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.

 

 

 

 

Last Week

Last week ended up being a potentially very important week, but not because of the actual data, which slightly disappointed in the U.S. and came in generally in-line in China (further implying the pace of growth is stabilizing).

The most important event of the week came Friday morning, when Bank of England Governor Marc Carney surprised markets by hinting the BOE could raise rates this year, which is sooner than the market expectation (Q1 2015).  That surprise comment sent the pound nearly 1% higher vs. the dollar and the FTSE down more than 1%.

Carney’s comments matter especially in the context of the Fed meeting this Wednesday.  I’m going to flush this out more in the preview of the FOMC, but if there’s one thing the market seems too “complacent” on, it’s that global central banks are going to keep policy static for quarters to come.

Point being, the stock market has not priced in the Fed suddenly upping the time frame of rate increases or an acceleration of tapering.  If the broader market is as surprised as London was by Carney, and the prospects of a rate increase become more real, that will be a negative on the market.  It’s early yet and Carney just “hinted” at rate increases, but it underscores the point that markets are very complacent about the expectation for monetary policy in the UK and U.S., and that is a source of risk we need to monitor.

Turning now to the actual data, there were only two releases worth covering in the U.S.:  weekly claims and May retail sales, and both were slight misses.

Claims ticked higher to 317K, while retail sales increased in May by 0.3% vs. (E) 0.6%, while the “control” group, which is the best gauge of consumer spending, was flat in May (which reflects an uninspired consumer).  While slightly disappointing, though, the data didn’t change the outlook for the economy going forward (GDP estimates for Q2 remain around 3%).

Finally, China was in focus last week as CPI, PPI, Money Supply, Industrial Production and Retail Sales were released.  All the reports were basically in-line with expectations, which further confirms the pace of economic growth in China is stabilizing and implies the chances of a Chinese “hard landing” continue to get smaller (so, point being, China isn’t a threat to the global rally).

This Week

It gets a bit busier this week from an economics standpoint, with the highlight clearly being the FOMC meeting Wednesday.

First, it’s a meeting with staff projections and a Yellen press conference.  That’s important, because as we saw in March, there is the chance for a “hawkish” surprise in Fed officials’ expectations for the economy, and from Ms. Yellen herself (i.e., the “6 months” comment during the March press conference).  Additionally, given the Carney comments last week, markets will be nervous about anything that might be incrementally more “hawkish” than consensus expectations.

Again, the thing the market seems most-complacent with right now is the outlook for Fed policy, so that’s an area we need to continue to follow, as surprises usually come from things with the most complacency.

Away from the Fed, we get our first look at June economic data via the Empire State Manufacturing Index (this morning), and Philly Fed Index on Thursday.  While neither moves markets the way they used to (given the “flash” PMIs, which will be released a week from today), Empire State and Philly still are important in the context of a market that needs constant re-affirmation that the economic recovery is accelerating.

Also this week we get the first piece of May housing data via Housing Starts on Wednesday.  The April data implied we may finally be seeing a “bounce” in housing like we’ve seen in other sectors of the economy after the winter weakness, so data that further confirm this will be welcomed by the market.

Bottom line is this week will be Fed-dominated, especially in light of the Carney comments.  But, the rest of the week’s data also matter, because the market does need constant proof that the economic recovery in the U.S. is continuing to slowly gain momentum. Multiple pieces of evidence to the contrary will act as a headwind.

 

 

 

Link to article here.

Last Week

Economic data last week was generally in-line with expectations, and ahead of this critical week, none of the data materially shifted the current consensus expectation for slowly rebounding global growth or Fed policy.

The “highlight” of last week was the revised Q1 GDP report, which missed expectations and showed a 1% annual growth rate—the first negative reading in three years.  But, as usual, the devil is in the details.

Despite the bad headline, the GDP report wasn’t all that bad.  PCE (consumer spending) was revised +0.1% higher to 3.1%, while final sales of domestic product (GDP excluding inventories) was little-changed.

The big drop in headline GDP came from inventory depletion (which will be a tailwind for Q2 GDP as manufacturers have to re-stock) and from increased exports (which obviously isn’t an economic negative, either).

So, while certainly this wasn’t a good report, the market didn’t really focus on it that much because the details were better than the headline, and economic data since Q2 started 2+ months ago has trended better.

Speaking of which, the more timely data points released last week were generally “OK” and reflective of a U.S. economy that is seeing the recovery slowly accelerate.  April durable goods were a mixed bag—the key sub component, non-defense capital goods ex-aircraft, declined slightly. But that was following a sharply revised higher gain in March, which more than offset the decline in April.  So, net-net it wasn’t a bad number.

The other report, April pending home sales, grew at 0.4% vs. 1.0% expectations.  While that was a “miss,” the important thing was that there was further improvement in sales. And, it’s now safe to say that the April housing data implied that housing may finally be joining other parts of the economy in rebounding from the winter dip.

Finally, there was one other number last week that I want to point out.  In Friday’s Personal Income and Outlays report, the “Core PCE Price Index” (the Fed’s preferred measure of inflation) showed a year-over-year increase of 1.4%, up from 1.2% in March.

That number hit expectations and remains well-below the Fed’s 2% “target,” but I point it out because it’s another piece of anecdotal evidence that inflation is slowly starting to tick higher.  And, an uptick in inflation would be a significant shock to the market, as it would have implications for Fed policy that no one is pricing in right now.

So, in an effort to point out what’s in “left field” so we don’t get blindsided, an uptick in inflation remains a potentially surprising occurrence to watch for.

Turning back to the economy at large, the bottom line is nothing last week (internationally or domestically) changed the outlook for U.S., Chinese or EU growth heading into this critical week.

This Week

This is a big week as we will (hopefully) finally have some clarity on what the European Central Bank is going to do about its dis-inflation problem. We’ll also get more data that (hopefully) confirms the market’s expectations for the major economies: stabilization of growth in China, continued slow recovery in Europe and acceleration of the recovery in the US.

The biggest event all week is the ECB meeting—and its announcement on Thursday, June 5—where the market will finally see what the central bank plans to do to help spur growth.

I’ll preview what to expect as we get closer to announcement, but this is critical in regard to the recent bond rally … and for the potential of a bond sell-off to become a tailwind on stocks.

As a preview to the ECB meeting Thursday, we get the “flash” EMU HICP reading tomorrow.  HICP is critical because it’s reflective of the dis-inflation threat in the EU. If this number remains low (well below 1% year-over-year), then it’ll put more pressure on the ECB to act forcefully on Thursday.

Outside of the ECB, it’s also “jobs week” here in the U.S.  So, we get ADP Wednesday, claims Thursday and the government report Friday.  This report isn’t as critical as previous reports have been, because it would take either a huge number or a total disaster to potentially alter the course of Fed tapering. But for a market constantly needing positive reinforcement that the economy is actually getting better, the jobs number matters.

We also get the May final global PMIs this week.  Manufacturing PMIs for Asia and Europe were out this morning, while we get the U.S. ISM manufacturing PMI at 10 AM, and the global composite and U.S. non-manufacturing PMIs Wednesday.

Again, these numbers represent an opportunity for the market (and investors) to become more confident about the global economy, and to confirm the current growth outlook for each region.

Bottom line is this week could be quite critical to the market.  The two large “unknowns” to the market at the moment are “What will the ECB do?” and “Is the global recovery for real?”  Data this week will help to more definitively answer those questions. If things go well, we could see a new tailwind for stocks.