It’s a Holiday Shortened Week, but the Economic Data Will be Market Moving

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Economics

Last Week

Last week was a mixed week of generally “second tier” economic data.  Positively, housing data continues to confirm the recovery in the housing market is still accelerating.  New home sales, Case-Shiller and pending home sales all beat expectations, although again the strong data is being taken with a small grain of salt as this doesn’t reflect higher mortgage rates, and next month’s housing data will be very closely watched for any negative effect of these higher rates.

Also last week, manufacturing data continued to imply we may finally be seeing a stabilization of activity in manufacturing, after a several month bleed lower.  Durable goods beat expectations  and new orders for non-defense capital goods excluding aircraft rose 1.1% in May.  That data comes on the heels of decent Empire and Philly Fed manufacturing surveys for June, so there are some signs that manufacturing activity may finally be picking up.

The data wasn’t all good, though, as consumption and personal spending disappointed.  First, the big headline of the week was the surprise drop in Q1 GDP to 1.8% from the previous estimate of 2.4%.  The drop was due to a reduction in PCE (personal spending).  But, that decline was based almost entirely on a reduction in the purchase of healthcare and “other” services (so it wasn’t because retail sales declined sharply).  But, it’s still not a revision that is welcomed by the market.

Then, on Thursday of last week the personal spending numbers for May were in line with expectations, but there was disappointment in the revision of the April data, which went from a positive 0.1% increase from March to a –0.1% decrease.

The takeaway is that while the consumer has been resilient, whether or not consumer spending can stay at current levels remains a worry for the market, given the headwinds of rising healthcare costs and taxes.

This Week

As mentioned, despite there being only 3 1/2 trading days this week, there’s a lot of important economic data packed in.

First, it’s jobs week.  So, we’ll get the ADP and Challenger reports Wednesday, and then the government number Friday.  Obviously, given the changing perceptions of Fed policy over the past few weeks, and resulting market turmoil, the jobs report will be very closely watched.

Second, we get a final look at June PMIs (both manufacturing and services).  Chinese and European manufacturing PMIs for June were released this morning.  The Chinese numbers were weaker than expected, although the focus there is more on liquidity than manufacturing activity at the moment, while the European numbers were little changed from the “flash” estimates of two weeks ago, which implied some stabilization in the EU economy.

Domestically, manufacturing PMIs are released this morning, and then global “composite” PMIs, which combine manufacturing and the service sector, will be released Tuesday night (China) and Wednesday morning (EU & US).

Finally, there are European Central Bank and Bank of England rate decisions Thursday.  There is no change expected from either bank with regards to rates or their QE programs.  But, given turmoil in debt markets recently, comments from Draghi in particular will be closely watched.  At the moment, though, both of these meeting look to be relatively run of the mill.

The important thing to remember this week is that with regards to the economic data, “good is good.”  The Fed seems determined to begin tapering “QE” this fall and based on the rhetoric, it’ll take a steep drop in the economic data to alter that present course.  So, for the rally to survive “tapering” the economic data needs to steadily improve between now and this fall, when accommodation begins to be removed.  1.8% GDP isn’t going to get it done for an equity market up nearly 13% in 6 months.  So, the economic data needs to get decidedly stronger, starting now.