Archive for date: June 23rd, 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.