News on the economy was generally positive. The early week announcement of a compromise federal tax and fiscal stimulus package, which provoked a round of upward revisions in growth forecasts for 2011—even among some notorious Wall Street bears—added a tone of optimism to overall trading. But the expected pressure on the fiscal deficit pushed bond yields up sharply by about a quarter of a percentage point in the second half of the week, to near 3.30% on Friday.

The early-Christmas party should continue next week, as we expect a solid increase in November retail sales and an upward bounce in November industrial production. November producer prices will be ambushed by the recent jumps in food and energy prices, but we expect overall and core consumer prices to be relatively tame. November housing starts should eke out a gain, but mainly due to a jump in multi-family units.

At the December 14 meeting, the FOMC is expected to keep the overall monetary policy ship tacking in the same direction. The Fed will vote to keep rates in the 0.00–0.25% range for an extended period of time, and will reiterate a commitment to purchase an additional $600 billion of Treasury securities through June 2011. The FOMC may drop hints that it is prepared to be flexible in terms of the size and timing of the QE II program, indicating that it could be ramped up or down, depending on the performance of the economy and other supporting fiscal policies.

KEY U.S. DATA RELEASES THIS WEEK

Tuesday, December 14 – Retail Sales (Nov.)

Total

• IHS Global Insight: 0.4%
• Consensus: 0.7%
• Last Actual: 0.4% (Oct.)

Less Autos

• IHS Global Insight: 0.8%
• Consensus: 0.6%
• Last Actual: 0.4% (Oct.)

What to Look For

• Overall sales to move up by 0.4%.
• Sales excluding autos to jump a solid 0.8%.

Implications

Retail sales are expected to increase 0.4% in November overall, and by 0.8% excluding autos. Retail sales used to estimate consumer spending should be stronger than last year, especially general merchandise, apparel and accessories, furniture, and other (GAFO) sales. We are holding firm to our view that holiday sales (November plus December retail sales, less autos, gasoline, food services, and nonstore outlets) will be up 4.5% versus last year.

Tuesday, December 14 – Producer Price Index (Nov.)

Total

• IHS Global Insight: 0.9%
• Consensus: 0.5%
• Last Actual: 0.4% (Oct.)

Core

• IHS Global Insight: 0.4%
• Consensus: 0.2%
• Last Actual: -0.6% (Oct.)

What to Look For

• Top-level index to jump 0.9%, pushed up by food and energy prices.
• Core prices to bounce up 0.4%.

Implications

November's core PPI should partially reverse October's 0.6% drop with a 0.4% increase; the moves are both tied to volatility in motor vehicles at the start of the new model year. Overall finished goods prices should look ugly with a 0.9% jump, as the expected rise in the core is supplemented by outsized gains in both food and energy (oil products).

Tuesday, December 14 – FOMC Press Release

Effective Federal Funds Rate

• IHS Global Insight: 0.00–0.25%
• Consensus: 0.00–0.25%
• Last Actual: 0.00–0.25%

What to Look For

• The FOMC is expected to keep the overall monetary policy ship tacking in the same direction.

Implications

The Fed will vote to keep rates in the 0.00–0.25% range for an extended period of time, and will reiterate a commitment to purchase an additional $600 billion of Treasury securities through June 2011. The FOMC may drop hints that it is prepared to be flexible in terms of the size and timing of the QE II program, indicating that it could be ramped up or down, depending on the performance of the economy and other supporting fiscal policies. Kansas City Fed chief Hoenig will cast another dissenting vote, but that will be his last kick at the can for a couple of years, as he rotates off the FOMC board in early 2011. In 2011, the black sheep mantle will fall either to Plosser from the Philadelphia Fed or Fisher from the Dallas Fed.

Wednesday, December 15 – Consumer Price Index (Nov.)

Total

• IHS Global Insight: 0.1%
• Consensus: 0.2%
• Last Actual: 0.2% (Oct.)

Core

• IHS Global Insight: 0.0%
• Consensus: 0.1%
• Last Actual: 0.0% (Oct.)

What to Look For

• Headline inflation is expected to climb by 0.1%.
• Core inflation to remain unchanged.

Implications

The CPI will be much better behaved than the PPI, with core inflation likely to remain unchanged and the headline measure climbing just 0.1%, with gasoline in the forefront. This should be the fourth consecutive zero reading for core inflation.

Wednesday, December 15 – Industrial Production (Nov.)

• IHS Global Insight: 0.2%
• Consensus: 0.3%
• Last Actual: 0.0% (Oct.)

What to Look For

• Overall production expected to rise by 0.2%.
• Manufacturing to see a modest gain.

Implications

Industrial production should creep 0.2% higher in October, with electricity up after a string of negatives, but motor vehicle production down after a sequence of strong months. Core manufacturing probably had an average month, because hours-worked were anemic, but solid productivity growth allows output to rise faster than hours.

Thursday, December 16 – Housing Starts and Building Permits (Nov.)

Housing Starts

• IHS Global Insight: 0.544 Mil.
• Consensus: 0.550 Mil.
• Last Actual: 0.519 Mil. (Oct.)

Building Permits

• IHS Global Insight: 0.563 Mil.
• Consensus: 0.558 Mil.
• Last Actual: 0.550 Mil (Oct.)

What to Look For

• Multi-family starts to rebound from a sharp drop in October, and drive a top-level gain of about 5.0%.
• Single-family starts are expected ease lower.

Implications

After a sharp 64,000 drop in October, we expect multi-family starts to bounce back by half of this amount in November. Single-family starts are likely to drop, since they are running somewhat above single-family housing permits. Added up, we expect housing starts to improve to by about 5%. Given that October's number was the third lowest ever (data go back to 1947), this is hardly much of an improvement. With the economy growing and adding jobs, and applications to buy homes rising, we anticipate a small improvement in housing permits.