Monday, December 22, 2014
Stocks appear on track to sustain the positive Fed-inspired momentum from last week, though volumes are expected to be relatively on the thin side in the next few sessions. On the data front, this holiday-shortened week’s docket is front-end loaded, with the final look at Q3 GDP, the November Durable Goods and Personal Income & Outlays as the key economic readings.
The GDP report is expected to show the U.S. economy’s growth pace revised higher to +4.3% from the second look’s +3.9% pace, with healthcare-related spending accounting for a big part of the positive revision. This would follow the +4.6% GDP growth in the second quarter of the year, the first time GDP growth exceeded the +4% pace for two back-to-back quarters since 2003. But the growth pace isn’t expected to be sustained in the current period, with consensus estimates of Q4 GDP growth at around +2.5%.
But given what we saw in Q3, with the final growth tally coming materially above initial estimates, we should brace ourselves for a stronger growth rate in Q4, with tomorrow’s November Personal Income & Outlays read prompting a reassessment of current growth expectations. The strong November jobs report and the accompanying gains in wages and workweek guarantee that we will be getting a solid income growth reading on Tuesday.
In other data, I will be looking for confirmation of further spending cuts by oil companies in tomorrow’s Durable Goods orders report. Orders for mining and oilfield machinery were down in September and October and we will likely see further declines in this report to reflect the continuous downtrend in oil prices.
A number of major oil companies like ConocoPhillips (COP), Apache (APA) and others have recently announced major cutbacks to their 2015 spending plans, which is starting to show up in rig counts already. U.S. oil production has been steadily growing in recent years, reaching a multi-decade high this year. The growth momentum will continue into 2015 despite the lower oil prices, but will start decelerating in a big way, with the 2015 growth at best about half of the roughly 1.2 million barrels per day produced in 2014.
It is this natural supply response to current oil price developments that makes me discount the excessively bearish market sentiment for the commodity. In the absence of a material deterioration in China’s economic outlook, I wouldn’t expect much further downside risk in oil prices from current levels.
Sheraz Mian
Director of Research
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