Tom Essaye on “The Bell” Podcast with Charles Nenner of Goldman Sachs and Adam Johnson

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Bullseye Brief with Charles Nenner, Tom Essaye, Adam Johnson

Thanks to Adam Johnson for having me on his podcast “The Bell” again last week. We talked with Goldman Sachs Strategist Charles Nenner on Cycles, Shorts, and Sunspots. We also talk about the data deluge, incredibly high credit scores, and the very busy week in economic data. Plus, find out who’s shorting Costco… and why? What’s the secret to retail?


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Jobs Report Preview, June 1, 2017

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For a second-straight month, the risks to tomorrow’s jobs report are balanced. A “Too Hot” number will increase the possibility of more than three rate hikes in 2017 while a “Too Cold” number will fan worries about the pace of economic growth, and the ability of economic growth to push stocks materially higher from current levels.

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“Goldilocks” Jobs Report Preview:

“Too Hot” Scenario (Potential for More than 3 Rate Hikes in 2017)

 >250k Job Adds, < 4.6% Unemployment, > 2.9% YOY wage increase.

A number this hot will guarantee a June rate hike, but more importantly it would likely reignite the debate over whether the Fed will hike more than three times this year. Likely Market Reaction: Withheld for Sevens Report subscribers—sign up for your free two-week trial to unlock.

“Just Right” Scenario (A June Rate Hike Is Guaranteed, But the Total Number of Expected Hikes for 2017 Remains at Three)

125k–250k Job Adds, > 4.7% Unemployment Rate, 2.5%-2.8% YOY wage increase.

This is the best-case scenario for stocks, as it would imply still-stable job growth, but not materially increase the chances for more than three rate hikes in 2017. Likely Market Reaction: Withheld for Sevens Report subscribers—sign up for your free two-week trial to unlock.

“Too Cold” Scenario (A June Rate Hike Becomes in Doubt)

< 125k Job Adds.

Given the recent unimpressive economic reports, a soft jobs number could cause a decent sell-off in equities. As the Washington policy outlook continues to dim, economic data needs to do more heavy lifting to support stocks. So, given the market’s focus on future growth, the bottom line is bad economic data still isn’t good for stocks. Likely Market Reaction: Withheld for Sevens Report subscribers—sign up for your free two-week trial to unlock.

Bottom Line

This jobs report isn’t important because it will materially alter the Fed’s near term outlook (it’d take a massive miss to do take a June hike off the table). Instead, it’s important because if it prints “Too Cold” it could send bonds and bank stocks through their 2017 lows. And while I respect the fact that stocks have been able to withstand that underperformance so far in 2017, I do not think the broad market can withstand material new lows in yields and bank stocks.

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Weekly Market Cheat Sheet, May 29, 2017

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Weekly Market Cheat Sheet May 29

Last Week in Review:

Economic data continued to underwhelm last week, and while for now, the lack of strong data isn’t preventing stocks from making incremental new highs. Beyond the short term, if we are going to see a material move higher from here, economic data needs to get better, period.

The two most important reports last week were the May Flash Manufacturing PMI and the April Durable Goods report, and both underwhelmed. The May flash manufacturing PMI dropped to 52.5, the lowest reading since of 2017, while Durable Goods was, as usual, a bit of a misleading number.

The headline on Durable Goods was better than expected at -0.7% vs. (E) -1.0%. We dismiss the headline because it’s massively influenced by the timing of airplane orders. Instead, we focus on New Orders for Non-Defense Capital Goods, Ex- Aircraft. That is the purest look at business spending and investment in the Durable Goods report, and there the results were a disappointment. NDCGXA was flat vs. (E) 0.2% increase while the March data was revised lower (from 0.2% to 0.0%).

Bigger picture, these soft business spending/investment numbers raise the question as to whether all this policy uncertainty regarding corporate taxes (will rates be cut, and what changes will occur with the deductibility of interest, etc.?) is starting to restrain business investment. To be clear, there’s no data that says it is being restrained, yet. However, it is a legitimate concern the longer we go with no clarity on taxes.

The other notable report from last week was the revision of Q1 GDP, and on the whole it was positive. Headline Q1 GDP was increased to 1.2% from 0.7%, and consumer spending (PCE) rose to 0.6% vs. (E) 0.3%. To be clear, that’s still pretty anemic consumer spending… but at least the numbers got a touch better.

Finally, turning to the Fed, the market traded slightly dovish last week after the release of the May FOMC minutes. In particular, worries about whether we’re losing upward momentum on inflation, combined with similar comments from Philly Fed President Harker a week ago, resulted in a slightly dovish move in currencies and bonds. But to be clear, the expectation for a June hike remains very high, and it’ll likely take a very soft core PCE Price Index (out today), and a bad wage number in Friday’s jobs report to put that June hike in doubt.

This Week’s Preview:

With the amount of economic data coming this week, it would be a busy week even if we had five days to absorb it all. So, it will be an especially busy week given we’ve got just four trading days this week.

First, it’s jobs week, so we get the ADP Jobs Report on Thursday (a day later due to Memorial Day), Jobless Claims on Thursday, and the government jobs report on Friday. We will send our standard “Jobs Report Preview” in Thursday’s report. As has been the case for virtually all of 2017, the wage numbers are almost as important as the actual jobs number itself, as signs of further deterioration could lead to a dovish Fed while a strong number could put upward pressure on the expected number of hikes in 2017 (from three to four).

Right behind the jobs report in importance this week is the May final manufacturing PMI, out Thursday. Obviously, with the disappointing flash PMI, a slightly better number this week will help inject a bit more confidence into the state of economic momentum here in the US.

And while the US number is important, the most important manufacturing PMI this week may be China, which comes tonight. Very quietly, Chinese data has been softening, and if we get a surprisingly bad number that could send a macro shock through markets.

Turning to inflation, our focus there will be a bit more acute this week given the FOMC minutes and Harker’s comments from last week. That means that today’s Core PCE Price Index, which is contained in the Personal Income and Outlays report, will be important. If it shows evidence of moving down further from the Fed’s 2.0% yoy target, that will create a dovish response from markets and sink Treasury yields further (which will be a negative for stocks).

Bottom line, the jury is still very much “out” on the current momentum in the US economy. In an absolute sense, data remains “ok,” but we are not seeing the acceleration everyone thought we would when the reflation trade was roaring back in Dec/Jan. If data continues to underwhelm, it will become a headwind on stocks beyond the short term… and again, that’s a point that is very important not to miss. We need better data to make this rally sustainable above 2400.

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OPEC (and NOPEC) Meeting Takeaways, May 26, 2017

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Oil trade over the last week was a classic case of “buy the rumor, sell the news,” as the speculative rally that carried WTI up to the $52 mark came completely unwound yesterday after OPEC announced that they would extend the cuts nine months, but not deepen them. WTI futures finished down a staggering 4.85% on the day.

The oil market ran higher this week into the meeting as expectations shifted from a six-month extension of current policy to a nine-month extension late last week. With that shift in expectations came a surge of speculative bets that if OPEC was willing to extend cuts longer, they might also be willing to deepen them.

OPECSo, a potential deeper cut began to get priced into the market amid the flurry of buying leading up to the meeting. Unfortunately for the bulls, it was just more of the same cuts through March 2018. The reason the market responded unfavorably to this outcome is pretty simple; the cuts haven’t worked so far, as global stockpiles remain near record highs.

Here is a quick refresher of the OPEC deal:

OPEC’s Goal: Higher oil prices.

OPEC’s Objective: Bring global stockpiles down from a record 3 billion bbls to the five-year average of 2.7 billion.

OPEC’s Task: Impose individual quotas totaling a production cut of -1.8M bbls (including Non-OPEC producers) from October 2016 levels to help the market rebalance.

OPEC’s Dilemma: Both Russia and Saudi Arabia want higher oil prices (as they always do), specifically because of upcoming elections and the Aramco IPO. But, with higher oil prices comes increased competition from US shale producers, who are ultimately taking market share from those imposing quotas overseas.

The bottom line here is that yesterday’s OPEC meeting was a disappointment to the market. Oil retraced all of the gains from the last week, as the market does not believe that “more of the same” is going to have a significant effect on stockpiles in the coming months… especially in the face of a nearly +600K bbls increase in US production so far in 2017. Looking into US fundamentals, there has been a slight, bullish shift in the data as oil inventories have been drawn down seven-straight weeks, and the pace of lower 48 production increases have moderated. But the data trend has been “less bearish” rather than outright bullish.

On the charts, there was a bearish, one-day reversal in both the active futures contracts as well as the notable calendar spreads. That’s a very bearish technical development with regard to the near term direction of oil.

While OPEC and their NOPEC friends say they are willing to “do all it takes” to support a balancing of the oil market, traders don’t believe them. The reason why is because if that were the case, they would have already cut production further. The fact that they’re hesitating to cut production shows that they are not willing to do all it takes, and that their main concern is with revenue.

Looking ahead, the single-biggest thing to watch remains US production. If US output continues to climb, it will not only offset cuts by overseas producers, it will increase OPEC angst about losing market share to the US. Recall that the rise of shale production is the reason OPEC crushed prices in 2014 with an “open spigot” policy. Looking ahead, nothing has changed with regard to OPEC member outlook on market share, which means every extra barrel being produced in the US increases the odds of cheating from cartel members.

Potential Medium-Term Bullish Catalysts:

1) Demand unexpectedly rises this summer amid economic growth and increased consumer spending (a big “if”), resulting in a decline in global stockpiles. It is worth noting that stocks are still pricing in strong growth, so this isn’t that big of a reach.

2) Geopolitics. If tensions rise with Russia, North Korea, or any Middle East nation, a flight to safety move into oil could push futures to new 2017 highs.

Potential Medium-Term Bearish Catalysts:

1) OPEC and NOPEC quota compliance falls. With every barrel of market share the cartel and friends forfeits to the US, the odds of compliance issues rise. If one producer begins to cheat, as Iraq apparently already has, then it will become much more likely that others will follow.

2) The trend of rising US production begins to accelerate again after moderating over the last few weeks. No matter how you spin it, rising US production is bearish for global oil prices, as it both offsets oil cuts by overseas producers and lowers morale among OPEC members because of the self-inflicted loss of market share that could induce cheating.

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Weekly Market Cheat Sheet, May 22, 2017

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Economic and Investing Cheat Sheet - May 22

Last Week in Review:

There weren’t many economic reports last week, and the data we did get was mixed. In sum the data did nothing to remove the growing feeling that the US economy is losing momentum.

First, the initial look at May data in the form of the Empire State Manufacturing Index badly missed at -1.0 vs. (E) 8.0, but the Philly Fed Business Outlook Survey on Thursday contrarily blew away expectations (38.8 vs. E: 19.6). The net effect is that it put more focus on this week’s flash manufacturing PMI to give us a true look at the pace of manufacturing activity in May.

In the US housing market, the Housing Market Index beat expectations on Monday (70 vs. E: 68), but Housing Starts data on Tuesday whiffed (1.172M vs. E: 1.256M).

The most encouraging report last week was Industrial Production, which beat estimates of 0.4% with a headline print of 1.0%. But, a lot of that “beat” came from auto manufacturing, and activity in that sector has almost certainly peaked (remember Ford is cutting employees amidst more challenging sales environments). Point being, the Industrial Production beat is likely a one off, not the start of a trend.

Rounding things out with the labor market, weekly jobless claims fell 4K to 232K, as the general trend lower remains very well defined. Continuing claims fell to a 29-year low while its four-week moving average fell to a 43-year low. This encouraging report was especially notable because the data was collected from the week corresponding with the survey week for the May jobs report, and the strong print suggests that May could be another very strong month for the labor market. Bottom line, economic data last week did not materially change our outlook for the markets.

This Week’s Preview:

This will actually be a relatively busy week of economic data, as we get the flash manufacturing PMIs, Fed minutes from the May meeting, and other important economic reports.

The most important report this week will be Wednesday’s May flash manufacturing PMI. This will be the first major data point for May and it needs to show stabilization and, better yet, acceleration for stocks to rally.

Second in importance this week will be the FOMC minutes. Markets have priced in a slightly more dovish Fed given the soft inflation data recently, but markets have overestimated the Fed’s dovishness throughout 2017. If the minutes are hawkish, that could push yields and the dollar higher (which would be stock positive).

Meanwhile, there are two reports on housing data, New Home Sales and Existing Home Sales due out on Tuesday and Wednesday, respectively. Investors would welcome a rebound after last week’s soft Housing Starts report.

Finally, both the second look at Q1 GDP and Durable Goods Orders will be released Friday morning. The latter will be closely watched as the gap between soft and hard data remains a concern, and a strong revision to GDP and a good Durable Goods number will help close that gap. Bottom line, economic data remains the key to reigniting the reflation trade (remember, it’s #1 in my list of four events needed to restart the rally). So, the market needs good data and a confident/hawkish Fed for stocks to again test recent highs.

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Tom Essaye on “The Bell” Podcast with Nick Colas and Adam Johnson

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Nick Colas Bullseye Brief

Thanks to Adam Johnson for having me on his podcast “The Bell” again last week. We talked with Nick Colas, Chief Strategist at Convergex (Wall Street’s Malcolm Gladwell), about VIX, and high volatility. What does it mean when the VIX is so low, what’s being shorted, and what’s happening with the Chinese economy?

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Two Markets Down, Three to Go?, May 18, 2017

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The most important trading across markets Wednesday was not in the stock market, it was in the bond market… and the signals sent there were not good. Both the absolute level of bond yields, and the shape of the yield curve, deteriorated materially… and this is a concern that should not be ignored.

First, the 10-year Treasury yield imploded, falling 11 basis points to close at 2.22%, the lowest in three weeks and now just above the 2017 low of 2.17%.

Second, and potentially more importantly, the 10’s—2’s Treasury yield curve also flattened materially, as the spread fell from 1.04% to 0.92%.

sevens report - trumponomics

This is especially important, because the 10’s—2’s yield spread has now retraced the entire post-election steepening, and the curve is more flat than it was pre-Trump presidency. That is a very bad sign for banks, and since banks must lead a market higher in a reflation expansion, that is a bad sign for the entire stock market.

The 10’s—2’s spread has more than retraced the entire post-election move, as has the US Dollar Index (two down).

The 10-year yield is threatening to fall to fresh lows for the year. Yet, the BKX (Bank Index) remains nearly 20% above the pre-election close, and the S&P 500 still trades almost 10% above its pre-election close.

So, are we now looking at a situation where we are two down, three to go?

This situation cannot exist in perpetuity, and the collapse in yields yesterday is a warning sign that should not be ignored.

It’s not definitive yet, and one bad day doesn’t break a trend, but the price action in the bond market is becoming outright worrisome. And, I must continue to stress (as I’ve been doing since mid-March) that the bond market is the leading indicator for stocks. If the 10-year yield breaks below 2.17%, that will add to that warning. At that point, I will consider becoming more defensive in our portfolios.

Again, for context, the entire 2017 stock market rally is based on a expectation of an economic reflationary expansion. But, that expansion likely can’t occur unless the pro-growth policies from Washington actually materialize, and that probability is decreasing daily.

So while stocks have held up, reflationary-sensitive as-sets have negatively reacted (banks, bonds and cyclicals). These sectors must lead a reflationary bull market, yet all of them are breaking down or are in danger of breaking down. If they go, then the broad market isn’t far behind.

Again, I’m not saying get materially defensive yet, as one bad day doesn’t invalidate the market’s resilience. But caution signs are growing on this market, and I do not want anyone blindsided.

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Trumponomics Update, May 17, 2017

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Politics remains a deafening influence on the markets in 2017, but amidst the ongoing circus (which again got bigger overnight) I wanted to step back and take a look at the current state of the Trumpenomics agenda, revise current markets expectations, and re-examine what will create positive or negative political surprises for stocks over the coming months and quarters.

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Finally, I want to provide some independent context to the recent political headlines. First, they are net negative because they are causing some Republicans to start to distance themselves from Trump, and that reduces the chances of tax cuts. Second, if there was some crime committed (obstruction of justice, etc.) that is clearly a bearish gamechanger—but we are not there yet. Third, impeachment claims are currently overblown. It’s a Republican Congress and Congress must decide impeachment. Every Republican, at this point, has a better chance of getting re-elected if they pass tax cuts rather than dump Trump, and we can always count on politicians to focus on their re-employment. Bottom line, these never ending headlines are a headwind on stocks, but they are not a bearish gamechanger, yet.

Trumponomics Pillar 1: Tax Cuts

What Was Expected By Markets: An agreement in principle by the August Congressional recess to cut corporate taxes to the low-20% range, and include a one time, 10% repatriation tax holiday for foreign profits.

Reality: Nothing. There has been little-to-no progress on the tax issue, and major sticking points remain between Republicans, including border adjustments and removing interest deductibility for corporations.

Market Impact: So far, stocks have generally weathered the ineptitude here because there is still the broad expectation that there will be corporate tax reform before the mid-terms in 2018 (people are now pointing to Q1 2018).

Current Expectation: A small corporate tax cut into the high-20% range in place by Q1 2018, and some foreign profit tax repatriation holiday (around 10% tax rate).

Bullish If: Withheld for subscribers. Sign up for your free trial today.

Bearish If: Withheld for subscribers. Sign up for your free trial today.

Trumponomics Pillar 2: Deregulation (Especially Obamacare)

What Was Expected: Repeal and replacement of Obamacare in the first 100 days; massive deregulation via executive order, especially regarding environmental regulations.

Reality: Virtually nothing. While the House passed an Obamacare repeal/replace, there is no credible path for the legislation to make it out of the Senate. Meanwhile, there has been progress on reducing one-off regulations, but it’s not the type of large-scale deregulation that will ignite economic growth.

Market Impact: Healthcare has outperformed on the reduction of political risk (XLV, IHF, IBB). Overall, however, no macro impact.

Current Expectation: Not much. The healthcare bill is in limbo, and there’s no expectation of a Obamacare repeal/replace anytime soon. Meanwhile, Dodd-Frank banking regulations remain largely in place and it’s unlikely we’ll see a large overhaul of that legislation, either (that’s anecdotally negative for regional banks as they bear an outsized compliance burden compared to money center banks).

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Bearish If: Withheld for subscribers. Sign up for your free trial today.

Trumponomics Pillar 3: Infrastructure Spending

What Was Expected: $1 trillion over a 10-year period (this was always an exaggeration, but a lot was potentially expected).

Reality: Virtually nothing. Infrastructure spending has been soundly buried between the healthcare drama, tax cut bickering, and the constant media battles emanating from the White House.

Market Impact: Infrastructure stocks that rallied hard following the election have lagged so far in 2017, but this hasn’t had any macro impact on markets.

Current Expectation: Nothing. Some hope that we will see a bipartisan infrastructure bill by Q2 2018, but it’s so buried by everything else right now that’s not very likely.

Bullish If: Withheld for subscribers. Sign up for your free trial today.

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Bottom Line

Earnings and economics have helped to offset any Trumponomics disappointment as Q1 earnings were strong, and $138 2018 S&P 500 EPS is supporting stocks in the face of repeated Washington failures. Meanwhile, economic data has been “fine” on an absolute basis despite the slight loss of momentum recently.

Point being, markets have been lucky that earnings and economics have provided a shock absorber for the policy disappointment; but considerable risks remain should no further policy progress occur in the coming months and quarters, and given the seemingly unending scandalous headlines emanating from the White House, the probability of nothing happening is rising.

If we do not see real political progress by the end of ’17 or ’18, then its unlikely that economic growth will be able to hold up as the uncertainty surrounding these policies will begin to act as a headwind.

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What Direction is the Pain Trade?, May 16, 2017

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Pain Trade Sevens ReportLonger term readers know that one of the better indicators we use to determine the near-term trend of markets is the “pain trade,” and figuring out whether the pain trade is higher or lower can help us determine whether the near-term risk for stocks is for a breakout, or a pullback.

For reference, the pain trade is an industry term that describes the most painful market outcome for investors. It’s based on the simple (and accurate) principle that the market always moves to extract the most amount of pain from the most amount of people.

So, if the most amount of people are long and positioned for higher stock prices, the pain trade is lower. Conversely (as has been the case for most of the 2010s), when investors are underweight equities and are cautious and expecting a correction, the pain trade is actually higher, because investors lament underperformance and are “missing” the rally.

We think that after years of the pain trade being higher, we are approaching a turning point where the pain trade will once again move lower, like it was for most of the 90s and 00s, and we wanted to cover the reasons behind that observation. This matters, because if, in the coming months, the pain trade does turn lower, that will effect how we are positioned.

When determining which direction the pain trade lies, I look at

1) Sentiment and

2) Investor exposure to stocks.

Again, as a general rule, if sentiment is bullish/positive and investor exposure to stocks high, the pain trade is lower, meaning a drop in stocks elicits the most pain from the most people.

Conversely, if sentiment is skeptical/cautious and investors are underinvested in equities, the pain trade is higher, meaning a rally in stocks elicits the most pain from investors as they are “missing” the rally.

Investor Sentiment: No Irrational Exuberance, but the Multi-Year Caution is Eroding. Various measures of investment sentiment are simply not signaling an undue amount of euphoria out there at this time.

Put/Call Ratios are in the middle of the historical range (and well above the 0.45% that represents excessive bullishness). Meanwhile, the AAII Sentiment Survey (American Association of Individual Investors) shows just 32.7% bulls, well below the historical average of 38.5%. Again, that’s not the type of extreme bullishness that would make the pain trade lower.

However, not all sentiment indicators are cautious. The Investors Intelligence Advisor Sentiment Index is above 3.0 (the level that denotes excessive expectations of higher stock prices) and the percentage of bullish advisors is creeping towards the peak of 60% (currently 58.7). So, it would appear that advisors are a bit more bullish than options traders or individual investors. But, it’s still a mixed picture, and doesn’t imply the pain trade is materially higher or lower.

Takeaway: For the past several years, market skepticism has helped power stocks higher; but while the expectations of investors and advisors has turned more positive (and hence reduced the upside pain trade) it is still not bullish enough to make us think the pain trade has turned definitively lower near term, yet.

Investor Exposure to Equities: Getting More Long. Underinvestment in the stock market also has been a powerful tailwind on stocks over the past seven years, as cautious investors have been waiting for another financial crisis (one that’s yet to arrive). So, with each new high, investors and advisors have “chased” stocks higher after throwing in their bearish towels and finally getting back in the market.

That’s one of the reasons super-cap internet and tech stocks have outperformed. Those stocks are called “long rentals,” because they are ultra-liquid and are positively correlated to the market in general and tech specifically. It’s an easy, general way to get a client more long the market in a hurry without taking too much risk.

However, now, that broad market underinvestment situation also has somewhat resolved itself. Since October we’ve seen consistent inflows into US mutual funds and ETFs, including in April (if we ignore the large outflows during the first week of April, as people liquidated accounts to pay taxes, contribute to IRAs, etc.)

Additionally, the amount of money market fund holdings over the previous year.

Takeaway: The extreme levels of underinvestment that prompted investors and advisors chasing markets higher has not been eliminated, but it has been seriously reduced… and that also reduces the upward direction of the pain trade.

Bottom Line

For years, the pain trade has been higher due to cautious/pessimistic investors who were burned by the financial crisis, combined with lots of dry power in the form of equity market underinvestment. However, while the pain trade likely is still marginally higher, it is not the bullish force that it once was. As such, we do not expect to see stocks magically grind higher in the face of unimpressive fundamentals the way we did over the past several years.

From a practical standpoint, this analysis reinforces our cautiously positive opinion on stocks, but also restrains us from chasing stocks without evidence of a reignited reflation trade. Bottom line, the pain trade now is much more two sided than it has been in years, and that puts even more emphasis on getting the political and economic analysis right—because at this point just as much pain will be elicited from investors if we roll over, or if we breakout.

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Weekly Market Cheat Sheet, May 15, 2017

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Last Week in Review:

Economic data last week was mixed in total, but from a market standpoint the takeaway was that it was neither strong enough to support a push through 2400 in the S&P 500, nor weak enough to generate any real selling. So, the net effect is that the market is left wondering whether the economic acceleration can continue, or whether we are losing momentum.

Retail Sales was the most important report last week, and while on the headline it appeared disappointing, a closer look revealed it was basically in line with expectations.

I say that, because while the headline missed estimates (0.4% vs. 0.6%) the revisions to the March data were positive, from -0.2% to 0.1%. Taken in aggregate, the two-month retail sales performance was slightly better than expected.

Looking at the more important “control” group, which is the best measure of discretionary consumer spending, it also appeared to be a disappointment, up just 0.2% vs. (E) 0.4%. But once again, the revisions were positive (from 0.5% to 0.7%), so if you take the two months together it was in line with estimates.

Bigger picture, consumer spending remains decently healthy, but activity isn’t on pace with Q3/Q4 of last year, when consumer spending powered economic growth. Without an acceleration in consumer spending, it’s hard to see the US economy accelerating materially from here.

The other notable domestic numbers last week were the April CPI and PPI. The former was much-hotter-than-expected, as the core rose 0.7% vs. 0.2% on surging service inflation (financial services costs, especially). However, core CPI was slightly underwhelming, rising just 0.1% in April, and up 1.9% year over year, below the 2.0% estimate.

Bottom line, it’s a given that inflation pressures continue to build, but all the statistical data implies they are building very slowly. And given the Fed watches the statistical data, nothing in the inflation numbers will make the Fed think about hiking more aggressively or delaying the June rate hike.

The other notable data last week came from China, and it was on balance negative. April exports, imports, M2 money supply and PPI all missed estimates, although not by wide margins. Not all the data was bad, as new yuan loans were slightly better than expected. Then, this weekend, Fixed Asset Investment, Retail Sales and Industrial Production all slightly missed expectations.

Bottom line, legitimate doubts are creeping in about the state of the Chinese economy, but it’s simply too early for anyone other than Kyle Bass to declare a problem (he’s been warning about the implosion of China for years, and I’m sure one day he will be right. In the meantime, he has plenty of capital to wait it out). Yet for us, slowing Chinese growth remains a risk, but one that just needs to be monitored for now, which we are doing.

This Week’s Preview:

The calendar is once again relatively quiet this week, although we will get the first look at May data, which will help us decide whether the March/April lull in economic growth is ending.

To that point, the two most important numbers this week are the Empire Manufacturing Survey (today) and the Philly Fed survey (Thursday). Both give us our first look at May economic activity, and while both are just regional surveys, they still matter given the seemingly precarious trend in economic data (is it the pause that refreshes, or are we losing momentum?).

Outside of those two manufacturing surveys, April Industrial Production comes Tuesday, and that will give us another hard-data look at manufacturing activity. Remember, while manufacturing PMIs soared in early 2017, actual hard data hasn’t really moved (hence the gap between soft sentiment indicators and hard data). So, it’ll be an economic positive if Industrial Production can show an acceleration in manufacturing activity.

Outside of those reports, the only other notable numbers are housing related, as we get the first look at April home sales numbers. The Housing Market Index comes today, Housing Starts come tomorrow. Sentiment towards housing is pretty buoyant right now, so it’d be unlikely (and a big surprise) if we saw a housing roll over.

Bottom line, this week will shed some incremental light on the current state of economic growth, and given the markets are starving for a catalyst (positive or negative) usually inconsequential numbers may indeed move stocks.

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