EC 12 Thoughts About The Week Ahead

1.  The Federal Reserve upgraded its assessment of the labor market in its statement at the end of last month.  It noted that the “under-utilization of labor resources was gradually diminishing.”  Nothing in the October jobs report will challenge that assessment.  The Fed’s new labor market conditions index will be released at the start of the week and the JOLTS report on Thursday. 

We expect the continued gradual improvement in the labor market will allow the Federal Reserve to hike rates around the middle of next year. Yellen and Fischer have recently been emphasizing the Fed’s desire to minimize the impact of changes in its monetary stance. It will do so by being as transparent and forthright as possible.  It appears that process by which it announced and then implemented the exit from its asset purchase program serves as the model for the communication of its first hike.  Before the weekend, NY Fed President Dudley reaffirmed that barring a significant economic surprise, the Fed funds rate will likely increase next year.

2.  The continued improvement in the labor market should not be confused with a strengthening of the US economy.  Specifically, the recent construction spending and trade figures warn of a notable downward revision in Q3 US to possibly below 3%, and the data for Q4 appears to be tracking something closer to 2.5%.  This is probably closer to trend growth than the 3% handle that infatuates many. 

That said, the employment growth coupled with the decline in gasoline prices will likely boost discretionary spending.  As the recent consumer credit report confirms, household consumption is not relying on credit cards (revolving credit).  October retail sales, the main US economic report of the week, is likely to show a recovery after the unexpected weakness in September, especially in the measure that excludes, autos, gasoline and building materials.  University of Michigan consumer confidence is likely to have been lifted by the recovery in stock prices, the falling gasoline prices, and the gradually improving labor market. 

3.  Contrary to a widely cited Reuters report, the ECB came together and endorsed the expansion of its balance sheet toward the peak near three trillion euros.  It also unanimously endorsed adopting additional measures that will likely be needed given the downside risks, and instructed the staff to expedite their exploration of the options, within its charter, to expand its balance sheet.  These downside risks will be underscored by the ECB’s Survey of Professional Forecasters, and will likely hint at what to expect from the next month’s updated forecasts by the ECB’s staff.