President Trump, Speaker Pelosi and the Fed
This week we’ll get more clarity on the interaction between President Trump and the Democratically-controlled House under the speakership of Nancy Pelosi. The first order of business for the newly-installed majority was to pass a bill reopening the government, or at least several agencies of the government, including Homeland Security. The fate of the bill, and how quickly the Democrats start to ramp-up investigations of the administration, will give us insight into how much gridlock is in store for us. We’re betting it will be a lot. Also coming out of D.C. the minutes from the Fed’s December FOMC meeting will give us a little deeper look into the Fed’s thinking vis-à-vis future rate hikes, although Powell’s address last Friday seemed to soothe the fears of risk-on buyers that the Fed will be mindful of the markets’ concerns. On Friday, the CPI release and today’s ISM Non-Manufacturing Survey for December headline the few economic tidbits we’ll get as the government shutdown will prevent a host of other data from being released.
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Top 5 Events for the Week
JAN. 7-11, 2019
1. DC Developments — All Week
2. FOMC Meeting Minutes – Wednesday
3. December CPI — Friday
4. December ISM Non-Manufacturing — Monday
5. November New Home Sales — Tuesday
1. DC Developments — All Week
This week we’ll get a closer look at the interaction between President Trump and the Democratically-controlled House under the speakership of Nancy Pelosi and it doesn’t look like it will be warm hugs and kisses. The first order of business for the newly-installed majority was to pass legislation reopening the government, or at least several agencies of the government, including Homeland Security. The fate of the bill in the Senate, not to mention how quickly the Democrats start to ramp-up investigations of the administration, will give us insight into how much gridlock is in store for us. We expect there will be plenty and that will be a continuing irritant if not headwind to the overall economy.
2. Minutes From FOMC December Meeting — Wednesday
Also coming out of D.C. the minutes from the Fed’s December FOMC meeting will give us a little deeper look into the Fed’s thinking when they unveiled their rate-hiking forecast. Powell’s address in Atlanta last Friday takes a little drama out of the minutes as he clearly sought to soothe fears of risk-on buyers that the Fed was somewhat out of touch with the markets’ concerns. In any event, the minutes should give us a fuller understanding of the Fed’s expectations for 2019, at least at the time of the December 19th meeting.
3. December CPI Report — Friday
While the labor market has continued to impress, (see last Friday’s December jobs report), inflation readings have failed to show the expected Phillips Curve-inspired bump to inflation. It’s with that backdrop that the December CPI release on Friday will be eagerly awaited, for if there’s one thing that will keep the Fed hiking is any hint that inflation is starting to trend higher and away from the 2.0% benchmark. Expectations, however, are for the overall reading to retreat -0.1% due to the massive drop in energy costs. The core rate (ex-food and energy) is expected to increase 0.2% matching the gain in November and October. On a year-over-year basis, CPI is forecast to drop 3/10ths to 1.9% from November’s 2.2% (again driven by the drop in oil/energy costs). Core CPI YoY is expected to be flat at 2.2% for the second straight month. The YoY measures are near the Fed’s 2% benchmark and if anything are trending lower due to collapsing oil prices. In addition, the Fed’s preferred inflation measure, core PCE, remains slightly under 2% at 1.9%. The trend for PCE is to run 30bps below CPI so if core CPI stays at 2.2% that implies core PCE will remain near 1.9%. That will have the trend in core CPI and PCE either static or decreasing over the past several months and that would allow the Fed to pause in March even with strong jobs numbers.
4. December ISM Non-Manufacturing Survey — Monday
The December ISM Manufacturing Survey from last week was a real eye-opener posting the largest month-over-month decline in ten years and the second largest dating back to September 2001. While the headline number plummeted it still signaled an expanding sector. The internals, however, were flashing more warning signs. One metric: the New Orders minus Inventory ratio was negative for the first time since August 2012 and a potential recessionary warning if it stays negative for long. It’s with that backdrop that the ISM Non-Manufacturing (services) Survey, which encompasses around 90% of the economy, will be viewed when it’s released later this morning. The forecast is for the headline index to move slightly lower to 58.5 versus 60.7 in November. The average over the past year has been 58.8 so slight miss against the twelve-month average but well above 50 which will indicate the sector continues to exhibit healthy expansion, albeit with some recent moderation. If it prints as expected, and combined with the strong December jobs report, some rate-hiking expectations should start creeping back into the futures market.
5. November New Home Sales — Tuesday
Housing-related releases were some of the first to reflect the impact of higher rates, but the so-so numbers have lately moved from mediocre to something a little more concerning. The combination of modest wage gains, home price appreciation, low inventories, and higher interest rates have all conspired to reduce housing affordability and that has fed back to reduced activity. That being said new home sales for November are expected to rebound 4.5% versus the disappointing –8.9% decrease in October. One benefit of the market volatility is the drop in rates which will improve some of the affordability concerns but those rate declines occurred after November so a modest level of sales are expected.
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Thomas R. Fitzgerald
Director, Strategy & Research
Tfitzgerald@centerstatebank.com
