One of Brian’s Favorite Quotes
As civil rulers, not having their duty to the people duly before them, may attempt to tyrannize, and as the military forces which must be occasionally raised to defend our country, might pervert their power to the injury of their fellow citizens, the people are confirmed by the article in their right to keep and bear their private arms. TENCH COXE inRemarks on the First Part of the Amendments to the Federal Constitution, under the pseudonymA Pennsylvanian in the Philadelphia Federal Gazette, June 18, 1789.Last Monday a string of amendments were presented to the lower house; these altogether respect personal liberty.”
— Sen. William Grayson of Virginia In A Letter To Patrick Henry.
All Eyes On Oil As We Wait For The Jobs Report — Here’s A Preview Of This Week’s Economic Events
REUTERS/Carlos JassoNothing to see here. Just Ironman, checking out some Cyber Monday deals.We’re entering the final month of 2015.
This week begins with the monthly manufacturing purchasing manager reports from around the world, and it’ll end with the November jobs report.
In short, economists expect more confirmation that the global economy is diverging. Europe is slowing, China is decelerating, and Japan is stumbling as the US economy continues to pick up steam.
The US seems to be recognizing a net benefit from crashing oil prices.
However, it’s also important not to ignore the many risks associated with the new oil order.
“While lower oil prices would historically have been seen as a clear positive for the economy, the growing role of US energy production suggests at least a partial offset,” Goldman Sachs’ Kris Dawsey writes.
Here’s your Monday Scouting Report:
Crashing Oil Is Good: The American consumer is benefiting from falling crude oil prices through cheaper gasoline, one of the products yielded from refining oil. From Goldman’s Dawsey: “For the consumer, we see the recent drop in gasoline prices as equivalent to a roughly $75bn tax cut… [W]e think the impact of lower energy prices through this channel should be a benefit of about 0.3 percentage point (pp) on GDP growth over the coming year. The total positive “tax cut” effect for the whole economy may be as much as +0.4 pp.”
Crashing Oil Is Bad: Technological advances in hydraulic fracturing have enabled drillers to extract oil and gas from America’s shale basins. This flood of supply has contributed to the global oil glut pushing prices lower. The shale boom has contributed job creation, capital expenditure growth and a narrowing trade deficit, all which are at risk as low prices make drilling these basins unprofitable.From Dawsey: “[T]he energy sector is more important to the US economy than it once was due to the shale boom. Based on the recent drop in prices, our Exploration Production equity analysts anticipate slowing, but still positive, growth in production during 2015. Energy-related cap-ex should also slow a bit. The GDP growth headwind from this shift should be around 0.1 pp over the next year, mainly seen in a slightly wider petroleum trade deficit than would otherwise occur.”
Crashing Oil Puts Us All At Risk: For now, low oil prices seem to be net benefit to the US economy. However, low prices could trigger civil unrest in some parts of the world. They’ll also force capacity to come offline, much of which can’t come back online in a timely manner. And with OPEC showing that they’re willing to let prices fall further, the above mentioned risks only become more acute.From Morgan Stanley’s Adam Longson: “Low prices today also raise the risk of price shocks in the future. The lower and longer prices fall in the interim, the greater the long run impact. Losing too much investment or stimulating demand could create a price shock in future years as necessary supply growth cannot return quickly once curtailed. If anything, removing the “OPEC put” should raise the hurdle rate required on oil projects, which may require even high prices for higher cost and risky projects. Moreover, as prices fall, outage risks rise, particularly from financially stressed nations that cannot maintain subsidies (e.g. Venezuela, Nigeria, etc.). As subsidies are lifted, the risk of civil unrest tends to rise, putting production at risk. With little spare capacity today, the market has few options to deal with a large outage.”
Markit US Manufacturing PMI (Mon): Economists estimate this manufacturing index came in at 55.0 in November, up from a preliminary estimate of 54.7 but down from 55.9 in October. “The manufacturing sector is undergoing a marked slowdown in the fall after enjoying a buoyant summer,” Markit’s Chris Williamson said. “The manufacturing and service sector PMI data available so far point to GDP growth slowing to around 2.5% in the fourth quarter.”
ISM Manufacturing (Mon): Economists estimate this manufacturing index fell to 57.9 in November from 59.0 in October. “Early reads on November manufacturing have suggested continued growth momentum but little price gain,” UBS’s Sam Coffin said. “The export orders index could gain attention if it corroborates (or contradicts) recent signs of softening global demand.”
Vehicle Sales (Tues): Analysts estimate the pace of vehicle sales increased to an annualized rate of 16.55 million units in November, up from 16.35 million in October. “Autos haven’t typically been a focus of Black Friday, but last year the industry made a push to get in on the holiday sales frenzy to good results, and there’s an effort underway again this year to get more people into dealerships after Thanksgiving,” Morgan Stanley’s Ted Wieseman noted. “So we’re looking for some more upside to potentially reach 17 million for only the second time in the past eight years.”
Construction Spending (Tues): Economists estimate construction spending increased by 0.6% in October. “Slowing home improvements have weighed on residential construction spending recently, and there has been some slowdown in nonresidential construction, which could be due to negative payback after stronger spending in Q2,” Nomura economists said. “The relatively solid level of housing starts in October should provide some support for construction spending in October.”
ADP Employment Change (Wed): Economists estimate US employers added 221,000 private payrolls in November.
Markit US Services PMI (Wed): Economists estimate this services index came in at 56.3 in November, up from a preliminary estimate of 56.3 but down from 57.1 in October. “A fifth-consecutive monthly slowing in growth in the service sector adds to signs that the economic upturn has lost considerable momentum, though it’s important to note that the pace of expansion remains robust by historical standards,” Markit’s Chris Williamson said.
ISM Non-Manufacturing (Wed): Economists estimate this services index climbed to 57.5 in November from 57.1 in October. “Increases in the business activity and new orders are projected to drive a small improvement in the composite,” BNP Paribas economists said. “Possible supply chain disruptions are a source of downside risk to our forecast.”
Beige Book (Wed): The Federal Reserve will publish its collection of regional economic anecdotes at 2:00 p.m. ET. From Credit Suisse: “Any anecdotes regarding the prospects for wage increases or the effect of the global economic slowdown on domestic businesses presumably would garner some attention. We saw little of either in the previous Beige Book, which was released on October 15, thereby just missing most of the financial market volatility that month. As in the October report, we expect the tone of commentary from the US business community in next week’s Beige Book to be optimistic overall, suggesting that the economy’s fundamentals are healthy.”
Initial Jobless Claims (Thurs): Economists estimate the pace of weekly claims fell to 295,000 from 313,000 a week ago. “The four-week moving average of initial claims has been below the 300k threshold for almost three months, a sign that involuntary separations have reached their nadir,” Nomura economists said.
The Jobs Report (Fri): Economists estimate US employers added 228,000 nonfarm payrolls in November, driven by a 220,000 gain in private payrolls. The unemployment rate is expected to be unchanged at 5.8%. Average hourly earnings are forecast to increase by 0.2% month-over-month or 2.1% year-over-year. “The current nine-month streak over 200K is the longest since 1994-1995,” Credit Suisse economists noted. “Jobless claims remain at low levels, with the four-week average below 300K for ten consecutive weeks.”
Trade Balance (Fri): Economists estimate the trade deficit narrowed to $41.2 billion in October from $43.0 billion in September. “Shipping container volumes suggest a widening of the real deficit, with export volumes falling faster than imports,” Barclays economists said. “Price trends moved in the opposite direction, however, with import prices down more than export prices. On balance, we expect these trends to largely offset each other and look for the nominal trade balance to remain unchanged on the month.”
Factory Orders (Fri): Economists estimate the pace of orders went nowhere in October. “Factory orders continued to decline again in September, primarily because of declines in transportation Orders,” Nomura economists said.
Consumer Credit (Fri): Economists estimate consumer credit balances increased by $16.5 billion in October. “Non-revolving consumer credit growth has accelerated this year (likely due to an increase in auto loans),” Nomura economists noted. “Revolving credit has shown some above- trend gains in a couple of months, but this hasn‟t been consistent. More solid growth in revolving consumer credit would suggest that consumers are more confident about their finances and could provide a boost for spending going forward.”
Wall Street’s top equity strategists have been unveiling their forecasts for the stock market in 2015. And overall, the tone is somewhere between cautiously optimistic and bullish because there are no better alternatives.
“With the normalization of SP 500 valuations from cheap to near fair value, we find it difficult to sustain as much conviction in equities as had supported our bullish outlooks for 2013 and 2014,” Bank of America Merrill Lynch’s Savita Subramanian said. “Our slate of signals now implies the lowest forecasted SP returns since we took on this role in 2011. And while stocks certainly look more attractive than bonds, the case for stocks versus other asset classes is less clear.”
Subramanian expects the SP 500 to close 2015 at 2,200, which implies a modest 6% gain from current levels.
For more insight about the middle market, visit mid-marketpulse.com.