Week Ahead
Empire State Manufacturing Survey (January, Tuesday 8:30 ET)
Forecast: 10.0 Consensus: 11.0 Previous: 9.53
The Empire State Manufacturing Index is expected remain positive for the third consecutive month in January after jumping to a 7-month high in December. Manufacturing payrolls rebounded in December to the highest levels since July, possibly marking a reversal in the slow-growth trend for the sector. The 6-month outlook has improved significantly in recent months, and growth in the new orders component points to gains in future production. Overall, we expect that this momentum will spillover into the beginning of 2012.
Industrial Production (December, Wednesday 9:15 ET)
Forecast: 0.4% Consensus: 0.5% Previous: -0.2%
Industrial production dropped in November for the first time since April 2011, dragged down by weakness in the auto sector. According to regional Federal Reserve surveys, the manufacturing sector has rebounded in December and durable goods orders remain strong. Furthermore, manufacturing employment jumped significantly, signaling an increase in activity for the month. In general, production is expected to grow in December to make up for losses in the previous month and will continue to approach pre-recession levels.
Consumer Price Index, Core (December, Thursday 8:30 ET)
Forecast: 0.1%, 0.1% Consensus: 0.1%, 0.1% Previous: 0.0%, 0.2%
Headline inflation has been lower-than-expected in the past two months and will likely increase only slightly in December. The energy component of CPI declined in both October and November and appears to have fallen again in December as suggested by a decline in crude oil prices. Food inflation has been decelerating but is likely to remain positive. Import prices declined only slightly for the month after a large jump in November, while rent prices continue to exert pressure on inflation. Excluding food and energy, core inflation is expected to continue easing due to excess resource slack.
Existing Homes Sales (December, Friday 10:00 ET)
Forecast: 4.55M Consensus: 4.65M Previous: 4.42M
Existing home sales increased on a MoM basis in November, however, downward revisions to the prior 5 years of data suggest a more discouraging outlook of the housing recovery. Recent price increases and depleting supply likely reflect a moderate rebound in demand conditions, with gains centered mostly in the single-family component. Although tight credit conditions continue to limit sales of existing homes, we expect modest increases to continue for the third straight month.
Market Impact
Markets will remain sensitive this week to further developments in Europe following S&P’s downgrade of several sovereign credit ratings. We suspect that market attention will center on these details, and it is unlikely that only modest improvements in US data will offset much of the pessimism. However, easing core inflation in line with Fed expectations could provide a more stable US outlook for the start of 2012.
