Introduction

December liftoff looked like a sure thing, but that was last week. The latest week's economic data are on the soft side in contrast to the October employment report which, with the 271,000 headline payroll surge, upped the odds heavily for the Fed's big move. But the strength of the employment report didn't point to strength for retail sales nor to strength for the week's run of labor reports, and price reports continue to show no traction whatsoever.

The Economy

Don't stop spending!

On the surface, October's retail sales report looks a bit iffy. The headline only inched 1 tenth higher while the year-on-year rate came in at only plus 1.7 percent. But the weakness was tied to a pause for vehicles, where sales have been very strong all year, and also to another decline for gasoline sales which have been contracting all year. The graph to the left excludes both vehicles and gas, showing a respectable 0.3 percent increase on the month and a likewise respectable year-on-year rate of 3.5 percent, which however has been moving lower.

And there are solid gains in the report including for housing-related components of furniture & home furnishings and building materials & garden equipment. Nonstore retailers also showed a strong gain as did restaurants. The latter is a discretionary category where gains hint at a building sense of confidence among consumers. The graph tracks year-on-year restaurant sales, the light line, against the dark line of the consumer sentiment index. They move pretty much in tandem as they also do by the way with vehicle sales, another discretionary category. Restaurant sales are up 5.5 percent on the year, the best of any retail category next to vehicle sales which are up 6.2 percent. And note the pick up in the sentiment index where the November flash came in at 93.1 for the highest reading since June, a gain that hints perhaps at a coming uplift for restaurants.

Labor market mix up

The week's run of job indications is not showing the same strength as the October employment report where not only payrolls surged but unemployment came down, to 5.0 percent remember and ahead of the Fed's schedule. This week, the Fed's broadly defined labor market conditions index rose but the level of strength is not that convincing. The index, as seen in the graph, is on a 6-month winning streak where, however, the rate of growth has averaged only 1.4 which is  well below the prior two years. Removing monetary accommodation could be touchy for the Fed if the November employment report proves substantially weak and offers a reminder that the recent payroll trend, October's strength aside, has been soft.

There was a positive sign in the week for the labor market and that was a pop higher for job openings in the JOLTS report, to 5.526 million in September. Openings, as seen in the columns of the graph, peaked in July at a recovery best 5.668 million. But employers haven't been filling the jobs based on hiring, which is the line in the graph and which has been lagging and flat at 5.049 million. If employers begin to raise their offers to fill the jobs, hiring would rise as would wage inflation as well. But another reading in the report isn't hinting at wage strength at all. The quits rate, which is considered a measure of worker confidence, has remained stubbornly low, at 1.9 percent for a sixth straight month and suggesting that workers are not moving up to higher paying jobs.

The biggest jobs news in the week came from initial jobless claims which are coming in on the high side, at 276,000 for both of the last two weeks. The 4-week average is now on the rise, up 5,000 in the latest week to a 267,750 level that is, however, still in line with the month-ago comparison, a comparison that in the next report will match the October-to-November sample weeks of the monthly employment reports. If initial jobless claims again show pressure, don't be surprised if expectations soften for the November employment report not to mention for a December rate hike. 

Inflation: where's the pressure?

Price data in the week offer a uniform indication — pressures of any kind are still very hard to find. The headline index for producer prices (PPI-Final Demand) fell an unexpected 0.4 percent in October. Year-on-year, prices are down a very sizable 1.6 percent. What's telling about this report are services prices which, as seen in the dark column at the far right of the graph, fell 0.3 percent following what was then a totally unexpected 0.4 percent decline in September. Goods prices, the light columns, have long been showing the effects of low commodity prices and imported deflation and have been below water 10 times in the last 13 months. But services are supposed to be insulated from global effects, at least to a degree. The downturn for this reading points to the pass through of cross-border price effects and does not point to any progress toward the Fed's 2 percent inflation target. Year-on-year, services prices are up only 0.1 percent.

Import & export prices, as tracked by index levels in the graph, are no more encouraging, pointing as they do straight down. In month-to-month percentage terms, import prices fell 0.5 percent in October with details showing wide weakness. When excluding petroleum products, which have been skewing readings lower across reports, prices still fell heavily, down 0.4 percent for a 10th straight decline. Year-on-year, nonpetroleum import prices are down 3.4 percent for the largest drop since October 2009. The story on the export side is the much same with export prices down 0.2 percent for a year-on-year decline of 6.7 percent. Contraction in export prices reflects deflationary global trends while contraction in import prices reflects not only low commodity prices but also the strength of the dollar which has been giving U.S. buyers more for their money. For Fed policy makers who are charged with keeping inflation up, recent data are definitely not pointing to any urgency for a rate hike.

Markets: the changing pace of policy

Fedspeak is now looking past liftoff a bit and focusing more on the trajectory of liftoff. One dove and current FOMC voter, Chicago President Charles Evans who is concerned about the lack of inflation, is arguing for a very shallow trajectory that would leave the fed funds target still under 1 percent by the end of next year. He argues that a well signaled gradual approach would keep Fed policy from jarring the markets. Not jarred this week was the bond market which got hit the week before with the employment report. The stock market, however, did get jarred this week with major indexes down 3 and 4 percent in what seems like a delayed reaction to the report. The Dow, ending at 17,315, lost 3.7 percent in the week and is now back in the red for the year. Commodities also moved lower in what is another negative for the inflation outlook. WTI, ending near $42, fell more than 5 percent on the week. And with rising domestic output and still heavy oil imports, an approach to $40 shouldn't be ruled out.

The Bottom Line

The consumer is still very alive despite the soft October retail sales report. And who knows, when the weather starts to chill, seasonal buying may begin to pick up. But jobs data are still uneven while inflation data are uniformly weak. The week's numbers certainly do not add to the chances for December liftoff.

Looking Ahead: Week of November 16 to November 20

Manufacturing and housing will be the features of the week including a key update on inflation. Empire State, a key report that back in August decisively signaled the subsequent break lower for the factory sector, kicks off the week with the first indication on November's activity followed on Thursday by the Philadelphia Fed report which has also been weak. Industrial production on Tuesday will offer the first definitive indications on October's factory activity and a badly needed bounce for the manufacturing component is expected. Consumer prices will also be posted on Tuesday and some pressure is expected. But whatever the results, the CPI is capable of affecting December FOMC expectations.

Monday

The Empire State report, since back in August, has been offering advance and decisive signals on the breakdown underway in the factory sector. The Econoday consensus is calling for a headline of minus 5.00 vs October's minus 11.36. New orders in this report have been in very deep trouble, at minus 18.92 in October for what was a fifth straight contraction. And manufacturers have been having a hard time keeping up production as unfilled orders have also been in deep contraction.

Empire State Index - Consensus Forecast for November: -5.00

Range: -8.50 to -2.50

Tuesday

Consumer prices at the headline level have not been showing any pressure at all, having fallen for two straight months in declines tied to low energy costs and low costs for imports, the latter reflecting the strength of the dollar. But the Econoday consensus is calling for a 0.2 percent rebound in October. Shelter prices have been showing some pressure and have been pushing up the core rate which is expected to also increase 0.2 percent in what would be a tangible gain for this closely watched reading.

Consumer Price Index, M/M Chg - Consensus Forecast for October: +0.2%

Range: -0.1% to +0.2%

CPI Less Food & Energy, M/M Chg - Consensus Forecast for October: +0.2%

Range: +0.1% to +0.3%

Industrial production has been on a two-month decline but is expected to edge 0.1 percent higher in October. The manufacturing component, which has contracted in four of the last five reports, is expected to rise 0.3 percent in line with a gain in manufacturing hours. Vehicle production has been showing the most strength in this report, offsetting weakness in business equipment and underscoring that demand right now is domestically based.

Industrial Production, M/M Chg - Consensus Forecast for October: +0.1%

Range: -0.4% to +0.4%

Manufacturing Production, M/M Chg - Consensus Forecast for October: +0.3%

Range: -0.1% to +0.5%

Capacity Utilization Rate - Consensus Forecast for October: 77.5%

Range: 77.3% to 77.8%

Strength for the new home market has been the signal from the housing market index since back in June, and continued strength is expected for the November report with the Econoday consensus calling for a steady reading of 64. Future sales have been the leading component in this report, pointing to gains ahead for single-family permits. Holding back the index has been the traffic component where lack of first-time buyers is a major negative.

Housing Market Index - Consensus Forecast for November: 64

Range: 62 to 65

Wednesday

Multi-family units drove starts higher in the prior report though single-family starts also showed some strength. But housing starts for October, reflecting prior weakness in permits, are expected to fall 1.2 percent to a 1.162 million annualized rate. Housing permits, however, are expected to bounce back 1.1 percent to a 1.150 million rate. Ups and downs aside, this report has been mostly solid and has been signaling continued strength in construction spending.

Housing Starts - Consensus Forecast for October: 1.162 million

Range: 1.125 to 1.200 million

Housing Permits - Consensus Forecast for October: 1.150 million

Range: 1.125 to 1.220 million

Thursday

Econoday forecasters see initial jobless claims, which have risen noticeably the last two reports, slipping slightly in the November 14 week to 270,000. The week will match the sample weeks of the monthly employment reports, offering a key indication for November's data. Despite the recent rise, initial claims continue to trend at historic lows. Continuing claims have also been low.

Initial Jobless Claims - Consensus Forecast for November 14 week: 270,000

Range: 265,000 to 275,000

The Philadelphia Fed manufacturing report sank into contraction in October and September but is expected to come out at neutral in November with the Econoday consensus calling for a zero reading. New orders plunged a very steep 20 points in the October report to end up well in the negative column at minus 10.6. Unfilled orders have been showing similar contraction, a factor that drove employment into the negative column in October. Note that the release time of this report, a mainstay of the U.S. economic calendar, has been moved from 10:00 a.m. ET to 8:30 a.m., making it available before 9:30 opening of the U.S. equity markets.

Philadelphia Fed Manufacturing Index - Consensus Forecast for November: 0.0

Range: -2.1 to +3.2

Leading indicators have been soft, down 0.2 percent in the October report following two unchanged readings. The Econoday consensus for November is a gain of 0.5 percent. Though manufacturing components in the report have been especially soft, the gain for the ISM new orders index does point to support for November. And a steepening yield curve could point to increasing strength for the report's interest rate component.

Index of Leading Economic Indicators - Consensus Forecast for October: +0.5%

Range: +0.1% to +0.7%