Wake-up Call - Macro Kickoff: US consumers are back

Macro Kickoff: US consumers are back

The US economy is shifting into a higher gear as we go into an eventful week. The Middle East will likely draw headlines, but we also have ISM Manufacturing, Nonfarm Payrolls, and an ECB rate meeting.

Canadian economy expanded in November?
We kick the week off with gross domestic product from Canada and personal income and spending from the US all three of which are expected to increase on the month. We look for economic activity in Canada to grow 0.2 percent month-on-month on top of the 0.2 percent in October. Should our forecast be met it would take the annualised growth rate to 2.4 percent so far in the fourth quarter, a clear improvement on the disappointing 1 percent recorded in the third quarter even though it would mean that the economy slowed to 2.8 percent on a year-on-year basis in November from 3.3 percent in October. Consensus is a tad more optimistic regarding today’s report and look for a growth rate of 0.3 percent month-on-month. The numbers have generally been strong in November in Canada with employment up another 15K, housing starts up to 187K from 172K, and industrial product price up 0.5 percent month-on-month (note this is not seasonally adjusted).

The US consumer finally gets her act together
When it comes to spending the US consumer is back to what she does best, consume, with the GDP report indicating a 4.4 percent annualised quarterly growth rate (slightly above our own bullish 4.2 percent and consensus’ 4 percent ). While there may yet be several changes to fourth quarter GDP, we can for now say that the consumer seems to be doing exactly what is needed, taking over and continuing the previously inventory-led GDP growth.

This is likely to be reflected in today’s income-and-spending combo where we look for a 0.5 percent monthly surge in each, meaning that the savings rate would be more or less unaltered; which suggests that while the consumer may be increasing consumption again some dollars remain unspent as private deleveraging is still very much a part of everyday life in the US.

Other releases today
An hour and 15 minutes after the income and spending report from the US we get to take a look at manufacturing sector in Chicago, which is generally a reasonable indicator of tomorrow’s ISM Manufacturing report. However, the Chicago PMI has been overly bullish of late, likely a reflection of the improvements in the auto industry. [Note that Chicago PMI is released three minutes earlier to subscribers at 14:42 GMT].

As an aside, we note that the annual revisions to the seasonal factors of the ISM surveys saw December’s ISM Manufacturing index be revised higher to 58.5 from 57 earlier while the Non-manufacturing index was unchanged at 57.1 in December while non-manufacturing employment was revised up to 52.6 from 50.5.

 Before the US and Canadian economic data the Eurozone presents its initial take on January’s inflation, which is expected to show yet another increase to 2.3 percent year-on-year from 2.2 percent in December. This is particularly interesting given the recent more hawkish (or so the market interpreted them) remarks from the ECB and even more so given that the ECB will take centre stage on Thursday and announce (unchanged, we expect) rates. At the brink of 2011 the market was looking for a hike of 50bps in 2011, but in light of the recent speeches the market is now expecting the ECB to raise rates by 75bps by year-end. We remain happy to take the under on this one for now, but anything is possible as the July 2008 hike to 4.25 percent can attest to.

US GDP in review
While GDP disappointed the market by clocking a 3.2 percent annualised quarterly growth rate below the consensus estimate of 3.5 percent (and below our more optimistic 3.7 percent), the report was a mixed bag with both uplifting and disturbing pieces. First of all, as we mentioned above, consumption grew a massive 4.4 percent; by far the strongest growth rate in this recovery/expansion and a full 2 percentage points above the previous best of 2.4 percent in 3Q10. In particular durable goods led the way with a 21.6 percent surge. Net exports also contributed solidly, mainly due to a 13.6 percent decline in imports, which was caused by a large uptick in the relevant price deflator. Inventories was the main drawback to GDP by subtracting 3.7 percent (real final sales in other words rose a remarkable 7.1 percent).

Given the steep increase in the import price deflator (and the rising inflation evidenced in all other reports on the subject) one wonders why the overall GDP price index is estimated to have slowed to 0.3 percent in the fourth quarter from 2.1 percent a quarter earlier. It will certainly be interesting to see if the price index remains this low in the coming months’ revisions.

Calendar

 

Equity Kickoff: Tensions in Egypt point to lower open

European cash indices will open lower Monday after tensions in Egypt escalated over the weekend. Earnings will, for a moment be set aside as the main driver for equity markets, but earnings season isn't quite over.

The tensions in Egypt accelerated during the weekend and the general fear in markets will be as to whether this will spread into other Middle Eastern countries where uncertainty would result in concerns over oil supply. Markets will generally shift into risk aversion mode, selling off commodities and equities until the tensions have eased.

Ryanair, the European airline sector's enfant terrible, posts earnings today. EPS is expected to expected to be negative, EUR -0.015 per share vs. a prior reading of EUR 0.211 and sales is expected to have dropped from EUR 1,284 mio to EUR 725.000. But we expect Ryanair to have handled the higher oil prices better than Easyjet last week given their its cost structure.

Exxon Mobil is expected to show and EPS improvement from USD 1.44 per share to USD 1.63 and likewise with sales from USD 95,290 mio to USD 100,124 mio. This is mainly driven by higher oil prices, but the company’s profit is also likely to have been helped by the higher volume in the chemical segment which picked up in 2010. DuPont, Exxons main competitor, posted earnings earlier in the season and it surprised rather significantly to the upside, pointing toward this from Exxon too.  On another note, Exxon has recently stated it expects demand for natural gas and oil to be 35% higher in 2030 compared to 2005.