Stocks largely gained in a thinly traded Thanksgiving week—small moves logged while Wall Street welcomed a spate of economic data and a cautious outlook for holiday spending that many traders see doing little to nudge the Federal Reserve from a December interest rate hike (figure 1).
You heard that right. The Street appears to be drawing collective comfort in surprise-free data that could allow for business as usual at the Fed, where members have signaled their intent to unwind recession-era monetary policy. If the Fed does move in December, it will be the first rate hike in nearly a decade. And, yes, it’s a 180-degree twist from stock market sentiment earlier in the year, when the whiff of coming rate hikes tended to punish stocks. These days, bulls generally want confirmation that the U.S. economy is strong enough to handle a few rate increases, especially with policy overseas tilting in the other direction.
Once again, the week packs plenty to make or break the Fed’s case. For starters, Wall Street is likely to assess the shopping climate of Black Friday and Cyber Monday. These two well-publicized days could set the tone for the entire holiday buying season. The National Retail Federation (NRF) projected a 3.7% year-over-year growth rate for Black Friday, while ShopperTrak estimated a 2.4% increase in overall holiday sales. The NRF forecasted that overall online holiday sales will increase between 6% and 8%—to as much as $105 billion—during the months of November and December from that period last year. For some retailers, the holiday season can represent as much as 30% of annual sales, the NRF said.
New Jobs, New Cars?
What may matter more is how much holiday cash will be thrown at big-ticket goods, including cars.
December 1 features the release of monthly auto sales (see the full economic report calendar below).—This type of big ticker consumer spending can indicate if job growth is actually translating into consumer spending on pricy goods.
Car sales have been upbeat, but can that continue? A WardsAuto forecast calls for U.S. light-vehicle sales to reach an 18.4 million-unit seasonally adjusted annual rate in November, leading to the first three-month streak of 18 million-plus results.
It’s the December 4 jobs report that could offer a few clues on momentum for big-ticket spending heading into the new year. This typically market-moving report is expected to show a 200,000 increase in nonfarm payrolls in November, made up of 195,000 private-sector jobs and a slim 5,000 new government jobs, according to third-party analysts. A 200K gain would be off the clip of the upside surprise in October, when 271K new names found the payroll.
How Many Hikes?
Consumer spending and the pace of hiring are two chief metrics under watch at the Fed. Short-term Fed funds futures market traders have priced in a 78% chance that the Fed activates the first interest rate hike since 2006 when it meets in December. That’s according to pricing calculations provided on the CME Group’s FedWatch Tool. And that’s up from the 35% odds priced in right after the Fed took a pass on an October rate change but issued a statement entertaining the thought of a December hike. Several speeches since then have made the Fed’s comfort with a modest rate hike pretty clear.
Currently, bond market pricing reflects trader expectations for the Fed to raise rates by an additional half-point, or 50 basis points, in all of 2016.
But economists at Goldman Sachs are guessing the Fed will opt to be more aggressive.
“We now expect the economy to reach full employment over the next year — the ‘tortoise recovery’ will soon cross the finish line,” wrote Goldman Sachs economists Jan Hatzius and Zach Pandl, in a research note.
Watch for the Fed debate to swing toward the scope and speed of a rate-hike campaign, and with this week’s chock-full calendar, that debate could begin sooner versus later.
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