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Jobs

The unemployment rate was unchanged in November at 5.0%. Nevertheless, payroll additions of 211,000, higher revisions to the previous two months’ job gains and an October job openings number of 5.5 million (the second highest number recorded), convey even further narrowing than determined by the headline rate. The employment status allowed the Fed to raise rates last week, and healthy aggregate demand in the economy relative to anemic supply suggests that unemployment will likely drop faster than the Fed predicted in 2016. Initial jobless claims dropped by 5,000 to 267,000 in the week ending December 19, 2015. The four-week moving average was 272,500.

Inflation

In November, headline consumer prices remained flat, in line with the consensus anticipation, dragged lower by falling food and oil prices. Headline inflation is currently up 0.5% from November 2014, while the energy index is down 14.7% from November 2014. Core CPI increased to 2.0% y/y growth and has improved by 0.1% m/m. With the burden from energy prices set to dissolve in early 2016, headline inflation should also shift closer to the Fed’s 2.0% mandate in the medium term.

Rates

The 10-year U.S. Treasury note yield increased 0.06% to 2.25% for the week ending December 24, 2015. The Federal Reserve showed its confidence in the health of the U.S. economic recovery by raising short-term interest rates 0.25% last week. This move was a unanimous decision by the voting members of the Committee, and this decision ends seven years of a near-zero interest rate policy. The rate hike was well communicated to the investing community, so the market reacted to the announcement positively, with stocks rallying and Treasury yields remaining comparably stable. However, now that the obstacle of the first rate increase has passed, markets need to prepare for the Fed’s expectations for future interest rate increases.

Growth

The U.S. economy grew at a 2.0% q/q saar pace, the BEA showed in its final estimate of 3Q 2015 GDP. The data shows a larger inventory overhang than originally estimated, leading to a moderate revision downward from the second estimate. Inventory accumulation in the first half of the year reduced 0.7% from 3Q 2015 growth, revised up from the original estimate of -1.4%. However, the lower-than-expected negative hit from inventory accumulation means a forceful headwind to future growth as the pace of inventory accumulation returns to average levels. Consumption remained steady in 3Q, with consumer expenditures increasing 3.0% y/y following a 3.6% rise in 2Q. Consumer spending increased 0.3% in November. The Commerce Department posted new home sales hiked 4.3% and durable goods orders remained flat in November. The NAR noted existing home sales decreased 10.5% in November.

Profits

According to S&P Dow Jones Indices, as of December 17, 2015, of the 499 S&P 500 Index companies reporting 3Q earnings, 67.9% beat analysts’ estimates. The BEA posted that corporate profits dropped 1.6% q/q in 3Q 2015. As earnings season comes to an end, two of the major themes this year, high U.S. dollar and falling energy prices, definitely continued to cut down earnings. The estimate for y/y S&P 500 EPS in 3Q has now dropped 15.2%, but ex-energy has increased by 1.9%. Looking forward into 2016, these themes should continue, but the impact from low prices should begin to die down and point to stronger earnings growth.

 

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