Your Weekly Economic Cheat Sheet – 6.30.2014

Last Week

There were three important economic takeaways last week:  First, housing appears to be finally bouncing from its winter dip.  Second, capital spending (businesses buying a new machine or some other high-cost investment) continues to not rebound like the rest of the economy has since the winter.  Third, inflation has clearly accelerated over the past three months, but economic growth doesn’t appear to be keeping pace with the recent acceleration in inflation.

Of the three, the final point is by far the most important. While it’s very early yet, if the economy can’t keep pace with accelerating inflation, then we risk stagflation, which is bad for most assets (bonds and stocks).  We aren’t anywhere close to stagflation, but after the data last week, it’s something we need to keep an eye on.

Looking at the actual data, the Personal Income and Outlays report was the most important release last week, and the main cause of the “stagflation” worries.  Core PCE, the Fed’s preferred measure of inflation, rose +0.2% in May and is now up +1.5% year-over-year (yoy), and that met expectations.  More importantly, though, Core PCE has gone from rising +1.1% yoy in February to +1.5% in May. If we annualize the last three months’ gains, we get an annual core PCE increase of +2.1%, basically at the Fed’s target.  This recent acceleration confirms what we’re seen recently in CPI.

At the same time, though, while the economy is continuing to recover, it’s not matching the gains in inflation over the past three months.  Case in point: May consumer spending slightly missed expectations, increasing +0.2% vs. (E) +0.4%, and real consumer spending (consumer spending less inflation) was actually negative in April and May.  So, the key here isn’t that the economic recovery has stalled—it has not.  But, over the last few months, the economy hasn’t grown as quickly as inflation has.

Capital spending, however, still isn’t seeing the rebound in activity that other sectors of the economy have enjoyed since April.  The May Durable Goods report headline declined, but the real number to watch (Non-Defense Capital Goods Excluding Aircraft) rose +0.7% and the three-month rolling average showed a +1.5% gain.  But, while it’s a positive number, it’s not strong growth.

With housing now showing clear signs of a rebound, capital spending (again, think investment by businesses in machines, etc.) is the one sector of the economy that still hasn’t gotten a bounce. This probably reflects continued caution by businesses on the future of the economy (i.e., things are getting better, but not enough to make large investments because people aren’t confident in revenue visibility).

Bottom line with last week: Nothing resulted in a material change in the outlook for the economy or Fed policy. But the recent acceleration in inflation/less than impressive consumer spending report (and extrapolating it out to potential stagflation) bears watching.

This Week

It is going to be a busy holiday-shortened week (the market closes at 1 p.m. EST Thursday and Friday is off).

Probably the most important number of the week has already been released, and it was the European flash HICP for June (their CPI).  The annual inflation rate ticked slightly higher to 0.8% vs. 0.7% in May (meeting expectations) so that’s slightly encouraging, but overall the deflation threat in Europe remains and this will keep the ECB fully “engaged” in the deflation fight.

Turning back to the future data, it’s “jobs week” this week, although be aware the May jobs report will be released Thursday at 8:30, at the same time as weekly claims.  Prior to that we get ADP on Wednesday.  The jobs report isn’t as critical as it has been in recent months, but it still is important.  In the context of our “stagflation” point earlier, markets will be watching for jobs growth in line with recent reports (so around 200K). If there is an increase in wages and hours worked, this will imply tightening in the labor market (which is both inflationary and positive for consumer spending).

Tomorrow we get global official June manufacturing PMIs, which should continue to confirm the consensus that: The pace of economic growth in China has stabilized, Europe’s economy continues to slowly recover, and the manufacturing sector of the U.S. economy is seeing the recovery accelerate.

The biggest risk of disappointment in this report is in Europe, as France’s flash PMI was pretty bad (47.8) while the overall EMU was stagnant.

Finally, as if all that wasn’t enough, Fed Chair Janet Yellen speaks Wednesday (we can expect similarly “Dovish” remarks like the last FOMC meeting) and there is an ECB meeting.  But, after their attempt to “shock and awe” the market last month, this meeting should be a non-event.

 

 

 

Sevens Report 6.30.14

Sevens Report 6.30.14

Sevens Report 6.27.14

Sevens Report 6.27.14

Sevens Report 6.26.14

Sevens Report 6.26.14

Sevens Report 6.25.14

Sevens Report 6.25.14

Sevens Report Analyst Tyler Richey Featured on the WSJ’s MarketWatch.com Discussing Crude Oil Prices

Oil holds above $106 on demand prospects

7:00’s Report Editor Tom Essaye Discusses Gold Miners on Fox Business 6.23.14

Tom Essaye discusses the outlook for the broad market and the potential for a continued rally in gold mining stocks on FBN’s Varney & Co. with Stuart Varney.

http://video.foxbusiness.com/v/3637800558001/time-to-buy-gold-miners/#sp=show-clips

Sevens Report 6.24.14

Sevens Report 6.24.14

Your Weekly Economic Cheat Sheet-6.23.2014

Economic data last week were universally better than expected and further implied that the pace of economic growth domestically is accelerating to the best levels since the crisis (referred to as “escape velocity,” or greater than 3% GDP growth).  Additionally, we got more signs that inflation is indeed bottoming, via the CPI.

Despite that, the Fed was “dovish” at the FOMC meeting, which helped push stocks to new all-time highs.  Interestingly, though, we saw some early signs that the market is starting to view the Fed as potentially very slightly “behind the curve” from an inflation standpoint. Meaning, the Fed is remaining incredibly “easy” despite clear signs growth is accelerating and inflation is bottoming. (That’s why bonds couldn’t rally despite the dovish Fed.)

So, the most important thing that happened economically last week was a very slight change in the market’s perception of the Fed.

Starting first with the Fed decision, it was in-line with most analysts’ expectations. However, there definitely was an expectation from some of the market that the Fed would at least hint that it’s starting to consider the normalization of policy. This hint would come via increases in Fed presidents’ projections for the expected Fed Funds rate over the coming years, and decreased unemployment rate forecasts.

That did not happen, however, as the average Fed Funds rate projection by Fed presidents for ’15 and ’16 was increased only slightly, to 1.2% for ’15 and 2.5% for ’16 – so, not enough of an increase over the March estimates to be considered “hawkish.”

Likewise, the expected unemployment rate was reduced only slightly to 6.0%-6.1% for ’14, and 5.4%-5.7% for ’15, but not enough to be considered “hawkish.”

So, the FOMC wasn’t “dovish” because of what the Fed did, but instead because of what it didn’t do.  Still skeptical of the economic recovery, the Fed seems content to ignore the uptick in growth and bottoming of inflation … and the market noticed.

Turning to the actual hard data, all three manufacturing reports further confirmed that the manufacturing sector is recovering:  May industrial production rose 0.6%, meeting estimates.  April’s declines were revised higher.  The first data points from June (Empire State manufacturing survey and Philly Fed manufacturing survey) rose to a 4-year high and 8-month high, respectively.  The New Orders components of each survey, which are leading indicators, surged higher as well.

So, the data continue to imply we’re seeing a strong rebound in the manufacturing sector after the winter dip and inventory depletion.

Finally, the most important piece of data last week was  the May CPI report, which increased +0.4% on the headline and +0.3% for “core” CPI, which is the largest monthly increase since ‘09.  To underscore the point that statistical measures of inflation are starting to move higher, looking at the last three months’ increases in CPI and annualizing them gets us to 2.8% yoy. So, while it can’t be taken as a true indication of inflation trends, it does show how we’ve seen an uptick in the rate of inflation recently.

This Week

Given the increased focus on inflation, the Personal Income and Outlays report this Friday will be the most-important data point this week.  That’s because the Fed’s preferred measure of inflation (Core PCE Price Index) will be released within that report. If we see a decent uptick in that price index, the idea that the Fed is “behind the curve” from an inflation standpoint will gain more traction (which will be positive for gold, and negative for bonds).

Beyond that, the global flash manufacturing PMIs for June hit earlier this morning and we get the U.S. reading later today. This and the Core PCE Price Index are the two most-important numbers to watch this week.

We also get some incremental insight into the economy, as May Durable Goods comes Wednesday, as does the final look at Q1 GDP (which is going to stay shockingly negative, but the market’s moved beyond it at this point).

Finally, we also get more insight into the state of the housing recovery via existing home sales (this morning) and new home sales (tomorrow).  Housing remains the one sector of the economy that hasn’t enjoyed a “bounce” off the winter dip. However, over the last month, the housing metrics have implied that may be changing.

Last week, new home sales was a headline miss but the details were “OK” as single-family permits rose nicely. If May existing and new home sales show continued signs of improvement, worries about the pace of the housing recovery will further recede. This will be a positive for the economy generally and the market.

 

 

 

 

Sevens Report 6.20.14

Sevens Report 6.20.14