US Weekly Prospects - Personal Web Server - ITS - … Research January 16, 2015 US Weekly Prospects...

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Economic Research January 16, 2015 US Weekly Prospects Data Watch: Weak retail sales 2 Focus: Earnings turning? 4 Global Data Watch: Reality check 5 Economic Indicators 8 US Forecast 15 Calendar 16 -5 0 5 10 15 0 1 2 3 4 5 Jan 13 Jul 13 Jan 14 Jul 14 %ch saar over 3 months with Dec. forecast Real consumer spending and total retail sales %ch saar over 3 months Source: BEA, Census, forecast by J.P. Morgan Real consumer spending Retail sales Michael Feroli (1-212) 834-5523 [email protected] Robert E Mellman (1-212) 834-5517 [email protected] Daniel Silver (1-212) 622-6039 [email protected] www.jpmorganmarkets.com

Transcript of US Weekly Prospects - Personal Web Server - ITS - … Research January 16, 2015 US Weekly Prospects...

Economic Research January 16, 2015

US Weekly Prospects • Data Watch: Weak retail sales 2

• Focus: Earnings turning? 4

• Global Data Watch: Reality check 5

• Economic Indicators 8

• US Forecast 15

• Calendar 16

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%ch saar over 3 months with Dec. forecast

Real consumer spending and total retail sales%ch saar over 3 months

Source: BEA, Census, forecast by J.P. Morgan

Real consumer spending

Retail sales

Michael Feroli (1-212) 834-5523 [email protected]

Robert E Mellman (1-212) 834-5517 [email protected]

Daniel Silver (1-212) 622-6039 [email protected]

www.jpmorganmarkets.com

JPMorgan Chase Bank NA Robert E Mellman (1-212) 834-5517 [email protected]

Economic Research US Weekly Prospects January 16, 2015

Data Watch: Weak retail sales • Drop in December retail sales and core retail sales looks

like an aberration; 1Q15 growth forecast is unchanged

• December CPI -0.4% with core CPI flat; recent weak-ness in core inflation is concentrated in goods prices

• Manufacturing output increased at a 7% pace in the lastthree months of 2014, but surveys point to slowingahead

What had been a string of upbeat economic reports was inter-rupted this past week by some surprisingly soft economic releases. The biggest surprise was the sharp 0.4% samr de-cline in core retail sales in December (vs. expectations of a 0.4% gain). The decline came against the backdrop of strong job growth, falling gasoline prices, improving consumer con-fidence, and milder-than-usual December weather. The week’s reports also included a noticeable increase in initial jobless claims and lackluster results for the first two regional factory surveys for January.

We have lowered our forecast for 4Q14 real GDP growth to 2.8% saar (from 3.3%) to reflect weak December retail sales and a sharper-than-expected decline in utilities output as re-ported in the December IP release. But we view the December retail sales report as an aberration. J.P. Morgan forecasts in-creases this quarter of 7.5% saar for real disposable income, 5.0% for real consumer spending, and 3.0% for real GDP.

The December CPI declined an expected 0.4% samr on lower gasoline prices, and the core CPI was unchanged. The slow-ing in core inflation recently has been concentrated in goods prices, which have been held down by the stronger dollar and lower materials prices.

The upcoming calendar includes updates on housing in the January Homebuilders survey (Tuesday), December housing starts (Wednesday) and existing home sales (Friday), as well as the January flash manufacturing PMI (Friday).

December retail markdowns Although recent trends in job growth, inflation, and consumer confidence argued for reasonably strong December retail sales, the Census report on spending showed otherwise. Monthly retail sales fell 0.9% samr. And while the large price-related drop at gasoline stations and modest dip in sales at motor vehicle dealers were largely expected, the 0.4% samr decline in core retail sales was not. Sales fell in many catego-ries of stores including electronics (-1.6%), clothing (-0.3%), general merchandise stores (-0.9%), and non-store retailers including internet shopping (-0.3%).

The decline follows reasonably strong core retail sales gains in the prior two months. Taking into account these prior in-creases, the low inflation, and growth in services spending, real consumer spending for 4Q14 is tracking 4.0% saar (re-vised down from 4.7%). Real spending in 4Q14 about matched the growth of real disposable income.

The weak trajectory of spending leading into 1Q15 poses downside risks to our 5.0% saar real consumer spending fore-cast for this quarter, and we will need to see appreciably stronger sales reports over the next few months for that fore-cast to be realized. But the surge in the preliminary Michigan measure of consumer confidence for January, to its highest level since early 2004, also points to much stronger consumer spending early this year.

Core inflation slows a little more The December CPI declined 0.4% samr, held down as ex-pected by a 9.4% decline in the price of gasoline, and the core CPI was unchanged. Core goods prices fell 0.3% samr on declines for many items including apparel (-1.2%), new vehi-cles (-0.1%), and used vehicles (-1.2%). Core services prices increased 0.1%, held down by a 5.0% monthly plunge in air-fares, which seems to reflect the pass-through of lower fuel prices. The 3-month run rate for core goods is down to -2.9% saar, reflecting the effects of the stronger dollar, lower materi-

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%ch saar over 3 months with Dec. forecastReal consumer spending and total retail sales

%ch saar over 3 months

Source: BEA, Census, forecast by J.P. Morgan

Real consumer spending

Retail sales

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%ch saar over 3 monthsCore CPI

Source: BLS

Core services

Core goods

Core CPI

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Economic Research US Weekly Prospects January 16, 2015

JPMorgan Chase Bank NA Robert E Mellman (1-212) 834-5517 [email protected]

als costs and, possibly, unusually extensive discounting this holiday season. The 3-month run rate for core services is 2.5% saar, slightly above its growth rates during all of 2013 (2.3%) and 2014 (2.4%). Based on available PPI and CPI source data, we expect the core PCE price index for Decem-ber to be unchanged and the over-year-ago increase to slow to 1.3% from 1.4% in November.

Upstream prices down, core prices steadier The persistent decline in the price of crude oil continued to de-press upstream price measures including the PPI and import pric-es through year-end. The December PPI for final goods declined 0.3% samr and import prices fell 2.5% nsamr. But we are more interested in the extent to which the combination of lower oil prices and the stronger dollar is depressing upstream prices for core consumer goods. The PPI for core consumer goods in-creased 0.2% samr in December and is up 2.6% saar over the past three months, slightly stronger than its three-month run rate in July when the move in oil prices and the dollar were just be-ginning. The price of imported nonauto consumer goods declined 0.2% nsa mr in December and the price of imported autos was unchanged. The three-month run for the combined price of im-ported consumer goods is running -1.4% nsaar over the past three months, only slightly weaker than its three-month run rate in July. In short, the movements in upstream prices for core con-sumer goods do not show any sharp downside break, at least yet. And they suggest that the declines in core goods prices at the consumer level (-0.4% samr in November and -0.3% in Decem-ber) may moderate soon.

First January mfg. surveys point to slowing Manufacturing output rose a moderate 0.3% samr in Decem-ber but was up a strong 5.1% saar in 4Q with nonauto output up a somewhat firmer 6.0%. We forecast factory IP to moder-ate to 3.0% this quarter as the stronger dollar begins to damp-en domestic production. The recent weakness in factory or-ders tends to confirm this view. The Fed’s regional manufac-turing surveys have not been very consistent or very good predictors of factory output over this expansion. But the re-sults of the two early monthly manufacturing surveys, from the New York Fed and the Philadelphia Fed, are also con-sistent with slower growth of factory output ahead. The de-rived composite increased 3.2pts to 51.7 in the NY region and declined 5.6pts to 48.8 in the Philadelphia region; both read-ings are consistent with much slower output growth. The up-coming flash PMI will provide further information about manufacturing activity early this year, including the extent to which any slowing might be concentrated in export demand.

More evidence labor markets tightening The Fed and the markets have been receiving some mixed signals in assessing the tightness of labor markets. The De-

cember labor market survey’s report of a noticeable monthly decline in average hourly earnings, and a noticeable slowing in earnings on an over-year-ago basis, support the view that considerable labor market slack remains. Yet other labor mar-ket descriptors suggest otherwise. (See “Focus” page.) For example, the November JOLTS report indicates that both job openings and the job openings rate (job openings as a share of employment and job openings) are above their peaks of the previous expansion. And the ratio of unemployed workers per job opening is approaching the lows of the previous expan-sion. Similarly, the December NFIB small business survey reports that the percentage of firms reporting job openings with few or no qualified candidates is near its peak of the pri-or expansion and that the percentage of firms planning to raise worker compensation is increasing steadily.

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%ch saar over 3 monthsUpstream core consumer prices

%ch nsaar over 3 months

Source: BLS

PPI for core consumer goods

Import prices: nonauto consumer goods and autos

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%ch saar over 3 monthsManufacturing IP and mfg. survey measure of factory shipments

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Source: Federal Reserve, New York Fed, Philadelphia Fed

Manufacturing IPShipments, average of NY and

Philadelphia Fed surveys

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Sa Underutilized workers per vacant job

Source: BLS; marginally attached seasonally adjusted by J.P. Morgan

Unemployed worker per vacant job

Unemployed and marginally attached

worker per vacant job

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JPMorgan Chase Bank NA Daniel Silver (1-212) 622-6039 [email protected]

Economic Research US Weekly Prospects January 16, 2015

Focus: Earnings turning? • The January 9 employment report showed a surprising

0.2% drop in average hourly earnings in December and a0.3% decline in the earnings series related to productionworkers. We have discounted this weakness in the earningsdata largely because we do not see any economic factorsuggesting that earnings have suddenly taken a turn for theworse. Reports since January 9 show increases in the re-spective shares of firms reporting that they raised compen-sation, and planned to raise compensation (from the De-cember NFIB small business survey), and job openingscontinuing to trend higher (from the November JOLTS re-port). As discussed below, these measures have historicallybeen somewhat reliable predictors of earnings growth butthe relationships have weakened in recent years. Neverthe-less, at least these recent reports support our view that theDecember decline in earnings did not represent a change inthe underlying trend.

• The table on the right shows the equation estimates for thethree related models. The equations predict production-worker earnings growth (used because of the longer historyavailable than the total private-worker series) as a functionof (i) the NFIB survey’s responses on firms concurrentlyraising compensation, (ii) the NFIB survey’s responses onplanned compensation changes lagged, and (iii) the laggedjob openings rate. All three equations also include constantsand are estimated at quarterly frequencies. When theseequations are estimated over the complete available timeseries, the independent variables are statistically significant.But when they are estimated with data beginning in 2010,the significance drops out and the signs on the coefficientsare counterintuitive. These findings are consistent with pastresearch on the JOLTS data. We should note that theJOLTS data lose significance if the model also includes theunemployment rate as an independent variable (either con-currently, or with a number of lag permutations). The NFIBdata generally remain significant even when the models in-clude the unemployment rate, but these results are some-what sensitive to the model specification (not shown).

• The lower two charts show the earnings estimates predictedby these equations generated over the full sample sizes. Theimprovement in the NFIB and JOLTS data in recent yearsnormally would have been consistent with firming in theearnings data. But earnings growth has fluctuated belowwhat these models would have suggested, in part due toslack persisting in the labor market despite improvement insome of the related indicators. We think we are unlikely tosee a sustained downturn in earnings without a reversal ofthe favorable labor market trends. But earnings may notfirm significantly until there are substantial further reduc-tions in labor market slack.

• The Employment Cost Index (ECI) reported on January 30will provide another look at recent changes in wage infla-tion. We prefer this measure over the earnings data to gaugeinflation pressure.

Equation estimates: earnings growth (%q/q, saar) as dependent variable Equation (independent variable) Coefficient t-statistic Model R^2 Equation i (share reporting raised compensation)

Full sample 0.1 7.9 0.4 Post-2010 -0.0 -0.3 0.0

Equation ii (share planning to raise compensation lagged) Full sample 0.1 8.7 0.4 Post-2010 -0.0 -0.5 0.0

Equation iii (lagged job openings rate) Full sample 0.9 3.2 0.2 Post-2010 -0.3 -1.0 0.0

Source: J.P. Morgan. Note: models estimated at quarterly frequency. Constants not shown.

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Net %, saNFIB survey compensation responses and JOLTS job openings rate

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Source: NFIB, BLS

Job openings rateFirms reporting raised

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%q/q, saarEarnings growth and NFIB model estimates

Source: BLS, J.P. Morgan

Earnings growth

Equation i forecast values (NFIB data)

Equation ii forecast values (NFIB data)

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%q/q, saarEarnings growth and JOLTS model estimates

Source: BLS, J.P. Morgan

Earnings growth

Equation iii forecast values (JOLTS data)

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Global Data Watch • Oil shock boosting growth and financial stress; there is precedent

• SNB stuns markets, underscoring rising global central bank tensions

• Greek government needs to move fast post election

• Next week: soft China data against firming global flash PMI

Reality check Large declines in oil prices have been associated with economic and financial market volatility, and the current episode looks likely to follow history’s script. It is easy to understand why the 55% decline in oil prices is having a dramatic effect on inflation. Having already started at a relatively low level in mid-2014, global inflation is likely to set a record low level for an expansion in 1H15, including a temporary phase of deflation in the developed world.

Assessing the growth impact of the oil price slide is more complicated since previous oil price shocks have been associated with both global growth spurts and recessions. Our judgment that the fall in oil prices reflects a combination of positive supply-side developments and disappointing EM demand implies a material lift in global growth in 2015, sparked by the purchasing power boost to households (see Oil Market Monthly: Low prices required to restore mar-ket balance, January 16, 2015).

Risky assets have come under pressure recently. This development partly re-flects concerns that the striking decline in oil prices is grounded in weakening demand and that the slide into deflation in the DM will generate a damaging deflationary psychology. These concerns were magnified by surprise reports of declines in US hourly wages and retail sales and the flat core CPI in the month of December.

The contrast between these fears and the reality of a global economy that ap-pears to have gathered momentum as we moved through the latter part of 2014 is striking. Indeed, global GDP appears to have expanded at 3.1% annual rate during 2H14, rivaling the fastest pace in four years. This solid perfor-mance was accomplished via a big bounce in consumer spending. Global auto sales are at a record high and retail sales volumes are on track for a near-6% ar increase last quarter, the fastest gain since 3Q10. US consumption is track-ing a 4% annualized gain for last quarter, even with this week’s retail sales setback. The surge in global retail sales is giving manufacturing output a push. Following weak gains averaging 1.5% ar in the middle quarters of the year, global factory output looks to have expanded at a robust 4% rate in 4Q14.

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Bond yields and equity pricesIndex

Source: MSCI and J.P. Morgan

MSCI global equity index

G7 10yrgovt yield

Economic Research US Weekly Prospects January 16, 2015

JPMorgan Chase Bank NA Bruce Kasman (1-212) 834-5515 [email protected] David Hensley (1-212) 834-5516 [email protected]

Joseph Lupton (1-212) 834-5735 [email protected]

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While the oil price shock is boosting economic growth, it also is generating powerful income transfers. The incomes of oil-producing nations are being squeezed even as the purchasing power of global consumers is boosted. In the US, earnings in the rapidly expanding shale oil industry are set to decline with pressure on states with large energy-producing sectors, nota-bly Texas. More broadly, the oil price drop is combining with currency movements to generate significant terms of trade shifts. In the US, oil price declines and a rising dollar repre-sent a significant income shift away from corporate profits toward household purchasing power.

Experience shows that the global economy sometimes flour-ishes in response to oil price declines despite an escalation in financial market turmoil resulting from unexpected, sharp income transfers. Global growth strengthened following the oil price shock of 1997-98, notwithstanding the severe turmoil in global credit and equity markets that was exacerbated by the Russian debt default. The global economy also accelerated amid the oil price plunge of 1986-87, which occurred against a backdrop of unusual stress in foreign exchange markets, the long-running Latin American debt crisis, and a historic global stock market crash in October 1987.

Although we can identify the sources of the income transfers and their direct effects, the transmission of the financial ele-ments of the oil price shock can produce significant surprises. Consequently, we recognize that the current environment also is characterized by elevated risk of financial market accidents. The recent weakness in risky assets cautions about the heightened risk of turbulence that lies ahead. However, we also are confi-dent that the boost to growth from falling oil prices is powerful. As this reality becomes clearer, risk premia should ease.

The central bank divergence This week the ECB got the green light for sovereign QE. In no uncertain terms, the advocate general of the ECJ recom-mended that the ECB be given wide latitude to engage in sov-ereign asset purchases to meet its stated goal of price stability. Next Thursday, we expect the ECB to announce a €500 bil-

lion sovereign debt purchase plan spread over the coming year: credit risk will be fully shared with the private sector (pari passu). But, credit risk will be shared across the Eurosystem (that is, between the ECB and the national central banks) only for investment grade purchases. For sub-investment grade purchases—which include the bonds of Greece and Cyprus—credit risk will remain at the level of the national central bank. We also expect the ECB to complement the sovereign QE announcement by purchasing non-financial corporate debt (in addition to the €500 billion of sovereign debt) and making the TLTROs more attractive.

With indications of a new chapter in ECB easing, this week the SNB stunned markets by abandoning its currency peg to the euro. The lesson seems to be that central banks in very different cyclical positions cannot remain aligned indefinitely. The move is a reminder that the Fed is expected to chart a course consistent with US economic fundamentals despite the widening policy gap with the ECB. Indeed, even as oil and the US dollar weigh on both headline and core inflation, the Fed is likely to look through these effects as temporary. We stick with our call for a June rate hike.

A similar argument could be made for the BoE. Growth has been strong, the labor market continues to tighten, and signs of wage inflation are increasing. However, the BoE appears more influenced than the Fed by its proximity to the Euro area and has sounded more open to the idea that low headline in-flation could reduce the need to raise rates. This message is likely to be confirmed in next week’s January MPC minutes. We now see the first rate hike in 4Q15, one quarter later than previously expected.

The SNB’s action is also a reminder of the tension being creat-ed between monetary policies in the US and the EM. Although the start to Fed normalization is fast approaching, the fall in global inflation continues to provide breathing room and we now expect easing from roughly half the EM central banks we follow. EM central banks may find themselves in a very differ-ent world later this year in which energy price disinflation is unwinding, the Fed is hiking, and financial conditions are tight-ening amid capital outflows and falling FX rates.

Post-election Greece will need to move fast Polls continue to show Syriza will be the largest party in the new Greek parliament but will not have enough seats for an outright majority. Assuming that a coalition can be formed, negotiations with the Troika will then begin. At the moment, Syriza’s posi-tion on many issues is some way away from the Troika’s stance. In our view, this period of heightened uncertainty will be rela-tively short-lived. Any new Greek government needs to reach an agreement with the Troika quickly in order to avoid defaulting on IMF loans and market debt. Presumably the current two-

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Source: J.P. Morgan

5y5y inflation break even

Income 1-2 yrs, median

Economic Research US Weekly Prospects January 16, 2015

JPMorgan Chase Bank NA Bruce Kasman (1-212) 834-5515 [email protected] David Hensley (1-212) 834-5516 [email protected]

Joseph Lupton (1-212) 834-5735 [email protected]

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Economic Research US Weekly Prospects January 16, 2015

JPMorgan Chase Bank NA Bruce Kasman (1-212) 834-5515 [email protected] David Hensley (1-212) 834-5516 [email protected]

Joseph Lupton (1-212) 834-5735 [email protected]

month extension to the existing program could be extended fur-ther, and the Greek government has a small primary surplus, some cash balances, and it could increase arrears. But an im-passe cannot last beyond the next few months. If an agreement can be reached, there likely will be further debt relief in the form of maturity extensions and coupon reductions.

Japanese consumers join the party Friday’s Cabinet Office report confirmed that consumer spending bounced back strongly in Japan last quarter, con-sistent with our call that GDP returned to growth at 4%q/q, saar. To us the more important issue remains what kind of growth we can expect in 2015, particularly in light of recent mixed signals on hiring and capex. The easing in financial conditions, as seen in lower interest rates, the stronger Nikkei, and the weaker yen, provides a tailwind. Though growth has picked up, at next week’s meeting BoJ officials are likely to revise down their FY2015 core inflation forecast to about 1.2% from 1.7%, even as they reaffirm their call that inflation will climb to the 2%oya target by March 2016. However, if oil pric-es remain near current levels, core inflation, which includes energy, is likely to slide to -0.5%oya by mid-2015. At that point, the BoJ likely would concede that its goal of achieving 2% inflation as soon as March 2016 is unattainable. Conse-quently we look for additional easing at the July meeting.

Data to confirm China decelerating We expect next week’s GDP report to show that China’s growth rate slowed to 7%q/q, saar in 4Q14, from 7.9% in 3Q. We expect the balance of the December activity releases to point to sustained deceleration in the economy, focused in FAI, especially in real estate and manufacturing capacity, along with local government spending. In contrast, retail sales gains should remain solid, while this week’s trade report pointed to a contin-ued positive contribution from net trade. We expect IP to rise a soft 0.6%m/m following the anemic gain in November. Against this backdrop, we continue to look for one more policy rate cut in 1Q and two RRR cuts in 1H15. Visibility on regional activity soon will dim as the Lunar New Year holidays approach.

EM Asia disinflation gives path to easing With oil prices continuing to tumble and incoming inflation prints surprising on the downside, the prospects for monetary easing in EM Asia have risen. This week India’s central bank started off the process with a surprise 25bp rate cut three weeks before the scheduled February policy review. The move was partly in response to a lower-than-expected De-cember CPI inflation. The fall in oil prices along with declin-ing domestic food prices raises the probability that inflation will remain below the RBI’s 6% target for the foreseeable future. That said, the central bank indicated that future easing would be contingent on high-quality fiscal consolidation and the continuation of disinflation. Given the emphasis on the 2015-16 fiscal stance, we expect another 25bp cut after the budget, sometime in mid-March or early April.

The Bank of Korea kept its base rate on hold at 2.0% this week. However, it downgraded its outlook for growth and inflation. The latter still appears high since the BoK’s oil price assumption is above the current market price. We have re-vised down our forecast further with inflation falling below 1% by 2Q15, opening the door to a 25bp rate cut in April.

Commodity swings ripple through EM Within EMEA EM, sharply lower oil prices have provided oil importers with a favorable terms of trade boost. We upgraded our 2015 growth forecast for South Africa on the heels of upgrades to Turkey and Israel. We now expect the improved inflation backdrop to leave room for the SARB to keep rates unchanged this year. Lower oil prices should also boost Cen-tral European growth. However, there are risks from weak regional trading partner demand and likely negative, albeit moderate, balance sheet effects from this week’s CHF spike keep us from making meaningful upward revisions.

Not surprisingly, net oil exporters are not faring as well. Along with lowering our sights on the GCC outlook this week, we have cut the growth outlook for Russia, where we now expect GDP to contract 5% this year. At the same time, a weaker currency and elevated inflation should delay monetary policy easing in Russia.

In Latin America, the pass-through from oil prices to domes-tic consumers generally is limited due to government policies. The main exceptions are Chile and Peru, where this week we lowered inflation forecasts to account for lower oil prices. However, Chile and Peru are net exporters of other commodi-ties and their national income is being squeezed as global metals prices slip. This trade-off explains why we are not rais-ing forecasts for GDP growth. Indeed, Peru’s central bank eased the policy rate a further 25bp this week.

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Percent per annum; both scales

EM policy interest rates

Source: J.P. Morgan

EM ex Brazil/Russia

EM

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Economic Research US Weekly Prospects January 16, 2015

JPMorgan Chase Bank NA Michael Feroli (1-212) 834-5523 [email protected] Bruce Kasman (1-212) 834-5515 [email protected]

Robert E Mellman (1-212) 834-5517 [email protected] Daniel Silver (1-212) 622-6039 [email protected]

US Indicator forecasts

J.P. Morgan Research versus the consensus

Release date/ J.P. Morgan Consensus Consensus Indicator forecast median rangeTue, Jan 20NAHB survey (Jan) 58 58 55 to 60

Wed, Jan 21Housing starts (Dec) 1030k 1042k 999k to 1100k Permits 1070k 1060k 1025k to 1100k

Thu, Jan 22Jobless claims (w/e Jan 17) 305k 300k 280k to 315k

Fri, Jan 23Manufacturing PMI (Jan flash) 54.0 54.0 52.5 to 54.5

Existing home sales (Dec) 5.10 mn 5.07 mn 4.93 mn to 5.25 mn

Source: J.P. Morgan, consensus forecasts reported by Bloomberg.

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Economic Research US Weekly Prospects January 16, 2015

JPMorgan Chase Bank NA Michael Feroli (1-212) 834-5523 [email protected] Bruce Kasman (1-212) 834-5515 [email protected]

Robert E Mellman (1-212) 834-5517 [email protected] Daniel Silver (1-212) 622-6039 [email protected]

NAHB survey (Jan) Released on Tue, Jan 20, at 10:00am We forecast that the NAHB survey’s headline increased 1pt to 58 in January. The headline has not changed much in re-cent months, with three of the past four readings coming in between 57 and 59 (there was a one-month dip to 54 in Octo-ber). We think homebuilder sentiment in January will likely be lifted by the recent downward trend for mortgage rates as well as the recent jump in mortgage purchase application volumes. However, it is possible that the latest weekly surge in application volumes (+24% sawr) was caused in part by some issues seasonally adjusting the data at the start of the year.

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Homebuilders surveyJun 14 Jul 14 Aug 14 Sep 14 Oct 14 Nov 14 Dec 14 Jan 15

Overall 49 53 55 59 54 58 57 58 Sales: present time 53 56 58 63 57 62 61 Sales: next 6 months 58 63 65 67 64 66 65 Prospective buyer traffic 36 39 42 47 41 45 45Source: NAHB, J.P. Morgan forecasts

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Economic Research US Weekly Prospects January 16, 2015

JPMorgan Chase Bank NA Michael Feroli (1-212) 834-5523 [email protected] Bruce Kasman (1-212) 834-5515 [email protected]

Robert E Mellman (1-212) 834-5517 [email protected] Daniel Silver (1-212) 622-6039 [email protected]

Housing starts (Dec) Released on Wed, Jan 21, at 8:30am We estimate that housing starts edged up 0.2% to 1.030mn saar in December while housing permits rose a modest 1.7% to 1.070mn saar. The single-family data appear to be trending very gradually higher over time and we expect these trends to continue through some of the short-lived ups and downs in the monthly figures. We therefore look for a 1.9% increase in single-family permits in December to reverse the 1.4% de-cline reported for the previous month. Even with the 5.4% decline in single-family starts reported for November, the pace of starts during that month still outpaced the related pace of permits, which suggests that starts are due to cool off; we accordingly forecast that single-family starts declined 2.5% in December.

The multifamily starts and permits data are typically very noisy and can show some large swings in the monthly chang-es. But with the latest figures coming in relatively close to the recent averages for these series, we do not anticipate big changes in December and look for only modest increases in the multifamily starts and permits data during the month (5.5% and 1.5%, respectively).

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50100150

04 06 08 10 12 14

000s, saar, in permit-issuing areasSingle-family permits less single-family starts

Source: Census Bureau

0.00.10.20.30.40.50.6Mn, saar

Multifamily starts and permits

Multifamily permits

Multifamily starts

Source: Census Bureau04 06 08 10 12 14

Housing starts Housing permitsMn units, saar Aug 14 Sep 14 Oct 14 Nov 14 Dec 14 Mn units, saar Aug 14 Sep 14 Oct 14 Nov 14 Dec 14Total 0.963 1.028 1.045 1.028 1.030 Total 1.003 1.031 1.092 1.052 1.070Single-family 0.641 0.663 0.716 0.677 0.660 Single-family 0.627 0.631 0.647 0.638 0.650Multifamily 0.322 0.365 0.329 0.351 0.370 Multifamily 0.376 0.400 0.445 0.414 0.420% m/m, sa % m/m, saTotal -12.3 6.7 1.7 -1.6 0.2 Total -5.1 2.8 5.9 -3.7 1.7Single-family -1.7 3.4 8.0 -5.4 -2.5 Single-family -0.6 0.6 2.5 -1.4 1.9Multifamily -27.8 13.4 -9.9 6.7 5.5 Multifamily -11.7 6.4 11.3 -7.0 1.5Source: Census Bureau, J.P. Morgan forecasts

10

Economic Research US Weekly Prospects January 16, 2015

JPMorgan Chase Bank NA Michael Feroli (1-212) 834-5523 [email protected] Bruce Kasman (1-212) 834-5515 [email protected]

Robert E Mellman (1-212) 834-5517 [email protected] Daniel Silver (1-212) 622-6039 [email protected]

Initial claims (w/e Jan 17) Released on Thu, Jan 22, at 8:30am We forecast that initial jobless claims declined 11,000 to 305,000 during the week ending January 17, which is the reference period for the January employment report. Claims jumped 19,000 during the week ending January 10, bringing the level of claims up to 316,000, one of the highest figures reported over the past half year. It is unclear whether this increase was a result of noise in the weekly data (which can be especially volatile around the turn of the year) or more accurately reflects some deterioration in the labor market. We think it may be some of each, and therefore look for only a portion of the recent increase in claims to be undone in the upcoming report.

200

300

400

500

600

700

07 09 11 13 15

000, saInitial jobless claims

Source: Department of Labor

250

300

350

400

450

2012 2013 2014 2015 2016

000s, saInitial jobless claims: recent years

Source: Department of Labor

Change in init. claims around Martin Luther King, Jr. Day (first prints)t=-2 t=-1 t=0 (holiday week) t=1 t=2

2003 -32 18 14 -11 -182004 -11 -1 -1 17 62005 10 -48 7 -9 -132006 17 -36 11 -11 42007 -26 -8 36 -20 32008 -21 -1 69 -22 -92009 54 62 3 35 -82010 11 36 -8 8 -432011 35 -37 51 -42 -362012 24 -50 21 -12 -152013 -37 -5 38 -5 -272014 -2 1 19 -20 82015 19

Source: Department of Labor

Jobless claimsNov 29 Dec 6 Dec 13¹ Dec 20 Dec 27 Jan 3 Jan 10 Jan 17¹

Initial claims (000s) 297 295 289 281 298 297 316 305Weekly change -17 -2 -6 -8 17 -1 19 -11

4-week moving average 299 300 299 291 291 291 298 304Weekly change 5 1 -1 -8 0 1 7 6

Continuing claims (000s) 2520 2378 2407 2352 2475 2424Weekly change 148 -142 29 -55 123 -51

4-week moving average 2387 2398 2419 2414 2403 2415Weekly change 29 11 21 -5 -11 12

Insured unemployment rate (%) 1.9 1.8 1.8 1.8 1.9 1.8Source: US Department of Labor, J.P. Morgan forecasts. 1. Employment survey week.

11

Economic Research US Weekly Prospects January 16, 2015

JPMorgan Chase Bank NA Michael Feroli (1-212) 834-5523 [email protected] Bruce Kasman (1-212) 834-5515 [email protected]

Robert E Mellman (1-212) 834-5517 [email protected] Daniel Silver (1-212) 622-6039 [email protected]

FHFA HPI (Nov) Released on Thu, Jan 22, at 9:00am We estimate that the FHFA house price index increased 0.4% samr in November (+5.0% oya). The separate CoreLogic house price index increased a solid 0.9% samr in November after jumping 1.2% in October (using our own seasonal ad-justment). While this recent strength suggests that the FHFA index could also post a solid gain in November, the monthly changes in the FHFA data have been steadier than the month-ly changes in the CoreLogic data lately, and we therefore look for a more modest gain in the FHFA index.

-10

-5

0

5

10

15%oya

FHFA house price index

Source: FHFA00 02 04 06 08 10 12 14

-1.5-1.0-0.50.00.51.01.52.0

2010 2011 2012 2013 2014 2015

%samrMonthly changes in FHFA and CoreLogic house price measures

Source: FHFA, CoreLogic (sa by J.P. Morgan)

FHFA

CoreLogic

-10

0

10

20

2010 2011 2012 2013 2014 2015

%ch over 3 months, saarHouse price measures

FHFA HPI

Case-Shiller 20-city composite

CoreLogic HPI (sa by JPMorgan)

Source: FHFA, CoreLogic, Standard&Poors

12

Economic Research US Weekly Prospects January 16, 2015

JPMorgan Chase Bank NA Michael Feroli (1-212) 834-5523 [email protected] Bruce Kasman (1-212) 834-5515 [email protected]

Robert E Mellman (1-212) 834-5517 [email protected] Daniel Silver (1-212) 622-6039 [email protected]

FHFA house price indexPurchase-only Apr 14 May 14 Jun 14 Jul 14 Aug 14 Sep 14 Oct 14 Nov 14 % oya 6.1 5.5 5.4 4.8 4.9 4.4 4.5 5.0 % m/m (sa) 0.0 0.3 0.4 0.2 0.5 0.0 0.6 0.4Source: FHFA, J.P. Morgan forecasts

13

Economic Research US Weekly Prospects January 16, 2015

JPMorgan Chase Bank NA Michael Feroli (1-212) 834-5523 [email protected] Bruce Kasman (1-212) 834-5515 [email protected]

Robert E Mellman (1-212) 834-5517 [email protected] Daniel Silver (1-212) 622-6039 [email protected]

Manufacturing PMI (Jan flash) Released on Fri, Jan 23, at 9:45am We forecast that the Markit manufacturing PMI’s headline edged up from 53.9 in December to 54.0 in the flash January report. The PMI has been weakening lately, declining each month between August and December. But the forward-looking new orders index, along with the related order-inventories gap, improved somewhat in December, which leads us to believe that the PMI may stop declining in Janu-ary.

48

50

52

54

56

58

60

2010 2011 2012 2013 2014 2015

Index, saNational manufacturing surveys

Source: Markit, ISM

ISM survey

Markit PMI

-15

-10

-5

0

5

10

15

20

30

40

50

60

70

2007 2008 2009 2010 2011 2012 2013 2014 2015

Index, sa, both scalesPMI: new orders and orders-inventories gap

New orders

Orders less inventories

Source: Markit

Markit manufacturing PMIFlash

May 14 Jun 14 Jul 14 Aug 14 Sep 14 Oct 14 Nov 14 Dec 14 Jan 15Composite1 56.4 57.3 55.8 57.9 57.5 55.9 54.8 53.9 54.0

New orders (30% ) 58.8 61.2 59.5 60.5 59.8 57.1 55.0 55.4Output (25% ) 59.6 61.0 59.7 60.7 59.6 57.8 55.6 54.8Employment (20% ) 53.7 54.0 51.2 54.6 56.4 54.9 55.1 53.0Supplier del. times (15% , inverted) 47.1 46.8 48.8 45.3 46.2 47.3 46.1 47.2Stocks of purchases (10% ) 52.0 49.7 51.3 54.2 53.1 54.0 53.5 50.7

New export orders 52.2 50.6 50.3 54.4 54.1 51.2 48.3 51.0Backlogs of work 56.0 56.0 54.5 56.2 55.6 52.9 49.9 51.4Output prices 50.4 52.1 54.0 53.9 54.6 52.6 53.1 51.0Input prices 56.4 57.6 56.7 56.5 58.5 55.7 53.7 52.3Stocks of finished goods 47.9 45.2 50.2 51.7 50.9 50.5 51.1 49.8Quantity of purchases 59.2 57.9 57.4 59.6 58.9 55.8 55.5 55.0ISM-weighted composite 2 55.4 55.8 54.6 57.0 56.5 55.3 54.6 53.31. Component weights in parentheses. 2. Attributes ISM-composite weights (equal weights) to corresponding PMI seriesSource: Markit, J.P. Morgan forecast

14

Economic Research US Weekly Prospects January 16, 2015

JPMorgan Chase Bank NA Michael Feroli (1-212) 834-5523 [email protected] Bruce Kasman (1-212) 834-5515 [email protected]

Robert E Mellman (1-212) 834-5517 [email protected] Daniel Silver (1-212) 622-6039 [email protected]

Existing home sales (Dec) Released on Fri, Jan 23, at 10:00am We believe existing home sales increased 3.4% to 5.10mn saar in December. The November report was weaker than expected and the 6.1% drop in sales reported for the month was unusual given that the trend in pending home sales has been relatively flat lately (pending home sales typically lead existing home sales by one or two months). We therefore look for enough of an increase in the December existing home sales report to undo about half of the November de-cline. Home sales data available for a few local markets also look consistent with an increase in sales in December.

70

80

90

100

110

120

130

3

4

5

6

7

8

05 06 07 08 09 10 11 12 13 14 15

Mn, saarExisting and pending home sales

Index, saPending home sales

(advanced one month)

Existing home sales

Source: NAR

80859095100105110115

4.04.24.44.64.85.05.25.45.6

2011 2012 2013 2014 2015

Mn, saarExisting and pending home sales: recent years

Index, sa

Source: NAR

Existing home sales

Pending home sales (advanced one month)

Existing home salesMn units, annual rate May 14 Jun 14 Jul 14 Aug 14 Sep 14 Oct 14 Nov 14 Dec 14Existing home sales 4.91 5.03 5.14 5.05 5.18 5.25 4.93 5.10Single-family 4.32 4.43 4.54 4.47 4.57 4.62 4.33Inventory (mn, nsa) 2.25 2.29 2.35 2.33 2.28 2.24 2.09Months’ supply (months, nsa) 5.5 5.5 5.5 5.5 5.3 5.1 5.1Month over month % changeExisting home sales 5.4 2.4 2.2 -1.8 2.6 1.4 -6.1 3.4Single-family 6.1 2.5 2.5 -1.5 2.2 1.1 -6.3% oya, nsaExisting home sales -8.0 1.2 -4.8 -7.5 2.1 4.5 -2.8 4.7Single-family -8.1 0.9 -4.6 -7.2 2.4 4.6 -3.1Inventory 4.7 6.0 4.9 5.4 5.1 6.2 2.0Median price 4.4 3.7 4.3 4.1 5.3 5.1 5.0Average price 3.3 2.7 3.3 2.8 3.5 3.7 3.5Source: National Association of Realtors, J.P. Morgan forecasts.

15

Economic Research US Weekly Prospects January 16, 2015

JPMorgan Chase Bank NA Michael Feroli (1-212) 834-5523 [email protected] Bruce Kasman (1-212) 834-5515 [email protected]

Robert E Mellman (1-212) 834-5517 [email protected] Daniel Silver (1-212) 622-6039 [email protected]

J.P. Morgan US forecast

2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 2013 2014 2015 2013 2014 2015Gross domestic productReal GDP 4.6 5.0 2.8 3.0 3.0 2.5 2.5 3.1 2.5 2.7 2.2 2.4 3.2 Final sales 3.2 5.0 3.0 3.1 3.1 2.5 2.4 2.6 2.5 2.8 2.1 2.3 3.2 Domestic 3.4 4.1 2.9 4.1 3.7 2.8 2.7 2.2 2.8 3.3 1.9 2.4 3.5 Consumer spending 2.5 3.2 4.0 5.0 4.2 2.8 2.5 2.8 2.8 3.6 2.4 2.5 3.9 Business inv estment 9.7 8.9 1.8 2.9 3.9 4.6 4.6 4.7 5.4 4.0 3.0 6.1 4.3 Equipment 11.2 11.0 0.9 5.0 7.0 7.0 7.0 6.2 5.4 6.5 4.6 6.5 6.1 Structures 12.6 4.8 1.8 -3.0 -3.0 0.0 0.0 4.5 5.4 -1.5 -0.5 7.9 0.3 Intellectual property products 5.5 8.8 3.1 4.0 4.0 4.0 4.0 2.7 5.5 4.0 3.4 4.4 4.5 Residential inv estment 8.8 3.3 2.5 7.0 7.0 8.5 9.0 6.9 2.2 7.9 11.9 1.5 6.1 Gov ernment 1.7 4.4 -0.3 0.9 0.9 0.9 0.9 -1.9 1.2 0.9 -2.0 -0.1 1.1Net ex ports ($bn, chained $2009) -460 -431 -432 -475 -501 -518 -534 - - - - - -Ex ports (goods and serv ices) 11.0 4.6 4.7 2.5 3.5 4.0 4.5 5.1 2.5 3.6 3.0 3.2 4.2Imports (goods and serv ices) 11.3 -0.9 4.0 9.0 7.0 6.0 6.0 2.5 4.1 7.0 1.1 3.6 6.0Inv entories (ch $bn, chained $2009) 84.8 82.2 73.4 70.1 65.8 66.9 71.6 - - - - - -Contribution to real GDP grow th (% pts):Domestic final sales 3.5 4.3 2.9 4.1 3.7 2.8 2.7 2.3 2.8 3.3 1.9 2.5 3.5Net ex ports -0.3 0.8 0.0 -1.0 -0.5 -0.4 -0.3 0.3 -0.3 -0.5 0.3 -0.1 -0.3Inv entories 1.4 -0.1 -0.2 -0.1 -0.1 0.0 0.1 0.5 0.0 0.0 0.0 0.0 0.0Income and profits (NIPA basis)Adjusted corp profits 38.3 12.8 -13.0 -10.0 9.0 5.0 5.0 4.7 -2.2 2.0 4.2 -1.3 0.8Real disposable personal income 3.1 2.0 3.9 7.5 3.0 2.5 2.5 -1.9 3.1 3.9 -0.2 2.5 4.1Sav ing rate1 5.1 4.7 4.7 5.3 5.0 4.9 4.9 - - - 4.9 4.8 5.0Prices and labor costConsumer price index 3.0 1.1 -1.2 -4.8 1.8 2.0 2.0 1.2 1.2 0.2 1.5 1.6 -0.4

Core 2.5 1.3 1.4 1.7 1.8 2.0 2.0 1.7 1.7 1.9 1.8 1.7 1.7Producer price final demand index 2.4 1.8 -0.8 -3.8 1.9 2.0 2.0 1.2 1.3 0.5 1.3 1.6 0.0

Core 1.1 1.3 0.1 1.6 1.6 1.7 1.7 1.1 1.5 1.6 1.1 1.5 1.3PCE deflator 2.3 1.2 -0.5 -2.8 1.6 1.7 1.7 1.0 1.1 0.5 1.2 1.3 0.1

Core 2.0 1.4 1.1 1.5 1.5 1.7 1.7 1.3 1.4 1.6 1.3 1.4 1.5GDP chain-ty pe price index 2.1 1.4 0.0 0.0 1.6 1.7 1.7 1.4 1.2 1.2 1.5 1.5 0.9S&P/C-S house price index (%oy a) 7.1 6.0 5.0 4.6 4.2 3.9 3.6 10.8 5.0 3.6 9.6 6.9 4.1Productiv ity 2.9 2.3 -0.5 1.5 1.5 1.5 1.3 2.0 0.0 1.4 0.9 0.7 1.3Other indicatorsHousing starts (mn units, saar)1 0.985 1.030 1.035 1.060 1.090 1.115 1.145 - - - 0.930 0.994 1.103Industrial production, mfg. 7.0 4.3 5.2 3.0 3.0 3.0 2.5 2.9 4.5 2.9 2.6 3.6 3.8Capacity utilization, mfg. (%)1 77.1 77.5 78.1 78.2 78.3 78.4 78.4 - - - 76.1 77.2 78.3Light v ehicle sales (mn units, saar)1 16.5 16.7 16.7 17.0 16.9 16.8 16.8 - - - 15.5 16.4 16.9Unemploy ment rate1 6.2 6.1 5.7 5.5 5.3 5.2 5.1 - - - 7.4 6.1 5.3Pay roll employ ment (ch, '000s, samr)1 267 239 289 225 190 180 160 - - - 194 246 189Nominal GDP 6.8 6.4 2.8 3.0 4.6 4.2 4.2 4.6 3.8 4.0 3.7 3.9 4.2Current account balance ($bn)1 -98.4 -100.3 -90.4 -80.0 -83.8 -86.7 -88.6 - - - -400.3 -391.1 -339.1

% of GDP -2.3 -2.3 -2.0 -1.8 -1.9 -1.9 -1.9 - - - -2.4 -2.2 -1.9Federal budget balance ($bn)1 - - - - - - - - - - -680.0 -483.0 -470.0

% of GDP - - - - - - - - - - -4.1 -2.8 -2.61. Entries are average level for the period. Federal balance figures are for fiscal years.

Jan 16 1Q15 2Q15 3Q15 4Q15Interest rate forecast (end of period)Fed funds target 0.13 0.13 0.50 0.75 1.003-mo LIBOR 0.26 0.30 0.50 0.80 1.052-y r Treasury 0.48 0.80 1.05 1.25 1.455-y r Treasury 1.28 1.60 1.80 1.95 2.1510-y r Treasury 1.81 2.10 2.25 2.30 2.4030-y r Treasury 2.44 2.60 2.65 2.70 2.80Source: J.P. Morgan

%q/q, saar %q4/q4 %y /y

16

Economic Research US Weekly Prospects January 16, 2015

JPMorgan Chase Bank NA Daniel Silver(1-212) 622-6039 [email protected]

US economic calendar Monday Tuesday Wednesday Thursday Friday

19 Jan

Martin Luther King, Jr. Day, markets closed

20 Jan

NAHB survey (10:00am) Jan 58

Fed Governor Powell speaks on LIBOR in Washington, DC (10:00am)

21 Jan

Housing starts (8:30am) Dec 1,030,000 Permits 1,070,000

22 Jan

Initial claims (8:30am) w/e Jan 17 305,000 FHFA HPI (9:00am) Nov 0.4% (5.0%oya) KC Fed survey (11:00am) Jan

Auction 10-year TIPS $15bn Announce 2-year note $26bn Announce 2-year FRN $15bn Announce 5-year note $35bn Announce 7-year note $29bn

23 Jan

Manufacturing PMI (9:45am) Jan flash 54.0 Existing home sales (10:00am) Dec 5.10mn Leading indicators (10:00am) Dec

26 Jan

Dallas Fed survey (10:30am) Jan

27 Jan

Durable goods (8:30am) Dec S&P/Case-Shiller HPI (9:00am) Nov Services PMI (9:45am) Jan flash New home sales (10:00am) Dec Consumer confidence (10:00am) Jan Richmond Fed survey (10:00am) Jan

Auction 2-year note $26bn Auction 2-year FRN $15bn

FOMC meeting

28 Jan

Auction 5-year note $35bn

FOMC statement (2:00pm)

29 Jan

Initial claims (8:30am) w/e Jan 24 Pending home sales (10:00am) Dec Housing vacancies (10:00am) 4Q

Auction 7-year note $29bn

30 Jan

Real GDP (8:30am) 4Q advance Employment cost index (8:30am) 4Q Chicago PMI (9:45am) Jan Consumer sentiment (10:00am) Jan final

2 Feb

Personal income (8:30am) Jan Manufacturing PMI (9:45am) Jan final ISM manufacturing (10:00am) Jan Construction spending (10:00am) Dec Senior Loan Officer Survey (2:00pm) 1Q

3 Feb

Factory orders (10:00am) Dec Light vehicle sales Jan

Minneapolis Fed President Kocherlakota speaks on economy (11:45am)

4 Feb

ADP employment (8:15am) Jan Services PMI (9:45am) Jan final ISM nonmanufacturing (10:00am) Jan

Announce 3-year note $24bn Announce 10-year note $24bn Announce 30-year bond $16bn

Cleveland Fed President Mester speaks in Columbus, OH

5 Feb

Initial claims (8:30am) w/e Jan 31 International trade (8:30am) Dec Productivity and costs (8:30am) 4Q prelim

6 Feb

Employment (8:30am) Jan Consumer credit (3:00pm) Dec

9 Feb 10 Feb

NFIB survey (9:00am) Jan JOLTS (10:00am) Dec Wholesale trade (10:00am) Dec

Auction 3-year note $24bn

11 Feb

Federal budget (2:00pm) Jan

Auction 10-year note $24bn

Dallas Fed President Fisher speaks in New York

12 Feb

Initial claims (8:30am) w/e Feb 7 Retail sales (8:30am) Jan Business inventories (10:00am) Dec

Auction 30-year bond $16bn Announce 30-year TIPS $9bn

13 Feb

Import prices (8:30am) Jan Consumer sentiment (10:00am) Feb preliminary

17

Economic Research US Weekly Prospects January 16, 2015

JPMorgan Chase Bank NA Michael Feroli (1-212) 834-5523 [email protected] Bruce Kasman (1-212) 834-5515 [email protected]

Robert E Mellman (1-212) 834-5517 [email protected] Daniel Silver (1-212) 622-6039 [email protected]

Analysts' Compensation: The research analysts responsible for the preparation of this report receive compensation based upon various factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues. Principal Trading: JPMorgan and/or its affiliates normally make a market and trade as principal in fixed income securities discussed in this report. Legal Entities: J.P. Morgan is the global brand name for J.P. Morgan Securities LLC (JPMS) and its non-US affiliates worldwide. J.P. Morgan Cazenove is a brand name for equity research produced by J.P. Morgan Securities plc; J.P. Morgan Equities South Africa Proprietary Limited; JPMorgan Chase Bank, N.A., Dubai Branch; and J.P. Morgan Bank International LLC. J.P.Morgan Securities Inc. is a member of NYSE and SIPC. JPMorgan Chase Bank, N.A. is a member of FDIC. 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