The Economy: A Look Back and What’s Ahead (2.24.14)

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Last Week

Once again, last week was not a particularly good week for economic data.  Starting with the manufacturing sector, data here in the U.S. was mixed.  The Empire State and Philly Fed manufacturing indices both badly missed expectations, with the Empire State falling to 4.4 vs. (E) 8.5 and Philly plunging to -6.3 vs. (E) of 8.0.  But, refuting the weak readings was the national flash February manufacturing PMI, which rose to a multi-year high at 56.7.

Bottom line is weather continues to play a presumably large, unknown effect on the economic data. (The horrible winter weather was blamed for Empire State and Philly weakness, and credited for the strength in the national PMI on a “bounce back” effect nationally in February.) The important thing to know is that, for now, the market is giving soft data a pass, and likely will continue to do so at least until next week.

Internationally, the data wasn’t mixed. Both Chinese and EU PMIs missed expectations, with the China PMI moving further away from the important 50 level (48.3).  But, the data didn’t really spark a big sell-off like last month, and there are a few reasons for that.  First, funds are not as “long” as they were in January, so they don’t have to dump exposure. Second, the U.S. flash PMI was good. And third, despite the weak readings, no one is materially altering their growth outlook for China or the EU (7% and 1%, respectively), yet.

Turning to the Fed, there was a little bit of change on the margin regarding the market outlook for Fed policy. That’s because the FOMC minutes and multiple Fed speakers throughout last week pounded home the notion that the Fed is committed to tapering, unless economic data gets materially worse from here. This caught the “tapering the taper” crowd a little off-guard, and as a result we saw some dollar strength and bond weakness (hawkish response) on the week.  But, bottom line is the outlook for Fed policy (another $10 billion taper coming in March) didn’t change last week.

Finally, housing data was disappointing last week, as housing starts badly missed expectations (880K vs. (E) 950K) while existing home sales are now down 5.1% year-over-year. And, while weather and low inventories are negatively affecting the housing data, the broader point that the housing recovery is slowing remains. This is a critical piece of the overall economic recovery.

This Week

Economic data this week is largely “second tier” and won’t materially resolve the key question of “Is U.S. and global growth materially slowing?” In the context of a critical week of data coming next week (final global PMIs and the jobs report), this week shouldn’t cause any material downgrades of the growth outlook or changes to Fed policy, unless something really comes out of left field.

That said, there are some reports to keep an eye on, especially in housing.  This week we get Case-Shiller (Tues), New Home Sales (Wed) and Pending Home Sales (Friday).

The housing market recovery has definitely seen a loss of positive momentum lately, and while the recovery is ongoing, the pace of that recovery has slowed materially from this time last year.

We’ll get durable goods data Thursday, and given the conflicting manufacturing PMIs in January, it’ll be interesting to see which PMI the durables confirm—the weak January flash PMI or the better ISM January PMI.  Keep in mind PMIs are derived from surveys, while durable goods and industrial production are actual, hard manufacturing data.

Fed-wise, Janet Yellen speaks Thursday, which is the rescheduled Senate testimony that was delayed two weeks ago due to a snowstorm.  Expect the prepared remarks to be identical to the House testimony. Given the 6+ hours of Q-and-A the House Finance Committee already gave her, it is very unlikely this testimony will yield any surprises.

Finally, the most “important” piece of data we get this week comes from Europe.  The flash HICP (their version of CPI) will be released Friday.  Dis-inflation remains a significant risk to the EU economy, so if the flash HICP comes in below January’s reading of 0.8, that would likely send European stocks and the euro lower. Additionally, it will further press the ECB to provide more accommodation, which they seem unwilling to do.

Bottom line is the next week of critical data is March 3rd to the 8th, so unless durable goods or the housing data is plain awful, don’t expect any changes to the growth outlook or Fed policy.