Economic activity indicators next week may cause further headaches for the most determined bears. November industrial production is expected to rebound from an October pause, while housing starts see a weather-induced resurgence. November price reports should be benign, while the FOMC is expected to vote to keep rates unchanged and keep to its low interest rate strategy for an extended period of time.
Some influential bears are keeping the markets honest, but a range of positive economic indicators in the preceding week boosted the real growth outlook for the fourth quarter, sending the U.S. dollar, bond yields, and the stock market all higher.
Activity indicators next week may cause further headaches for the most determined bears. November industrial production is expected to rebound from an October pause, while housing starts see a weather-induced resurgence.
Reports on prices will not be big market movers. Sharp increases in gasoline prices during November will push the top-level producer and consumer price indicators higher, but core prices are not expected to diverge from relatively benign patterns. Recent declines in crude oil prices point in the direction of some reversal of the pressure from gasoline prices in December.
The FOMC is expected to vote to keep rates unchanged and stick to its familiar operating statement that "rates will remain exceptionally low for an extended period of time," but will condition the statement on the progress of the recovery and the stability of low-inflation expectations.
KEY U.S. DATA RELEASES THIS WEEK
Tuesday, December 15 – Producer Price Index (Nov.)
Total
Core
What to Look For
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We expect producer prices to rise 1.6% in November, largely due to a double-digit surge in gasoline prices.
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Core prices expected to bounce back by 0.3%, after sharp decline in October.
Implications
Gasoline prices rose in dollar terms and the rise will be amplified in the PPI, because the seasonal-adjustment process expects prices to fall. In December, gasoline prices have fallen back as the crude oil price has dropped to around $70/barrel. We expect core producer prices to rise 0.3%, reversing half of October's surprising decline, which was driven by much lower light-truck prices. We expect light-truck prices to rise this month. Outside vehicles, we see little change in core prices.
Tuesday, December 15 – Industrial Production (Nov.)
What to Look For
Implications
Hours worked in manufacturing surged 0.4% in November, the auto industry assembled more vehicles, and there appear to be no major negatives for the month. October could well be revised up. Electricity could be a wildcard, as industry association data suggest a rise in production, while the warm weather suggests output should have fallen back. Natural gas production surely did decline due to the warm weather. Overall, we assume little change in utility output.
Wednesday, December 16 – Consumer Price Index (Nov.)
Total
Core
What to Look For
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November consumer prices will also be driven higher by gasoline, which should rise about 6% seasonally adjusted.
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Core inflation to advance by 0.2%.
Implications
We expect core inflation to come in on the borderline between 0.1% and 0.2%; we have assumed it will round up to 0.2%, the same as in October. Inflation is not a problem and we do not expect it to become one any time soon, but deflation risks have greatly diminished.
Wednesday, December 16 – Housing Starts and Building Permits
Housing Starts (Nov.)
Building Permits (Nov.)
What to Look For
Implications
In the prior month of October, housing starts plunged 10.6%, to 529,000 units. But according to the National Oceanic and Atmospheric Administration, "The U.S. recorded its wettest October in the 115-year period of record and ranked as the third coolest based on preliminary data." But also, "The U.S. recorded its 18th-driest November in the 115-year period of record and ranked as the third warmest based on preliminary data." This swing in weather will cause housing starts to spike. For November, we project that starts rose to a 620,000-unit annual rate. Permits, which are less influenced than starts by weather, will bounce back by a smaller amount. The housing industry continues to cautiously increase output as inventory levels have come down dramatically, but builders remain extremely conservative in the face of potential foreclosure supply in the existing home sales market.
Wednesday, December 16 – FOMC Rate Decision
What to Look For
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The FOMC will vote unanimously to keep rates unchanged.
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It will reiterate that "rates will remain exceptionally low for an extended period of time," but will condition the statement on the progress of the recovery and the stability of low-inflation expectations.
Implications
The FOMC is expected to vote unanimously to keep the federal funds rate unchanged at 0.0–0.25%. With respect to the economy, the Fed will reference modest improvements, but still cite major headwinds in terms of unacceptably elevated levels of unemployment and weakening commercial real estate. Financial markets are improving, but credit flows still face major constraints.
