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).

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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.

Last Week

The major question for the market remains: “Was the slowdown in economic activity in Dec/Jan largely the result of the awful weather?” Last week the February and March data further implied the answer is “Yes,” and that’s a good thing for the stock market.

The first two data points from March, the Empire State manufacturing survey and Philly Fed survey, both bounced back from weak February readings. They imply we’re seeing a modest bounce-back in manufacturing activity this month in those two regions (again implying the soft Jan/Feb readings were weather-related).

Turning to the FOMC, you know by now the Fed:  Dropped its “quantitative” forward guidance and abandoned the 6.5% unemployment and 2.5% inflation thresholds, and replaced them with opaque, “qualitative” forward guidance.  Additionally, there was  an “upward drift” in the “dots” as 10 of 16 Fed officials believed the Fed Funds rate would be at or above 1% by the end of 2015, compared to 7 in December.  Finally, Yellen’s “6 months” comment about when rates would start to increase after QE ended was also taken as “hawkish.”

But, all that aside, not a lot really changed with regard to the Fed.  Tapering is expect to continue at the pace of $10 billion each meeting, and perhaps the expected date of the first increase in interest rates moved slightly forward from July/August 2015 to May/June 2015, but it’s not like that is a monumental shift.

Finally, last week’s housing data continued to disappoint, as both housing starts and existing home sales missed estimates and remained sluggish. The housing recovery is ongoing, and the data last week again got a “pass” because of weather. But while other measures of the economy have stabilized in Feb/March, the housing recovery continues to lose steam.  It’s a not a problem yet and likely we’ll see stabilization in the coming months, but it remains something to watch.

This Week

The most important number to watch this week already passed, as we got the Chinese flash manufacturing PMIs last night (and the European numbers this morning).

But, the March U.S. flash manufacturing PMI comes at 10 this morning, and we’ll want to see improvement similar to what we saw in Empire State and Philly last week (so, it doesn’t have to recoup all of the Jan/Feb decline, but the market will want to see the number improve, again implying weather was the reason for the steep drop over the past two months).

Outside of the flash PMIs, most of the other economic reports will continue to shed light on whether the dip in economic activity was weather-based.  Durable goods, (Wednesday) will be second-most-watched number this week, and jobless claims (Thursday) will also receive some attention for the first time in months. The recent trend has been downward in claims and, if it continues, people will start to think we’re seeing incremental improvement in the labor market.

Final Q4 GDP and Personal Income and Outlays come Thurs/Fri, respectively, but they shouldn’t move the market much. Finally, we get more insight into housing via new home sales (Tues) and pending home sales (Thurs).  As mentioned, housing seems to be the one sector not showing a bounce-back in February. While that’s likely weather-related, it’ll be encouraging to see some decent data points, especially out of pending home sales.