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Weekly Market Cheat Sheet, August 28, 2017

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Last Week in Review

There were only two notable economic reports last week, and neither were particularly controversial… and neither did anything to change the current market expectation of 1) High 2% to low 3% GDP growth in Q3, or 2) Fed reduction of the balance sheet in September.

Neither data point gave us any incremental color on whether the Fed will hike rates in December, although
we’ll get a lot more color on that issue this week. Looking at the data, the most important number last week was the August flash composite PMIs. The headline number beat at 56 vs. (E) 54.3, but that strong aggregate number hid some pretty significant discrepancies in the details.

The reason the PMIs beat was because of a surge in service companies. Flash service sector PMI rose to 56.9 vs. 54.8. But, the more important manufacturing PMI dropped to 52.5 vs. 53.2 (the manufacturing PMI is just a better reading of activity, so it’s more heavily weighted in the minds of economists).

So, despite the headline beat, this number was actually a disappointment, although I want to be clear that it was not an outright negative (PMIs need to drop below 50 before they imply economic activity is slowing). Bottom line, this is not the type of August reading that would make us think we’re seeing an economic acceleration.

Turning to Durable Goods, they were in line. Yes, the headline reading missed expectations as orders for Durable Goods fell -6.8% vs. (E) -5.8%. But, longer-time readers of this Report know you should ignore the headline as it’s massively skewed by airplane orders. The more important number is New Orders for Non-Defense Capital Goods ex Aircraft (NDCGXA) and it rose 0.4% vs. (E) 0.5%, although June data was revised 0.1% higher, so it was an in-line reading.

Again, we watch NDCGXA because it’s the best proxy for business spending and investment. And, similar to the flash PMI, while the number isn’t an outright negative, it’s not the kind of number that makes us think a broad economic acceleration is coming.

Bottom line, both numbers last week implied continued steady, but unspectacular, economic growth, and that’s simply not enough to cause a rising.

This Week’s Preview

This will be one of the busiest weeks of the year from an economic data standpoint, and it will come during one of the lowest liquidity weeks of the year… so the potential for data-based volatility this week is high.

The key reports this week (in order of importance) are: Jobs Report (Friday), Personal Income and Outlays (Thursday) and Global Manufacturing PMIs (Thursday night/Friday morning).

The reason those reports are ranked like that is because of inflation. Remember, barring a shockingly week Jobs Report on Friday, nothing is going to stop the Fed from reducing the balance sheet in September.

But, whether they hike rates in December remains uncertain, and the key variable that will decide that is inflation. So, that means that the wage number in Friday’s Jobs Report, and the Core PCE Price Index (the Fed’s preferred measure of inflation, which is contained in the Personal Income and Outlays report) will be the two key numbers this week.

If they run hotter than expected, you will see markets begin to price in the chance of a December rate hike, which would likely be a near-term headwind on stocks as a rate hike is not priced in to bond yields, the dollar or equities.

Turning to measures of economic growth, the August manufacturing PMIs are always important, but again there really shouldn’t be any major surprises here. A firm number in the US that refuted the soft flash PMI from last week would be welcomed as we need better growth to push stocks higher, but really the focus will be on inflation this week.

Looking at the dovish possibilities, we could easily see the data this week push the 10-year Treasury yield to new lows if the inflation data is underwhelming, and we would view that as a negative for stocks broadly.

Bottom line, I know this is a heavy vacation week, but it’s important one for Fed and ECB expectations, and that has the potential to move markets, especially given the precarious technical situation the S&P 500 is sitting in.

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Weekly Market Cheat Sheet, July 31, 2017

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Last Week in Review

Data has been remarkably consistent the last few weeks, including last week: “OK” but not great economic growth, and consistent signs that inflation is losing momentum. As such, the economic data continues to point to a “Stagnation” set up for stocks and other assets.

Given that inflation trends are more important than growth trends right now, I’ll start with the Quarterly Employment Cost Index, which, like many other inflation indicators in Q2, slightly missed estimates. The Q2 ECI rose 0.5% vs. (E) 0.6, maintaining a 2.4% yoy increase from Q1, but slightly disappointing vs. expectations.

Additionally on Friday, the PCE Price Indices from the Q2 GDP report showed deceleration in the pace of inflation. The PCE Price Index rose just 1% in Q2 vs. (E) 1.2%. Now, none of these inflation statistics are particularly bad. Yet from a policy standpoint, these numbers won’t make the Fed eager to tighten policy ahead of the current schedule (balance sheet reduction in September, rate hike, probably, in December).

Turning to actual growth data, it was “ok” but not great. Q2 GDP met expectations with a 2.6% yoy gain, and that was a true number as Final Sales of Domestic Product (which is GDP less inventories) was also 2.6%. Consumer Spending, or PCE as it’s known in the GDP report, rose 2.8%, again a solid but unspectacular number.

Similarly, June Durable Goods, while a decent report, wasn’t that strong. The headline was a big beat at 6.5% vs. (E) 3.5%, but that was because of one-time airline orders. New Orders for Non-Defense Capital Goods ex-aircraft, the best proxy for corporate spending and investment, was revised higher in May but dipped 0.1% in June.

Point being, like most growth data recently, it wasn’t a bad report, but it’s not the kind of strength that will spur a reflationary rally.

Finally, the one economic data point that was strong last week was the July flash manufacturing PMI. It rose to 54.2 vs. (E) 53.2, but while that is a potential positive (it’s a July report so it’s the most current) the PMIs are surveys, and the gap between soft survey data and “hard” economic numbers remains wide.

Turning to the Fed meeting last week, the two takeaways were: 1) The Fed confirmed that they will reduce the balance sheet in September, barring any big economic or inflation surprises. 2) The Fed did slightly downgrade the inflation outlook, but importantly it kept open the option to hike rates at any meeting, and as such a December rate hike is still likely).

This Week’s Preview

As stated, inflation is more important than growth data right now, so that means two most important numbers this week will be tomorrow’s Core PCE Price Index (contained in the Personal Income and Outlays report) and Friday’s wage data in the jobs report.

Stocks have rallied since Yellen turned incrementally dovish at her Humphrey-Hawkins testimony, and soft inflation data will further that sentiment and underpin stocks.

Conversely, if we see inflation bounce back, that will push bond yields higher and help reflation assets (banks, small caps, inverse bond funds, cyclicals).

But, inflation stats aren’t the only important numbers this week as we get the latest final manufacturing and composite US and global PMIs. They remain important because they will provide anecdotal insight into the pace of the US and global economy. But again, it would be a pretty big surprise if the data suddenly showed slowing in the global economy.

On the flip side, at least for the US, a strong report would be welcome, because strong economic data won’t cause the Fed to get more “hawkish” unless inflation ticks higher.

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Weekly Market Cheat Sheet, July 24, 2017

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Last Week in Review

The economic calendar picks up this week beginning with the flash PMI today (9:45 a.m. ET), as we continue to get an initial look at the July data. So far, the data has been a bit underwhelming as both the Empire and Philly Fed surveys came in light last week.

As far as hard data goes, Durable Goods comes out Thursday, and the preliminary second-quarter GDP number comes out Friday.

Housing data also picks up this week, and after last week’s mixed results (remember the Housing Market Index missed but Housing Starts was solid) economists will be looking for a better read on the current status of the real estate market. The two big reports this week are Existing Home Sales on Monday, and New Home Sales on Wednesday. However, the S&P CoreLogic Case-Shiller HPI also will be worth watching (due out Tuesday). If the housing data is more in line with the strong Housing Starts data we saw last week, that will be an underlying positive for the economy and supportive for risk assets near term.

Turning to the central banks, the FOMC meets Tuesday and Wednesday, and the meeting will be concluded with an announcement on Wednesday at 2:00 p.m. There are no material changes expected to come from the meeting, and it would be a shock if rates were not left unchanged. There is no press conference or forecasts released with this meeting, but language in the statement will be closely watched for any further clues on the Fed’s plans to reduce the balance sheet, or on when rates will be raised. Right now, expectations are for a December hike, but based on the trend in other central bank rhetoric the risk is for a dovish development due to the complete lack of inflation acceleration.

This Week’s Preview

Economic data was thin last week, but we did get our first look at July data in the form of regional Fed outlook surveys as well as a few reports on the housing markets.

Beginning with the Fed surveys, the Empire State Manufacturing Survey was released on Monday, and despite the bad headline it was not a terrible report. The headline missed estimates (9.8 vs. E: 15.0), but the forward looking New Orders component remained solidly above 13. The reason the report was not that bad was the fact that it had started to run hot at unsustainable level recently, and was due for a dip. And the correction we saw in the June data wasn’t too deep, and the details remained encouraging.

The Philly Fed Survey out on Thursday was not as bad a miss as the Empire data on the headline (19.5 vs. E: 22.0), but the details definitely dimmed the outlook for the Mid-Atlantic manufacturing sector. The forward-looking component of the report, New Orders, fell more than 20 points to just 2.1. The survey Philly data last week finally started to show a decline in enthusiasm from the extremely strong survey reports we’ve seen since the election. If these reports are foreshadowing a pullback in the broader US economy, that would be very bad for stocks, as solid growth is still priced into the market at current levels.

Housing data was mixed last week as the Housing Market Index missed expectations, but Housing Starts and Permits were very solid. Data on the real estate market has been all over the place recently, and it will take more data to try to decipher where the trends actually are in the sector. But if the strong Starts and Permits data from last week are any indication (this is a more material data point than the Housing Market Index) that will be a sign of confidence in the US economy.

Lastly, jobless claims were very solid last week as new claims fell back towards a four-decade low. The very positive weekly report was significant, because the data collected corresponds with the survey week for the July BLS Employment report. So, based on jobless claims alone we can expect another very strong official employment report early next month.

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