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Look forward at January 13, 2020 week: Sounding out inflation and inflation expectations before the FOMC meeting

A look forward at the January 13 week includes most of the major indicators for inflation in December and a first look at inflation expectations for January. Fed policymakers are feeling confident that the labor market is strong. Now they would like to see some signs that inflation is starting to move up at least a bit in response to the three rate cuts in 2019. A move closer to the Fed’s symmetric 2% inflation target would be a welcome development. At least a few policymakers are concerned about the credibility of the target in light of low inflation expectations, at least on the part of consumers. Businesses inflation expectations have been relatively close to the target. Confidence remains solid for consumers and businesses alike.

This is also the week before the communications blackout period around the January 28-29 FOMC meeting goes into effect at midnight on Saturday, January 18 and runs through midnight on Thursday, January 30. Recent comments from a variety of policymakers – including FOMC voters just coming off their voting rotation and those moving on to it – reflect unanimity in the view that the economy is in a “good place” and that modest-to-moderate growth is expected to continue with a strong labor market and mild inflation. The risks to the outlook have not been dismissed but come under the heading of “monetary policy is not on a preset course” and that the FOMC will act appropriately as data and developments transpire.

The three inflation reports in the week are all for December. The Consumer Price Index is at 8:30 ET on Tuesday, the Final Demand Producer Price Index is at 8:30 ET on Wednesday, and the Import Price Index is at 8:30 ET on Thursday. Upward price pressures are likely to be few in any of the reports. As has been the case for some time, commodities prices are showing little movement higher, if any. It is in price increases for services that account for most of what inflation there is. There were some modest increases in energy prices in December that could show through for the CPI and Import Price Index. However, it was later in the month and therefore will be less of a factor in the PPI report which takes its reading of oil prices in the second week of the month.

 

Fed officials will get a chance to assess the stability of inflation expectations with the January data in the Atlanta Fed’s Business Inflation Expectations report at 10:00 ET on Wednesday and the University of Michigan’s Survey of Consumers at 10:00 ET on Friday. Consumer inflation expectations have been testing historical lows as prices are held down by a variety of factors and consumers are more optimistic about stable employment and rising discretionary income. Business inflation expectations are running more-or-less in line with the Fed’s symmetric 2% target. As ever, the FOMC is likely to say the are monitoring the situation.

Data for the labor market is unlikely to change the overall impression of strength and tightness. Initial jobless claims for the week ended January 11 at 8:30 ET on Thursday could well suggest that businesses are not shedding workers as aggressively in retail and transportation as is usual at this time of year. While earlier layoffs in December may keep the level of continuing claims a bit higher as of the January 4 week, workers are not going to linger there for long, especially if they were in manufacturing and can find employment in construction. The insured rate of unemployment is expected to remain at 1.2% where it has been for 20 months.

The data on Job Openings and Labor Turnover (JOLTS) for November at 10:00 ET on Friday should be in line with recent months with solid levels of job openings, a healthy pace of hiring, relatively low layoffs, and workers voluntarily seeking new job opportunities while businesses are offering incentives in wages and benefits.

An early January read from the NAHB/Wells Fargo Housing Market Index at 10:00 ET on Thursday will probably retreat a bit from the spike to 76 in December after the 71 in November, but not that much. Demand for new homes is being driven by low mortgage rates and lack of supply in existing homes. Builders have adjusted to the market with more entry-level types of construction.

The data on housing starts and permits-issued in December may reflect continued demand. The number of permits-issued in November reached 1.482 million units (SAAR) which was its highest since May 2007. Builders have the contracts to get construction started. Housing starts were up to 1.365 million units in November, the second highest since June 2007. Activity is beginning to look the most normal since the housing bust. The busyness of the residential construction sector is atypical of this time of year and seasonal adjustment factors may boost the numbers. It may also borrow some activity from the spring months by reducing pent-up demand for when the weather is milder.

Consumer and business confidence may be off the highs of 2018. However, as the risks of recession have retreated, confidence has found its footing at still elevated levels. The NFIB’s Small Business Optimism Index for December may dip from the 104.7 in November without losing a much in the way of upbeat expectations for the future even as it navigates the last uncertainties of 2019. The University of Michigan’s preliminary Consumer Sentiment Index for January at 10:00 ET on Friday probably won’t look much different than the 99.3 of December. Consumers should find the things that kept the current conditions index buoyant are still there. Expectations may lose a bit of their upward move in December without changing the generally positive view of the near future.

The earliest of the regional surveys of manufacturing conditions for January will be the New York Fed’s Empire State Survey at 8:30 ET on Wednesday and the Philadelphia Fed’s Manufacturing Business Outlook at 8:30 ET on Thursday. It is doubtful that either survey’s general business conditions index will do more than show activity barely expanding for the month as was the case in December. Until some trade negotiations are explicitly settled, manufacturing may have little reason to report an improvement. Note that most surveys publish their annual revisions in January. The revisions should not alter the picture for weak conditions with few new orders.

Data on industrial production and capacity utilization for December at 9:15 ET on Friday could easily erase the gain of 1.1% reported for November. That was due to a rebound in manufacturing after the end of the strike at GM and an increase in utilities production when the weather turned colder. In December, motor vehicle production will be more than caught up and some regions experienced quite mild weather conditions.

The first of the regional surveys for the service sector is the New York Fed’s Business Leaders Survey at 8:30 Et on Thursday. Its general business activity index is a so-so harbinger for the ISM Non-Manufacturing Index.  If it continues to run at the 3.0 from the December report, it would be consistent with modestly expansionary conditions. This should also see annual revisions.

The Fed’s Beige Book will be released at 14:00 ET on Wednesday and will provide anecdotal evidence of economic conditions across the 12 Districts from around mid-November through the end of December. I would anticipate that the majority will report growth as slight-to-moderate. While the tone will lean upbeat, it will be caution. Slow conditions for manufacturing will weigh on the Districts more heavily dependent on the factory sector for growth. While recession risks have abated, there are still plenty of uncertainties that have restrained activity.

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