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Is Bad Economic Data Good For Stocks Now?

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What’s in Today’s Report:

  • Is Bad Economic Data Good For Stocks Now?  No.
  • EIA Analysis and Oil Market Update

S&P 500 futures are solidly higher thanks to strength in tech following very strong NVDA earnings.

NVDA beat earnings estimates and raised guidance on strong AI chip demand and the stock is up 8% pre-market and boosting Nasdaq and S&P 500 futures.

However, the “non-tech” parts of the market are flat to down as investors digest Wednesday’s disappointing economic data.

Today another AI driven rally in tech, following the NVDA earnings, should help support markets.  But, away from tech, markets will be focused on Jobless Claims (242K) and Durable Goods (E: -4.0%), and again the key here is stability, in that the data doesn’t show a sudden deterioration in activity (so spike in claims, drop in Durable Goods) or extreme strength (which would undo yesterday’s Treasury yield decline and weigh on the markets).

Core PCE Price Index Preview (Good, Bad & Ugly).

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What’s in Today’s Report:

  • What the Core PCE Price Index Will Mean for Markets (Good, Bad & Ugly)
  • EIA and Oil Market Analysis

Futures are moderately lower mostly on positioning ahead of the Core PCE Price Index release but also in reaction to disappointing EU economic data.

German GDP underwhelmed and fell –0.4% vs. (E) -0.2% while Gfk Consumer Climate also slightly missed estimates (-30.5 vs. (E) -30.4).

Today, focus will be on inflation and the key report is the Core PCE Price Index (E: 0.4% m/m, 4.3% y/y).  We have a full Core PCE Price Index preview in the Report, but generally speaking, if the numbers are below expectations, it’ll spark a rally, if they are around expectations that’s mostly priced in, and if Core PCE is higher than last month, prepare for a selloff.

Other data today includes Personal Incomes and Outlays (E: 1.0%, 1.2%), , New Home Sales (E: 617K) and Consumer Sentiment (E: 66.4), but barring a move in five year inflation expectations above 3% none of those reports should move markets.

Finally, we also have two Fed speakers today, Mester (10:15 a.m. ET) and Collins (1:30 p.m. ET).

What the CPI Data Means for Markets

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What’s in Today’s Report:

  • What the CPI Means for Markets
  • CPI Data Takeaways
  • How Will Russia’s Production Cut and the New SPR Release Impact Oil Markets?

U.S. equity futures are lower despite a stable Treasury market and better-than-feared inflation data overseas as investors continued to assess post-CPI Fed policy expectations.

U.K. CPI fell to 10.1% vs. (E) 10.3% in January down from 10.5% in December which sent the pound lower. Despite the bigger than expected drop, however, inflation remains far too high in the U.K. and more aggressive policy will be warranted to get price pressures back down towards the BOE’s target over time.

Today, focus will be on economic data as there are several important reports due to be released including: Retail Sales (E: 1.7%), Empire State Manufacturing Index (E: -18.5), Industrial Production (E: 0.5%), and the Housing Market Index (E: 37).

As has been the case lately, investors will be looking for signs of moderation in growth metrics (but not an all out collapse) and faster declining price readings to keep the hopes of a soft/no landing alive. Otherwise, it will be difficult for stocks to resume their 2023 advance.

There are no Fed officials scheduled to speak today but there is a 20-Yr Treasury Bond auction at 1:00 p.m. ET and if demand is weak and yields begin to add to yesterday’s upward moves, stocks could come for sale.

Why There’s Some Cause for (Cautious) Optimism

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What’s in Today’s Report:

  • Why There’s Some Cause for Cautious Optimism

Futures are slightly lower following a quiet night of news as markets digest Thursday’s rally.

Economically the only notable number was the UK Home Price Index, which like the U.S. readings this week saw smaller than expected declines, falling –0.1% vs. (E) -0.7%.

Geopolitically, Russia continued Thursday’s missile bombardment of Ukraine is a clear signal that fighting will rage on as the New Year begins.

Trading today will be dominated by book squaring and year-end positioning but there is one notable economic report, Chicago PMI (E: 41.0), and if it’s weak it could weigh on markets moderately.

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.

Time is money. Spend more time making money and less time researching markets every day.