1%) to round up to a similar increase. Both the December New York (+5.0 vs. +1.5) and Philadelphia Fed (+10.0 vs. +7.6) surveys are release later on Thursday morning, and they are expected to show incremental improvement. In the details, we will be most interested in new orders, as they are the most forward-looking component and should improve somewhat if purchasing managers are becoming more upbeat on future growth prospects. On Thursday morning we also get the December NAHB housing market index (64 vs. 63), which is expected to show only a slight gain because of the rise in mortgage rates over the past month.

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