Stock may have suffered through one of their most volatile weeks in years triggered by the unexpectedly large (if miscalculated) spike in January wages, the highest since 2009, resulting in the biggest volquake in history, and come this Wednesday it may be time for round 2, because at 8:30am on Valentine's Day, the U.S. inflation report - far more closely watched than the payrolls release - will hold the key to the next phase.
Indeed, as Deutsche Bank notes:
"it's hard to remember a data point as eagerly anticipated as next Wednesday’s January CPI report in the US. With rates, equities and vol selling off aggressively and markets on edge, the strong January average hourly earnings print this time last week has caused havoc in the market over the last few days."
Why is the fate of the market suddenly in the hands of the otherwise trivial CPI number? Because, as we showed every day last week, every single time the 10-year Treasury approached or surpassed the four-year high of 2.85% last week, equities investors panicked and yanked bids amid fears the specter of higher inflation would accelerate the pace of Fed rate hikes, crushing the nearly 10 year artificial bull market in stocks bought with nearly $20 trillion in central bank liquidity. This is shown in the BBG chart below.
And with average hourly earnings reportedly breaking out, there is suddenly a threat that core CPI may surprise to the upside, and not just modestly, but materially enough for the Fed - which is already expecting to hike rates 3 times in 2018 - to precipitate its tightening intentions, and if nothing else, certainly not intervene during the current market correction.
“What’s happening now is just price discovery between bonds and equities -- how far can the bond market push yields up before the equity market cracks?” T. Rowe Price's Stephen Bartolini told Bloomberg . "The big fear in risk markets is that we get a big CPI print and it validates the narrative that inflation is coming back and the Fed is going to have to move faster.”
While the re-emergence of wage growth - long considered the missing link in an economic recovery that’s driven the jobless rate to near record lows - took the market by surprise, what is more curious is that at least on paper, the Fed's intentions had been widely priced in: just before the stocks meltdown, traders were allegedly in sync with FOMC projections of three rate increases in 2018. However, the recent spike in longer-yields was the result of the bipartisan Senate plan, which would boost spending by an addition $300 billion, an increasing Treasury issuance even further, and beyond the $1 trillion projected this year.
Stocks have not taken that well.
That said, bond bulls remain: “The Treasury market is pricing in the most bearish scenarios that were on the docket for 2018, and still 10-year yields remain stubbornly below 3 percent,” BMO Capital Markets strategists Ian Lyngen and Aaron Kohli wrote in a Feb. 9 note. To the BMO due there’s a greater risk of yields declining over the next several months than rising.
However, skeptics will be silenced promptly on Wednesday should the CPI/Core print higher than the expected, in which case a 3% on the 10Y becomes virtually certain, and unless stocks find some pressure outlet to relieve concerns of rising inflation - ideally a statement by some central banker - the next sharp move lower in stocks will immediately follow. As Bloomberg notes, at least some speculators expect such an outcome: Block trades in puts on 10-year Treasury futures Friday pointed toward demand for protection against yields rising to that level by March 23.
So with that in mind, and with everyone's eyes on Wednesday's CPI report, here is what else to look for in the coming week:
- Feb. 12: Monthly budget statement
- Feb. 13: NFIB small business optimism; revisions to producer price index
- Feb. 14: CPI; MBA mortgage applications; retail sales; real average weekly and hourly earnings; business inventories
- Feb. 15: Empire manufacturing; initial jobless claims and continuing claims; PPI; Philadelphia Fed business outlook; industrial production; capacity utilization; Bloomberg consumer comfort; NAHB housing market index; Treasury International Capital flows
- Feb. 16: Import and export price indexes; housing starts; building permits; University of Michigan survey data
And summarized courtesy of Barclays:
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Below is Deutsche Bank's take:
It's hard to remember a data point as eagerly anticipated as next Wednesday’s January CPI report in the US. With rates, equities and vol selling off aggressively and markets on edge, the strong January average hourly earnings print this time last week has caused havoc in the market over the last few days.
Current market expectations are for a +0.4% mom headline reading and +0.2% mom core reading, which translate into +2.0% and +1.7% yoy readings (both a decline of one-tenth from December). Meanwhile the other potentially big event next week is in Washington with President Trump expected to release a $1.5tn infrastructure plan (which will kick off the process for producing legislation) and also his 2019 budget blueprint.
There is other important data out in the US next week too with the January PPI report on Thursday another significant inflation reading, while Wednesday will also see January retail sales released. January industrial production (Thursday), January housing starts and building permits (Friday) and the preliminary February University of Michigan consumer sentiment survey (Friday) will also be released. In Europe we’ll get final January CPI revisions in the UK (Monday) and Germany (Tuesday) while second readings of Q4 GDP will be out in Germany and the Euro area on Wednesday. Late on Tuesday we’ll also get Japan’s Q4 GDP print.
It’s also looking like a busy week for ECB speakers with Weidmann (Wednesday), Mersch (Wednesday and Thursday), Praet (Thursday) and Coeure (Friday) all scheduled to speak. The Fed’s Mester will speak on Tuesday.
Finally it’s worth noting that Chinese New Year kicks off on Thursday, with mainland markets subsequently shut until February 21st.
What to look out for next week?
- Monday: With data fairly thin on Monday all eyes will instead be on the White House with President Trump expected to release a $1.5tn infrastructure plan, along with his 2019 budget blueprint. Away from that the only data of note is the January monthly budget statement in the US. Heineken will report earnings.
- Tuesday: A busier day for data with the January CPI/PPI/RPI report in the UK the main focus. In the US the January NFIB small business optimism print will be released while in Japan the preliminary Q4 GDP print will be out in the late evening. Away from data the Fed’s Mester is due to speak in the afternoon on monetary policy and the economic outlook. Pepsico will release earnings.
- Wednesday: Front and centre on Wednesday is the January CPI report in the US, while January retail sales will also be released alongside. December business inventories is the other data release due in the US while in Europe we’ll get Q4 GDP in Germany (second estimate) and the final January CPI revisions, along with Q4 GDP for the Euro area (second estimate). Away from data the Bundesbank’s Weidmann is due to speak in the morning, followed by the ECB’s Mersch. German Chancellor Merkel is also due to speak at a CDU event. CISCO, and Credit Agricole will report earnings.
- Thursday: Another busy day for data with January PPI, January industrial production, February empire manufacturing, February Philly Fed PMI, February NAHB housing market index and the latest weekly initial jobless claims readings all due in the US. In Europe Q4 employment data in France and the December trade balance for the Euro area are due. The ECB’s Mersch and Praet are also slated to speak at an event in Paris. It’s with noting that New Year celebrations in China will also begin on Thursday, with mainland markets subsequently shut until the 21st. Nestle will report earnings.
- Friday: The end of the week will see January retail sales data released in the UK, along with the January import price index, January housing starts and building permits and the preliminary February University of Michigan consumer sentiment reading in the US. The ECB’s Coeure will also speak in the morning. Coca-Cola, and Kraft Heinz will all report earnings.
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Finally, here is Goldman with its breakdown of key US events together with consensus forecasts:
The key economic releases next week are CPI and retail sales on Wednesday and Industrial production on Thursday. There is one speaking engagement from a Fed official this week, on Tuesday.
Monday, February 12
- 02:00 PM Monthly budget statement, January (consensus -$51.0bn, last -$23.2bn).
Tuesday, February 13
- 08:00 AM Cleveland Fed President Mester (FOMC voter) speaks: Cleveland Fed President Loretta Mester will speak at a breakfast event hosted by the Dayton Area Chamber of Commerce. Audience and media Q&A are expected.
Wednesday, February 14
- 8:30 AM CPI (mom), January (GS +0.38%, consensus +0.3%, last +0.20%): Core CPI (mom), January (GS +0.22%, consensus +0.2%, last +0.24%); CPI (yoy), January (GS +1.98%, consensus +1.9%, last +2.1%); Core CPI (yoy), January (GS +1.71%, consensus +1.7%, last +1.8%): We estimate a 0.22% increase in January core CPI (mom sa), which would lower the year-over-year rate to +1.7%. Our forecast reflects a boost from January seasonality, and likely continued strength in shelter inflation. On the negative side, we expect a small drag from telephone hardware methodological changes. We estimate a 0.38% increase in headline CPI, reflecting firm consumer energy and food prices in January.
- 08:30 AM Retail sales, January (GS +0.2%, consensus +0.2%, last +0.4%); Retail sales ex-auto, January (GS +0.4%, consensus +0.5%, last +0.4%); Retail sales ex-auto & gas, January (GS +0.3%, consensus +0.4%, last +0.4%); Core retail sales, January (GS +0.3%, consensus +0.4%, last +0.3%): We estimate core retail sales (ex-autos, gasoline, and building materials) rose at a 0.3% pace in January. While the growth pace likely remains solid—reflecting a boost from strong service sector data and the January stock market rally— we anticipate some correction in the nonstore retailers category after a strong holiday shopping season. Given the further rise in (sa) gasoline prices and the decline in auto SAAR, we estimate 0.4% and 0.2% respective increases in the ex-auto and headline measures.
- 10:00 AM Business inventories (consensus +0.3%, last +0.4%)
Thursday, February 15
- 08:30 AM PPI final demand, January (GS +0.2%, consensus +0.4%, last -0.1%); PPI ex-food and energy, January (GS +0.1%, consensus +0.2%, last -0.1%); PPI ex-food, energy, and trade, January (GS +0.1%, consensus +0.2%, last +0.1%): We estimate a 0.2% increase in headline PPI in January, reflecting a slight uptick in gasoline prices. We expect a smaller 0.1% increase in in the PPI ex-food, energy, and trade services category. In the December report, the producer price index was weaker than expected, reflecting softness in both core measures as well as in food and energy prices.
- 08:30 AM Philadelphia Fed manufacturing index, February (GS +21.3, consensus +20.6, last +22.2): We estimate the Philadelphia Fed manufacturing index edged down in February. It is possible the decline in January partially reflected the Bomb Cyclone storms. Commentary from industrials remains encouraging, and we expect the index to remain at expansionary levels.
- 08:30 AM Empire manufacturing survey, February (consensus +17.9, last +17.7)
- 08:30 AM Initial jobless claims, week ended February 10 (GS 230k, consensus 228k, last 221k); Continuing jobless claims, week ended February 3 (consensus 1,928k, last 1,923k): We estimate initial jobless claims ticked up by 9k to 230k in the week ended February 10. Continuing claims – the number of persons receiving benefits through standard programs – declined in the previous week and may continue their general downward trend since early January.
- 09:15 AM Industrial production, January (GS +0.5%, consensus +0.2%, last +0.9%); Manufacturing production, January (GS +0.4%, consensus +0.3%, last +0.1%); Capacity utilization, January (consensus 78.0%, last 77.9%): We estimate industrial production rose +0.5% in January, as the utilities category likely rose further and manufacturing rebounded from last month’s soft report. We expect manufacturing production rose +0.4%, reflecting strength in non-auto manufacturing.
- 01:00 PM NAHB homebuilder sentiment, February (consensus 72, last 72)
Friday, February 16
- 08:30 AM Housing starts, January (GS +4.0%, consensus +3.3%, last -8.2%); We estimate housing starts rebounded 4.0% in January, reflecting a catch-up with the recently more resilient single-family permits, partially offset by unseasonably cold weather.
- 08:30 AM Import price index, January (consensus +0.6%, last +0.1%)
- 10:00 AM University of Michigan consumer sentiment, February preliminary (GS 94.8, consensus 95.5, last 95.7): We estimate the University of Michigan consumer sentiment index edged down 0.9pt to 94.8 in the preliminary estimate for February. We note the possibility of the recent stock market selloff over the last week to weigh on surveys conducted last week. The report’s measure of 5- to 10-year inflation expectations was 2.5% in January, near the middle of its 12-month range.
Source: Barclays, DB, Goldman