The new monthly cycle of high frequency economic data has begun. The manufacturing PMI shows the synchronized global recovery is continuing. The service sector and composite PMI will be reported in the week ahead. They are unlikely altering the general expectation for robust growth in Q4.
Even the disappointing US auto sales (17.35 mln seasonally-adjusted annual pace vs. expectations for 17.5 mln and 18.0 mln in October), the US economy appears to be accelerating. The Atlanta Fed GDPNow points to 3.5% Q4 GDP.The New York Fed GDP trackers see a 3.9% pace.
The November jobs report takes center stage in the week ahead. Although the month-to-month report can move around, the averages are quite stable. Last year, the non-farm payrolls rose an average of 187k a month. Through August, before the storms’ havoc, the US created 176k jobs a month. The median expectation in the Bloomberg survey is that the economy created net new 200k jobs in November.
Barring a significant surprise, the focus is on average hourly earnings more than the number of jobs created or the headline-grabbing unemployment rate. In the current debate, we find ourselves in the camp that expects inflation is accelerating next year. However, the November report may exaggerate the rise, which the median forecasts call for a 2.7% year-over-year pace from 2.4%. The base effect is less favorable this month.
There is little doubt the market, encouraged by commentary from Fed officials, continues to expect a Fed hike on December 13. We estimated fair value for the December Fed funds futures contract, assuming the hike, is 1.295% and it finished last week at 1.29%. The implied yield of the January 2019 futures contract has been fairly steady around 1.84%. This is consistent with a full hike and around 2/3 of a second hike discounted.
European economic activity is finishing the year on a strong note. Last week’s news that core inflation was unchanged at 0.9% in November disappointed the otherwise favorable economic momentum. This week, the disappointment may be delivered by weakness in retail sales, which have unwound October’s 0.7% increase. The year-over-year rate will fall back to 1.6%, which is where it was at the end of last year.
The UK offers a full slate of data, including PMI, industrial production, manufacturing output, house prices, and trade. On balance, it appears the UK economy is stabilizing at the quarterly growth rate of 0.3%-0.4%. The balance of opinion favors the BOE being on hold next year.
