A look forward at the October 14 week sees Monday starting off with a federal holiday. However, Columbus Day is not universally observed, and many state and local government offices will be open as well as private businesses. The bond market will have a full close while stock markets will remain fully open. The Monday holiday will not result in the delay of any of the normal weekly reports from private sources.
Monday also sees the kick off of the IMF/World Bank fall meetings in Washington, DC. These last through October 20. There’s likely to be plentiful comment from international leaders in business and finance over the week. The G20 finance ministers and central bankers will meet toward the end of the week as part of the events. They may have something to say about global economic conditions, easing monetary policy, foreign exchange rates and/or financial imbalances if a statement is issued as usual.
Fed policymakers are likely to be active and audible during the week as the start of the communications blackout period around the October 30-31 FOMC meeting draws near. It will go into effect at midnight on Saturday, October 19 and last through midnight on October 31. I anticipate there will be plenty to illustrate the divide between policymakers who are anxious for more and faster removal of interest rate accommodation and those who see less immediate reason for lower rates. Markets will be anxious to get a sense if another rate cut can be anticipated from the next meeting. At this stage it seems probably, but is by no means a certainty.
Please see the Whetstone Analysis October 9 comment on Fed rate decisions and proximity to election day.
Although there are a few pieces of first tier economic data on the calendar that will influence the outlook for the next FOMC meeting, from my perspective, it is the release of the Fed’s Beige Book at 14:00 ET on Wednesday that may sway policymakers more than the numbers. Downturns in the tone of the Beige Book closely mirror moves in the economy. The anecdotal evidence doesn’t necessarily presage the depth or duration of a recession, but it does signal one clearly and pretty much as it starts to take hold.
The Beige Book has only had one report in which all Districts reported growth this year. The softer conditions seen in the first two reports this year (January and February) could easily be attributed to more sluggish expansion that developed late in 2018 and the partial federal government shutdown that lasted from late December 2018 through nearly the end of January. The next report (April) showed a rebound with all Districts reporting slow-to-moderate growth. However, the past three reports have shown a steady slowing of conditions. No one District reported outright softening in growth, but the number of Districts where expansion stalled was on the rise. The next report will cover approximately the period between late August and most of September. If the share of Districts no longer reporting growth is the same or larger than the August report, I would have to conclude a recession is on the doorstep if not already inside.
September data for retail and food sales at 8:30 ET on Wednesday might offer some hope that an downturn was avoided in the third quarter 2019. Weekly surveys of consumer spending point to a still solid pace year-over-year over the course of the month. Consumers seemed to have an appetite for large ticket purchases like motor vehicles. The strength in the housing market would suggest that items like appliances and furnishings could be in demand. There should be some late back-to-school shopping for clothing and other supplies. Gasoline prices ticked up in the second half of the month and could mean that totals at service stations will be up as well.
The housing market has been a bright spot among the gloomier reports. Low mortgage rates have helped revive activity for home sales and refinancings. However, September may feel a little more constrained by worries about a possible recession. The NAHB/Wells Fargo Housing Market Index for September managed to inch up to 68 after 67 in August, but the October data at 10:00 ET on Wednesday may not manage to quite hold on to that high. Still, it should be consistent with demand for new housing, if just not quite as much. The numbers on new home starts and permits-issued for September at 8:30 ET on Thursday is likely to retrace the strong gains of August. However, the underlying trend should remain healthy for now.
The earliest looks at conditions in the factory sector are the New York Fed’s Empire State Manufacturing Survey at 8:30 ET on Tuesday and the Philadelphia Fed’s Manufacturing Business Outlook Survey at 8:30 ET on Thursday. The general business conditions index in both surveys turned lower in August from September, and another downward move can be expected from September to October. The ISM Manufacturing Index has contracted for the past two months, and a softening in the in the New York and/or Philadelphia surveys could mean it will stay there in October when that report is released at 10:00 ET on Friday, November 1.
The New York Fed’s Business Leaders Survey for October at 8:30 ET on Wednesday could indicate where the service sector is headed at the start of the fourth quarter. The report’s business activity index doesn’t have the best correlation to the ISM Non-Manufacturing Index, but it could set the tone for expectations of sluggishness for services when that report is released at 10:00 ET on Tuesday, November 5.
Data on industrial production and capacity utilization for September at 9:15 ET on Thursday may be a hard call. While many parts of the US experienced exceptionally mild weather in September, some received the first blast of wintery conditions. Utilities output may not be much changed on net. The factory sector is basically in recession, so manufacturing probably won’t get much of a boost from what orders there were. Mining rebounded in August after drilling platforms had to be closed down in July due to severe weather in the Gulf of Mexico. September may experience some closures as a series of storms battered the Southeast, but probably no significant cutback in production occurred.
Initial jobless claims have been quite mild in recent weeks, but the ongoing UAW strike may now have lasted long enough that businesses tangential to auto production are feeling the pinch. Levels of new claims will probably rise in the October 12 week as a result. That may not have much impact on the insured rate of unemployment in the report set for 8:30 ET on Thursday as that will only be through the October 5 week. The insured rate of unemployment is expected to hold at 1.2% after rising in the September 28 after two weeks of historic lows of 1.1%.
The Atlanta Fed’s Business Inflation Expectations report for October at 10:00 ET on Wednesday could tick down for the current 1.9%. Businesses may be anticipating inflation will remain low while the economy is in a sluggish state. The University of Michigan Survey of Consumers for October pointed to weakening inflation expectations and businesses may follow suit.
Data on business inventories for August at 10:00 ET on Wednesday should help shape expectations for GDP in the third quarter. The preliminary data for manufacturing and retailers point to essentially no change in August from July, and for wholesalers to continue with incremental inventory building. It may be necessary to wait for the September data to understand if retail and wholesale businesses were stocking up before the end of the year to avoid higher prices from tariffs and/or were optimistic in preparations for the holiday shopping period. Inventory growth for manufacturing has been sluggish and isn’t likely to change with the factory sector seeing recessionary conditions.
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