UNITED STATES
The week is rich in new data about the economy: Personal income and spending; Employment costs, productivity and unit labor costs; Capital goods orders and shipments; Manufacturing and Consumer sentiment; last but not least, the January Non-Farm Payrolls. All expectations are positive. And this is important for the other key event of the week: the FOMC meeting on Wednesday.
It is Janet Yellen’s last. She hands the Committee over to Jerome Powell, and her departure is a loss. The transition increases policy uncertainty, but all that is known about Powell suggests that he will continue with what is by now a well-trodden and researched path: A steady climb in the policy rate (100bp in 2018) with continued divestiture of balance sheet assets at a pre-announced pace. The concern is as much about future threats to stability (with inflation, admittedly, still below target but financial conditions expanding into “exuberant” territory) as it is to normalize the system, hopefully well ahead of the next cycle of policy stimulus. For it is apparent that the economy is at near full-potential, and the next leg of the cycle is down, not up. Meanwhile, the concerns imposed by low rates—and the threat of the Zero Lower Bound—are present and amply acknowledged by Fed board members and staff. Powell has been through all that, and the expectation is that he is forward-looking enough not to risk action when it will be needed, in the near-future, for additional stimulus when it is not needed, such as today. Moreover, with the scheduled rotation in FOMC voters, Powell’s Committee will be notably more hawkish.
In other aspects, the January meeting is likely to be a non-event, without a change to interest-rate policy, and no post-meeting press conference scheduled. Nor will economic or interest-rate projections be updated; therefore, any change to policy guidance or the economic outlook will be limited to the statement—and Yellen is unlikely to innovate at her last meeting. Economic conditions and sentiment have not changed since December; the labor market continues to strengthen; economic growth is solid (as shown, for example, by last week’s Q4/17 GDP report which caused Q1/18 growth expectations to be revised up to 3%saar); and business investment is picking up. Meanwhile, inflation and wage gains lag. The latter was, increasingly, a concern of Yellen’s. Likely, it will be of Powell, backed by the battery of indicators produced by the Board’s staff and the Fed’s regional offices. In that regard, the release, on that same Wednesday, of the Bureau of Labor Statistics’ Employment Cost Index (ECI) will be critical. The ECI has shown, over the last year, much healthier gains than those reported in the payroll data. The numbers are quarterly and come out with a lag: The new one will be for Q4/17 and should be good. In Q3, the ECI was moving close to post-recession highs.
- Monday, January 29: Personal income and spending—Dec/17. (Actual, Income 0.4%momsa; Consumption expenditures (PCE) 0.4%momsa; PCE deflator 0.1%momsa, 1.7%yoy; Core PCE deflator 0.2%momsa, 1.5%yoy). The data came in as expected, quite solid. Personal income increased 3.1%yoy in 2017, compared with an increase of 2.4% in 2016. Disposable income (after taxes) increased 2.9%yoy in 2017 (1.2% in real terms) compared with an increase of 2.6% in 2016. In 2017, PCE increased 4.5%yoy (2.7% in real terms), compared with an increase of 4.0% in 2016. Prices remained subdued, but the core is showing an upward inflection, as the Fed expected.
- Wednesday, January 31: BLS-Employment Cost Index – Q4/17. (Consensus, 0.6%qoqsa). See above.
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FOMC meeting – Federal funds target rate. (Consensus 1.50%, no change). See above.
- Thursday, February 1 ISM Manufacturing—January. (Consensus 58.6 or -0.9pts mom). 2017 ended with a bang on the manufacturing ISM, partly because of cheering for and about the corporate tax reform. Underlying the expectations index, however, is a firm trend of improvement in manufacturing output and the outlook for new orders. Several analysts expect a post-recession high for the index in Q1/18.
- Friday, February 2: Non-farm payrolls (NFP)—January. (Consensus, Employment change 180k, 30k mom gain; Unemployment 4.1%, unchanged; Hourly earnings 0.3%momsa, 2.6%yoy). January’s NFP is expected to reverse December’s disappointing gain, sustaining the trend at a level well above the one needed to absorb new entrants. Thus, at the margin, building an ever-tighter labor market. The focus, therefore, will be on the unemployment rate and the pace of wage gains. Unemployment is down to levels below the Fed’s estimated NAIRU. The question, given sustained gains in employment, is when the trend in wages accelerates and, with it, inflation. This cycle has shown, yet again, a flattening of these relationships (the so-called Okun and Phillips curves). It has not, however, shown that the relationships have gone away. So, it is only a matter of time, and the Fed knows it. On balance, however, it would be comforting for the current path of monetary policy, to observe faster wage gains.
BRAZIL
A new batch of confidence indicators is out this week. We should get positive results, if judged by the recent performance of the BOVESPA, spurred on to record heights by Lula’s conviction in Porto Alegre’s Court of Appeals, and by the comparable performance of the US market. In contrast to the US, however, in Brazil, confidence indices are weakly related to the stock market, if at all. They respond to political circumstances, but the latest are too recent, and those in the previous months were not good. The data from National Confederation of Industry (CNI) is for Dec/17. It could show relatively flat results for both consumer confidence and manufacturing capacity utilization.
Not that either have failed to respond to the turnaround in the economy. On the contrary, CNI’s consumer data tracks well measures of monthly GDP. It reached a bottom in Q1/15 and recovered steadily through Q1/17. Interestingly, it slides sideways since, influenced by consumers’ less favorable expectations about future income. The trend could be a reflection of the sample, however. Another measure, by Fundação Getulio Vargas (FGV), shows a resilient consumer, with still positive albeit decelerating gains in the monthly measure. FGV’s data is out already for both Dec/17 and Jan/18.
CNI’s measure of Manufacturing Capacity Utilization shows an impressive recovery from the trough in Oct/16; from 76.1% to 78.3%, in Nov/17. New data, for Dec/17, is out on Tuesday, and it should show another recovery, although to a range still below the long-run average of 81.2%. On Thursday, we get the official (IBGE’s) data for Manufacturing output, also for Dec/17. The market expects another gain, 3.5%yoy, not as large as November’s 4.7%, but showing a steady rise that should, eventually, transmit to greater capacity utilization and higher profits. The bottom line is that the crisis in confidence that pushed the economy into recession in early 2015 is well over. With better political outcomes as well as a steady recovery in output, employment, and income, it should build strength leading, finally, to a recovery in investment—if the election outcome later in the year is not an upset.
In addition to data on expectations and industrial output, the week brings new information on the public debt and deficit; the credit market; unemployment; and the trade balance.
- Wednesday, January 31: Public budget primary and nominal deficits, debt — Dec/17. (Consensus, Primary deficit R$36bn; Nominal deficit $56bn; Net debt 52% GDP). In the last quarter of 2017, a faster pace of activity, and income from public concessions, lifted revenues higher. As a result, the primary deficit for 2017 will be smaller than expected, by about R$40bn, as announced by the Secretary of Treasury. Expectations are for a total primary deficit of 2.5% of GDP; nominal deficit of 9.2% of GDP (i.e., an interest bill of 6.7% of GDP); and a net public debt of 52% of GDP, or 77-78% in gross terms. This is good news for the execution of the budget of 2018. With the Congress failing to approve the measures requested by the MoF, not only the social security reform but also a postponement of increases in civil-service salaries and new taxes, the 2018 budget has a gap of about R$70-80bn. The surplus in 2017 could help cover this gap.
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Unemployment rate – Dec/17. (Consensus, 11.9%). In seasonally adjusted terms, unemployment is falling continuously from a peak of 13.1% in Dec/16. The trend should continue, with a slow but steady recovery in employment.
- Thursday, February 1: Industrial production – Dec/17. (Consensus 1.4%momsa; 3.3%yoy). See above.
IMPORTANT NOTICES:
This report is a general discussion of certain economic and geopolitical trends and forecasts. It does not constitute investment advice of any kind or constitute a recommendation to buy or sell any security or other financial instrument. Investors may not rely upon any of the conclusions or other statements contained herein.
Certain of the factual information contained herein was obtained from third party sources which the author considers reliable, but the accuracy of such information cannot be guaranteed.
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