Your Weekly Economic Cheat Sheet – 5.27.2014

Last Week

Last week was a good one for economic data, as global flash PMIs confirmed current market expectations (Chinese growth stabilizing, EU recovering slowly, U.S. recovery accelerating), and we got some welcome good news on domestic housing.

The global flash PMIs were the highlight of the week, and although there was some disappointment in European manufacturing data, largely the reports were better than expected.  Importantly, they helped reinforce that the pace of Chinese economic growth is stabilizing, Europe is seeing a slow recovery and growth in the U.S. is slowly accelerating.

Chinese flash manufacturing PMIs hit a five-month high at 49.7, just below the important 50 mark, and a lot of the details of the report were strong.  U.S. flash PMIs came in at 56.2 vs. expectations of 55.9, again implying that we are seeing a continued recovery form now that we’re past the winter-weather-imposed economic dip.

The one “miss” in these numbers was in Europe, where French PMIs disappointed, while German and EU manufacturing PMIs declined from April (and missed estimates).

On the headline that looks bad, but it’s really not.  First, everyone’s focus is on what the ECB will do a week from Thursday. So, in some respects, the slightly disappointing data are putting more pressure on the ECB to act (so, mildly bad news is good).  Second, in aggregate the PMIs for Germany and the EMU were “OK” (still comfortably above the 50 level), so importantly these weak numbers aren’t going to result in anyone changing their growth estimates for the EMU (which means the numbers aren’t really that bad for European stocks).

China and Europe remain two major areas of concern in the global economy, but the data last week further confirmed that we’re seeing positive incremental progress in both regions, which is a positive for global equities.

The other important data released last week were the existing home sales Thursday and new home sales Friday.  As you know, housing remains an area of concern for analysts and the Fed, as it hasn’t “bounced” from the winter dip like the rest of the economy.

Well, data last week implied that we may finally be seeing some sort of a “bounce” in housing, as April existing home sales rose month-over-month for the first time this year, while new home sales increased as well.

Those positive surprises helped stocks rally late in the week, because if we can get the housing recovery to start moving forward again, that will be an unanticipated tailwind on the U.S. economy (and a positive for equities).

Two reports won’t remove concern about housing, especially in this generally pessimistic environment, but these reports did help sentiment last week.

Finally, there were a bunch of Fed speakers last week and the release of the Fed minutes last Wednesday, but the bottom line is the outlook for Fed policy didn’t change at all (tapering ending in October/December, and first rate increases mid-2015).

Perhaps the most important Fed-related item from last week was Vice Chair William Dudley’s commentary about a Fed exit strategy. But there will be plenty of time to dissect that, as we’re still a ways off from the Fed even starting to exit all these programs.  But, as tapering and eventual rate increases draw near, expect the focus of the Fed analysis to shift to the exit strategy. For now, though, everything remains status quo.

This Week

There are several notable economic releases this week, but the truth is that, barring any major surprises, the market will be looking ahead to next week (ECB decision and May jobs report).  So, nothing this week should materially change the market’s outlook for the U.S. or global economy, again unless there’s a big surprise.

Revised Q1 GDP Thursday will likely be the most-watched number this week, as it’s likely we’ll see growth for Q1 revised into negative territory.  But, while that will be a much-publicized headline, again remember the market is much more focused on the pace of growth now than it was eight weeks ago.

April durable goods are released later this morning, while we get jobless claims and pending home sales Thursday.  Claims ticked up a bit last week so the market will be looking for a resumption of that downtrend, while pending home sales will be closely watched (and that’s probably the most important number this week, given the housing data last week).

It’s the same story in Europe, as there are several releases, but everyone is looking ahead to the ECB on June 5.  Japan is the one expectation, as there are multiple releases Thursday night.

This could move markets, as everyone is still trying to figure out how much the Japanese economy has slowed now that the sales tax increase has been in place for over a month.  That, obviously, will have a impact on when (and if) the Bank of Japan eases further.