UNITED STATES
Aside from the political fireworks of tomorrow’s election in Alabama, and the tax-law in Congress, this week’s attention will be on the FOMC meeting, on Wednesday. With near unanimity in expectations for a 25bp hike to 1.50%, the focus will be on forward-looking statements. There is consensus that the economy is in better shape than last month; in much better shape than last year. Growth is strong and labor conditions continue to improve, as evidenced in last week’s stronger than expected NFP report. At the margin, the unemployment rate dropped further, and is now well-below NAIRU. The latest inflation data is encouraging, with signs that the slump in the earlier part of the year is over. Since the November meeting the three-month annualized growth rate of the core PCE price index has risen from around 1.5% to nearly 2%. Financial conditions eased once again, as they have after each rate increase so far in this cycle. Yellen’s term at the Fed is ending on a high note: The economy is in one of the longest, if shallowest, expansions in the post-WWII era. The coming week’s economic data is likely to reinforce this tone.
Much uncertainty remains about the change in personnel at the Fed, as to whether Powell will broadly follow on Yellen’s footsteps, as we expect he will. And, even though Wednesday’s press conference could help, these uncertainties are likely to persist. To begin with, it is still too early for the FOMC voters’ dots plot, or the Fed staff’s own forecasts, to reflect the impact of the expected changes in the tax codes. Most likely, the dots plot will continue to point to three hikes in 2018 when we (and broad segments of the market) now expect four. Then there is the issue of slow wage growth, acting in the opposite direction to stimulative tax cuts. Will the trend continue, and if it does, does it point to sustained lower levels of inflation—the dreaded flat and flattening Phillips curve? Such a scenario, combined with political pressures, could lead Powell to postpone rate hikes. Finally, there is the question about the flat yield curve and the seemingly abnormal low level for the longer-term real neutral rate, in most estimates still close to zero. For these reasons, and other, uncertainty will persist, and there is little that Yellen can do in her last press conference to abate them.
Even so, we may all come to miss the Yellen era: She reinforced the Fed’s credibility by maintaining and even enhancing transparency in communication and honesty in forecasts and assessments; she did not engage in political controversy without shying away from upholding and defending the Fed’s prerogatives and independence.
- Monday, December 11: Job Openings and Labor Turnover Survey (JOLTS)—October (Consensus, 6.1k). Because it is about October, the report could still reflect the atypical weather-related shocks of earlier in the year, viz., the October NFP report. As usual, the key feature will be data on vacancies and quits. Vacancies will likely remain elevated as they continue to hover above 6 million and, of import, the quit rate should continue to point to increased willingness of workers to quit to find better opportunities in a tightening labor market.
- Wednesday, December 13: CPI inflation—November (Consensus 0.4%momsa, 2.2%yoy; core 0.2%momsa, 1.8%yoy). Gasoline prices increased in November by over 2%mom and should push the CPI headline higher, notably the year-on-year comparison, hence the consensus of 2.2%yoy. Core should remain at its more subdued trend, but some evidence pointing to the end of the inflation soft patch of 2017 will be welcome news. As noted above, November results will not impact FOMC meeting, nor its forecasts.
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FOMC meeting—December (Consensus 25bp hike). See above.
- Thursday, December 14: Retail sales—November (Consensus 0.3%momsa; ex-auto & gas 0.4%; control group 0.3%). Rising gasoline prices will likely lift headline sales, but they may decrease other spending. On the other hand, the latest NFP report showed that wage-bill growth (if not average hourly wages) continues to be on upswing. Aggregate income generation for the month rose solidly, and confidence remained at a high level, despite last week’s weaker than expected U-Mich reading. This bodes well for consumption, hence retail sales.
- Friday, December 15: Industrial production—November (Consensus 0.3momsa; manufacturing 0.2%). Forecasters expect a payback from the exceptional number in October (0.9%). Moreover, in last week’s NFP report, manufacturing aggregate hours worked were lower. Likely, these are deviations around a solid trend.
BRAZIL
Contrary to our expectations, the COPOM included in last week’s statement a reference to another rate cut in February 2018 (its next meeting): “For the next meeting, the Committee foresees as adequate, at this moment, another moderate reduction in the size of the easing, should the scenario evolve as expected, and considering the advanced stage of the easing cycle.” The reference to “another moderate reduction” is unequivocal, a 25bp cut to 6.75%, following last week’s reduction to 7%. The statement included a somewhat lower forecast for inflation at end-2018, 4.2%, thus below the 4.5% target. In part, this is due to an improved outlook for agricultural supplies and a lower risk of energy scarcity. While the recovery in output may be stronger, it will be weak in comparison to the amount of slack produced by the last recession. These considerations, together with the above statement, led the market to revise its expectations, foreseeing now a terminal rate of 6.5%. That is, a further 25bp cut beyond February, at the March 2018 meeting. The political cycle dictates upfront action. Thus, if we are to have two more cuts they will be in quick succession.
We are comfortable with this outlook, even though, in our view, it introduces an unneeded increase in risk. At issue are the developments in the political campaign. Last Saturday, the PSDB’s national convention voted to elect Geraldo Alckmin president. This basically seals the governor of São Paulo as the party’s nominee for the Presidential race. Once this would have nearly anointed him as the future President—the candidate of the large centrist coalition encompassing the PMDB, the DEM and satellite parties, in addition to the PSDB itself. Yes, there is a wave of anti-establishment feeling, but the election would have been another battle—the fifth in a row—between the PSDB and the PT, now with an enfeebled and demoralized PT. This was once but is not now. While it still may happen, currently neither the PMDB nor the DEM are willing to support the PSDB candidate. They want someone of their own. They may not find that person and be induced to regroup the coalition. However, for the time being, politics remains highly fragmented, even dysfunctional. Minority candidates have a chance, as does the PT, now that there is a possibility that legal action against Lula may be delayed until after the formal legal deadline for candidate selection, on August 5, 2018. If the PT is legally capable of registering Lula as its candidate, what will happen if he his subsequently condemned by another tribunal? Certainly, a great deal of confusion. For this and other political reasons it may have been wiser for the COPOM to be more prudent. But it chose to follow through on the strength of the economic arguments—and one must respect it for this.
- Wednesday, December 13: Retail sales—October (Consensus 0.2%momsa; 5.2%yoy; “Broad sales” -0.1%momsa, 9.5%yoy). Supermarkets sales unexpectedly decreased in October, and this should bear on the headline retail number. Moreover, the broad measure, that includes automobiles and construction equipment, is due to a pullback on the mom series, given a fall in auto sales. Nevertheless, retail sales remain strong, leading the recovery, consistent with the improvement in private consumption shown in GDP data. Recent data point to faster GDP growth already this year, perhaps as high as 0.8%yoy.
- Thursday, December 14: COPOM Minutes. 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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