We expect the Empire State manufacturing survey index to bounce back to 11.00 in November. The November Empire State manufacturing index likely rebounded to 11.00 after a steep fall to 6.17 last month. We look for the new orders component to bounce back after hitting a negative reading in October. While a negative new orders reading – which implies negative growth in new orders – is worrying for the future activity outlook, the employment component has remained positive so far this year and rose by almost 7 points in October. With healthy growth in manufacturing employment, we expect the overall survey index to rise to a level more in line with its 12-month average (of 11.6).
October industrial production was likely unchanged in October, with an expected 0.3% rise in manufacturing production offset by declines in the mining and utilities sectors. Industrial production was likely flat in October, with declines in mining and utilities production offsetting a rise in manufacturing production. We look for a 0.3% rise in manufacturing production following a 0.5% rise in September. Manufacturing employment picked up in October, rising 15K, though the factory workweek was unchanged. Strong increases in the mining and utilities sectors were likely reversed in October. The decline in natural gas prices coupled with below-normal heating demand suggest utilities production declined in October. Our forecast suggests a slight decline in the capacity utilisation rate to 79.2%.
The final demand Producer Price Index (PPI) likely fell 0.1% in October, with the core (excluding food and energy) rising 0.1%. This suggests top-line PPI decelerated to 1.3% YoY, with core PPI moving lower to 1.5% YoY. We expect a decline in the October PPI, led by energy and food prices. Retail gasoline prices fell 6.9% in October—the steepest decline since the downward trend began in July. Prices received by farmers also fell at a steeper rate in October, implying a decline in the food index after seasonal adjustment. Outside of food and energy, prices increases were likely soft. Since July, the prices paid component of the ISM manufacturing survey has declined by a total of 6 points, while the ISM non-manufacturing price index has fallen almost 9 points. Both readings remain a few points above 50, implying prices are rising but at a softer pace. We expect a 0.1% increase in the core PPI, leading to a 1.5% YoY pace vs 1.6% in September. The decline in top-line PPI brings the index down to a 1.3% YoY pace from 1.6% YoY in September.
The NAHB Housing Market Index (HMI) likely picked up in November, after retracing 5 points in October. We expect the Housing Market Index (HMI) of homebuilder sentiment to rise 2 points to 56 in November. The index previously fell with declines in all three components, which we view as a retracement from a post-recession high. We believe housing market fundamentals continued to improve. Mortgage rates remained at one-year lows in November, and the Fannie May indicator of housing market tightness improved notably over the past two months (with a narrowing between the share of respondents who say it is a good time to buy and those who say it is a good time to sell).
We expect housing starts to edge down 0.4% to a 1013K unit rate in October after a strong increase in the previous month. October housing starts likely slipped to 1013K unit annual rate. Starts rose 6.3% to a 1017K rate in October, led by a strong increase in multi-unit starts. We expect this component to reverse in October given its volatile nature on a monthly basis. Homebuilder sentiment fell several points in October. While permits rose in September, they likely fell 0.4% to a 1027K unit rate in October. As permits track monthly movements in housing starts on a more concurrent basis, we expect a slight decline in October starts to a respectable 1013K annual rate. We expect only a slight decline given the low interest rate environment, ie, conventional 30 year mortgage rates hit below 4% in October for the first time since June 2013.
In the October FOMC meeting minutes (released 19 November), we look for underlying views on economic progress and forward guidance as well as concerns over external risk factors. In the October FOMC meeting minutes (released 19 November), we look for underlying views on economic progress that led to the decision to terminate QE3 but retain the “considerable time” guidance. Most notably, improvements in the labour market was the predominant factor in ending QE3, as the term “significant” was removed from the October statement’s characterisation of underutilisation of labour resources. We expect more details on the state of labour market progress, as slack remains, in our view and in the FOMC’s view, despite the drop in the unemployment rate and strong payroll growth. However, as many FOMC members have expressed, recent disinflationary pressures from lower energy prices present an elevated risk to the Fed’s outlook. External factors – global growth concerns, a stronger dollar and declining energy prices – as well as the risks of a negative reaction in the financial markets may be highlighted as reasons for keeping rates low for a considerable time. The data-dependent language in the forward guidance was likely included to help compromise both sides of the dove-hawk spectrum, but concerns over keeping “considerable time” may be expressed. Given the recent modifications to the reverse repo facility in October, more colour on the effectiveness of this tool as a supplement to the fed funds rate may be offered.
The October Consumer Price Index (CPI) was likely flat on the month, with the core (ex food and energy) index rising 0.1%. We expect CPI to slip to a 1.6% YoY rate, with core CPI remaining unchanged at 1.7% YoY. The October CPI was likely flat, with lower energy prices continuing to weigh. Retail gas prices declined at a steeper pace in October, implying another decline in the energy CPI. While meat prices rose, crop prices received by farmers fell on balance, suggesting food price increases decelerated after the September pickup. In the core, we expect the shelter index to continue to rise on trend, but the transportation services index is to remain soft given lower oil prices and import prices. Softening in the core PPI in recent months also suggests a soft increase in the core CPI. Given a flat top-line CPI and a 0.1% rise in the core CPI, the inflation rate likely moved lower to 1.6% YoY but core inflation remained unchanged at 1.7% YoY.
The November Philadelphia Fed business outlook survey of manufacturing likely slipped about a point to 19.5. We expect the Philly Fed manufacturing index to edge lower to a healthy 19.5 reading. The employment and workweek components declined in October, with the latter component slipping into negative territory. However, the new orders index has remained at high levels and edged higher in October. Thus, we expect only a minor slip in the overall Philly Fed index, remaining well above its 12-month average.
Sales of existing homes likely fell a slight 0.2% in October to a 5.16 million-unit annual rate. We expect a slight decline in October existing home sales to a 5.16 million unit annual rate. Existing home sales have been following a solid uptrend for most of this year. However, mortgage applications for purchases have declined in recent months despite mortgage rates hitting more than one-year lows. Additionally, pending home sales in September remain below July levels. The data points to a roughly flat existing home sales reading for October. However, we do see upside risk due to lower mortgage rates and a strengthening labour market.