There are many moving parts in the economic story this week. We can begin and end with central bank policy. China is responding to expectations for cooler growth. It looks like they may miss 7.5 percent real GDP growth target this year, closer to 7.0 percent looks more likely. The Peoples Bank of China just lowered their benchmark lending rate 40 basis points, the first rate cut in 2 years.
European Central Bank president Mario Draghi announced that he is ready to expand stimulus due to very weak inflation in the euro zone. This could mean heading into conventional QE with sovereign debt purchases. However, the ECB is still getting push back from Germany and others. More asset purchases by the ECB means more downward pressure on euro, helping European exports. The euro dropped against the dollar.
Japan is in technical recession, post a slight decline in Q3 real GDP growth after a big downshift in Q2. Prime Minister Abe will delay the second round of consumption tax hikes. The expectation of ongoing aggressive policy by the Bank of Japan is pushing the yen down against the dollar.
The price for West Texas Intermediate crude oil has stabilized, at least temporarily, near $75 per barrel. The national average price for unleaded regular gasoline is down to $2.84 per gallon, according to AAA.
U.S. stock prices trended up through the week, back into record territory. The yield on 10-Year Treasury bonds looks stable near 2.35 percent.
U.S. inflation metrics for October were stronger than expected given declining petroleum prices. The PPI for final demand was up 0.2 percent. The CPI was unchanged, supported by housing and transportation services.
Housing data was decent, but still range bound. Existing home sales for October gained 1.5 percent to 5.26 million. Still below the recent mid-2013 peak. October housing starts eased by 2.8 percent to a 1.01 million unit rate. But permits strengthened by 4.8 percent to a 1.08 million unit rate. The National Association of Home Builders Survey for November showed a strong gain in builders’ sentiment.
Manufacturing metrics look good. Regional Fed surveys were solid. The Industrial Production Index for October dipped by 0.1 percent due to the impact of weather patterns on utility output. Manufacturing IP gained 0.2 percent.
Labor metrics remain solid. Initial claims for unemployment insurance dropped by 2,000 to hit 291,000 for the week ending November 15. Continuing claims fell by 73,000 for the week ending November 8, to hit 2,330,000. We expect the U.S. unemployment rate to continue to trend down through 2015.
The Conference Board’s Leading Economic Index for October surged ahead by 0.9 percent, no worries there.
So the Federal Reserve is looking at solid output and labor data and mixed signals on inflation with energy and import prices easing while labor markets tighten. We think that the Fed looks through the disinflationary impact of energy prices and continue to pivot. The next step will be a revision to forward guidance on interest rates.
For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 11-21-14.