Last Week

The economic data last week became a bit of a Rorschach (ink blot) test. Depending what camp you’re in (bull or bear), you could see last week’s data as supporting your case.  But, that aside, the takeaway is that nothing last week changed anyone’s expectations for economic growth domestically or internationally.

For the bears, April industrial production and retail sales both missed estimates.  By themselves those data points weren’t that consequential, as they weren’t big misses.  But, they were disappointing because they imply that the strong gains we saw in the economy in February and March were just part of a “bounce back” effect from the weather-related drop in December/January. And, now that the “bounce back” is over, we’re returning to the recent norm — data that imply 2% GDP growth, not 3% (which is what everyone expects and the stock market needs).  So, the IP and retail sales data were taken to potentially mean we’re not seeing a sustained acceleration in economic activity. 

For the bulls, while the April data were disappointing, the May data released last week were strong, implying the economy is picking up speed again. The Empire State and Philly Fed manufacturing surveys (the first two May economic releases) both beat estimates, with Empire  State coming in at 19.01 vs. (E) 5.0, and Philly registering 15.4 vs. (E) 14.3.  Additionally, jobless claims fell below the 300K mark (297K) for the first time since September (and only the second time for the recovery).  So, the current data imply we are seeing re-acceleration in the economy.

On balance, I’d say last week went in the bears’ favor, as investors and analysts remain very, very skeptical regarding the U.S. economy’s ability to reach “escape velocity” and finally move toward 3%+ GDP growth.

That’s important because if the bears are right (and data last week does not make them right) and the economy does indeed return to the recent “new normal” of 2% GDP growth annually (and not the expected 3%), then the stock market is extended and will correct. 

So, this remains an economy that is short on confidence. Despite current data coming in strong, until we see a more-extended trend, the benefit of the doubt will remain with the bears (but again, that doesn’t mean they are right).

In Europe, the big surprise last week was the weak Q1 GDP report (they can’t blame the weather).  Q1 GDP was just 0.2% quarter-over-quarter vs. (E) 0.4%, and year-over-year was 0.9%. 

That’s a touch weaker than the market expected (the market is expecting a little over 1% this year from the EU, so this stoked some fears about a slower than expected EU economy).  But, the focus remains more on the ECB and what they’ll do next, so this one number didn’t really change the outlook. 

This Week

There’s not a lot of data this week, but Wednesday night and Thursday will be important, especially given the context of the economic confidence problem we seem to have. 

Wednesday/Thursday bring the May flash manufacturing PMIs, with China coming Wednesday night and the EU and U.S. Thursday morning.  Again, the confidence problem isn’t limited to the U.S.  There are ongoing concerns about EU growth given the soft Q1 GDP print, and obviously China remains (and will remain) an ongoing concern.  So, if these flash PMIs can meet expectations or even beat, that will provide a nice confidence boost for the global economy. 

Outside of the flash PMIs, the minutes from the April Fed meeting are released Wednesday, although I don’t think there will be too much revealed in those minutes (perhaps some discussion on inflation and how/when to continue to exit QE, but the policy outlook for the Fed shouldn’t change).  Staying with the Fed, Chair Janet Yellen speaks Wednesday. But it’s at the NYU commencement, so I doubt there will be any revelations about monetary policy.

Finally, housing will remain in focus.  The housing starts number last Friday looked a lot better than it actually was, so the market remains focused on seeing housing rebound from the winter dip like the other parts of the economy.  Existing home sales come Thursday morning, while new home sales come Friday. 

Bottom line: This week won’t definitively alter the outlook for the global economy, but given the continued strength in the bond market (and the potential signal it is sending), strong flash manufacturing PMIs will help give investors a badly needed boost of confidence. 

Overall this was mostly a non-event, although on an otherwise slow news day, the press did try to spin some of her comments as mildly cautious on the economy. (However, the market didn’t really see it that way, evidenced by a stronger stock market and dollar, and weaker bonds and gold.).

In particular, Chair Yellen referred to GDP growth as being “somewhat” higher in ’14 than ’13, and it was the “somewhat” comment that commentators keyed off of, as it was viewed as a slight downgrade.

Additionally, although she said she did not think the stock market was in a bubble, she did cite overvaluation in some small caps.  Finally, she did reference some caution on the housing market, that the recovery might not resume as quickly as anticipated given rising prices.

But, extrapolating those comments out to be cautious on the economy—one week after the FOMC statement was upbeat on the economy—is a stretch. The bottom line with Chair Yellen’s testimony is that the outlook for Fed policy and the economy remains unchanged (continued QE tapering that ends in October/December of this year, first rate hike mid-2015, and 3% annual GDP growth, respectively).

 

Gold ends 1.5% lower after Yellen testimony

Comments from Putin help ease tensions as traders listen to Yellen testimony

Click here to read this article

Oil tops $100 after unexpected fall in crude supply

Weak products market seen limiting upside

Click here to read this article

Last Week

There was a lot of economic data last week, and with the exception of Q1 GDP, it was largely better than expected.  I could spend the entire Report recapping the data, but the bottom line is that both international and domestic data last week further confirmed that: 1)The U.S. economy is still on track for 3% growth, and the Q1 dip in the economy was weather-related and temporary.  2)  The economic recovery is progressing in Europe and slowly accelerating.  3)  The pace of growth in China is showing signs of stabilization.

Importantly, that macro backdrop is generally supportive of risk assets.

Looking at some of the specific takeaways from last week, one of the overlooked but important releases last week was the big increase in Pending Home Sales (up 3.4% in March vs. (E) 0.6%.  That’s important because housing has not bounced back from the winter slowdown the way other parts of the economy have, and concerns are growing that the slowdown in the housing recovery may not be temporary.

So, this big bounce-back in Pending Home Sales helps alleviate (to a point) those concerns. If other data can show the housing recovery is starting to pick up steam again, that will be an unanticipated positive tailwind on the economy.

Other than the jobs report (which I’ll get to in a minute), the other “big” number was Q1 GDP, which badly missed estimates at 0.1% vs. (E) 1.1%.  And, the details of the number were generally as weak as the headline.   To boot, given the construction data and factory order releases of last week, we may well see Q1 GDP revised to negative growth next month.

The number was ugly (and again may get uglier) but the important thing is that economic data in the present is trending much better. So even though Q1 was worse than everyone thought, we should see a big bounce-back in Q2. As it stands, the GDP number isn’t changing the outlook for the economy.

Turning to the jobs number, we all know it was a blowout (288K vs. (E) 215K), but the market focused on the fact that the labor participation rate dropped to a 36-year low (the lowest since 1978).  I’ll let the economists debate the minutiae, but the important takeaway here is that job growth is improving.  The rolling three-month average of job adds is now over 230k, which is pretty good.

The big question surrounding this jobs report is whether it’ll cause the Fed to accelerate tapering or pull forward when it raises rates.  According to how bonds reacted Friday, the answer is “no” and I concur (although I was astonished by the bond market’s reaction).

We’ll need to see some consistency of job adds above 200K before the Fed accelerates the taper. But if these types of numbers continue over the next two months, then I do think that the outlook for Fed policy will change, although it hasn’t happened, yet.

Bottom line is we can debate participation rates, hourly wage growth, etc. But stepping back, all the indicators say we’re seeing incremental improvement in the labor market, and that is a good thing for the economy and stocks.

Finally, looking internationally, the three big releases last week—Bank of Japan growth and inflation outlook, April EU HICP, and the official April manufacturing PMI—all met expectations.

With regard to the policy outlook for the BOJ and European Central Bank, not much changed.  The BOJ didn’t increase its 2015 inflation estimates (which is mildly dovish). Generally the consensus remains that they will ease further this summer (July now seems to be the expectation).

With the ECB, the bounce-back in HICP removes any potential of radical action at this week’s meeting. But the expectation remains that the ECB will have to do “more” soon. This should come via negative deposit rates or another interest rate cut.  QE, while possible, remains well off in the future.

But, importantly, both central banks remain committed to staying “easy” and, if anything, getting more-accommodative. This is supportive of Japanese and European stocks, and I continue to like being long both at these levels.

This Week

There is a decent amount of data this week, but it’s mostly international. Unless the data badly misses expectations, none of it should really change anyone’s outlook on the global economy.

Domestically it’s quiet, with April non-manufacturing PMIs (this morning) the highlight, although jobless claims will be watched to see if the two-week jump starts to reverse itself (it should).

Internationally, the ECB and Bank of England meeting Thursday are the highlights of the week, although likely both will be non-events.  The BOE almost certainly will do nothing. Given last week’s HICP report, the ECB will likely wait to do further accommodation.

Global composite PMIs hit tomorrow morning (China tomorrow night), while Chinese trade balance, CPI and PPI (all Thursday) will be watched for further signs of growth stabilizing.