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Weekly Market Cheat Sheet, July 10, 2017

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Weekly Market Cheat Sheet

Last Week in Review:

Reflation on? Not just yet, but last week’s data did imply that the US economy may be starting to gain more positive momentum, which will be much to the Fed’s relief after looking past recent soft economic data. Specifically, every major economic data point released last week beat expectations, and some handily so.

Before getting to those numbers, it’s important to address the biggest market-moving event last week: The ECB meeting minutes. Anticipation of those minutes, which were mildly hawkish, caused the German bund yield to break to a multi-year high above 0.5%, and that caused an acceleration in the decline in bonds/rise in yields that ultimately resulted in the 1% decline in stocks last Thursday.

The importance of the ECB minutes (and largely all the data from last week) was that it confirmed central banks do expect better growth and inflation, and that expectation is leading them to get less dovish, which is sending global bond yields higher.

The bottom line for the ECB and the Fed remains 1) The ECB is expected to begin to taper QE in January 2018, and end it completely in mid-2018, while the Fed is expected to begin to reduce the balance sheet in September, and hike rates again in December. The events of this week reinforced those expectations, which are largely priced into stocks and bonds at this point.

Turning to the economic data, it was good last week. The jobs report was the highlight, and it was strong. Job adds in June were 222k, solidly above the 170k estimate. However, wages were a slight disappointment, up just 0.2% and 2.5% yoy, which stopped the strong jobs report from being “Too Hot.”

Looking at the other two key numbers last week, the June ISM Manufacturing PMI and ISM Non-Manufacturing PMI, they also were strong. The Manufacturing PMI surged to the best level since August 2014, rising to 57.8 vs. (E) 55.1 while the Non-Manufacturing (or service sector) PMI rose to 57.4 vs. (E) 56.5. Details of both reports were also strong, as New Orders rose, suggesting continued momentum into the summer.

To a point, the data can be taken with a grain of salt, because there’s no question the jobs market remained strong in June (the weekly claims told us that) while the PMIs are still just “soft data” in so much as it’s survey data, and not hard economic data. Still, these numbers were good, and it does reinforce that we are seeing an emerging reflation in the economy, and an emerging reflation trade in markets.

This Week’s Preview:

Normally after the jobs report the following week is pretty quiet on the economic front. Yet that’s not so this week, as we get three very important economic numbers Friday.

June CPI is the highlight of the week, and it will be an important number for markets given the recent rise in yields. Since the Fed and other global central banks expressed surprising confidence in their respective economies in June, economic data has largely reinforced that expectation.

However, now it’s inflation’s turn. If inflation metrics show a further loss of momentum, that will undercut central bank’s expectation of future inflation, and could cause at least a mild reversal in the recent reflation trade (so bond yields down, banks/small caps/cyclicals down, defensives/tech up). Conversely, if CPI is strong, it will further prove central banks were right to look past the soft data, and the reflation trade will likely accelerate. So, this will be an important number regarding sector trade, and near-term performance in the broad market.

Also on Friday we get June Retail Sales and June Industrial Production. As previously mentioned, there is still a gap between soft, survey-based data (the PMIs) and hard, actual economic numbers. Given the strength in the PMIs, expectations for better actual economic data via Retail Sales and Industrial Production now is somewhat expected.

Finally, Fed Chair Yellen gives the second of her Humphrey-Hawkins testimonies this week, and she will address the Senate Banking Committee on Wednesday and the House Financial Services Committee Thursday. The tone of her comments will obviously be closely watched, but with several years on the job, Yellen seems to have learned not to give anything away in these testimonies. Yet if her tone echoes the confidence in the economy and inflation that we saw in the June FOMC meeting, it will be at least a mild reinforcement of the reflation trade across assets (i.e. higher yields).

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Last Week and This Week in Economics, April 24, 2017

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This week and last week in economics - The sevens report

Last Week in Economics – 4.17.17

April economic data started with a bit of a thud as all three April reports missed estimates last week. And while on an absolute level the numbers imply economic activity remains “fine,” the lack of additional progress is contributing to growing doubts about the strength of expected economic reflation (and that’s why bond yields are lower than most expect).

Last week’s headline economic report, flash April Manufacturing PMI, missed expectations at 52.8 vs. (E) 53.9, and declined from the March reading. Likewise, April Empire Manufacturing and Philly Fed also missed expectations and declined from very high readings in March.

Now, to be clear, on an absolute level all three readings show continued economic growth, but again it’s the pace that matters. Stocks have priced in reflation, but the loss of momentum in economic data undermines that thesis, and that’s why stocks have grinded sideways now for six weeks.

Meanwhile, the gap between soft sentiment surveys and hard economic data remained wide. March Industrial Production beat estimates but that was only because of strong utility production given the March blizzard. The manufacturing sub-component declined and badly missed estimates, again providing non-confirmation for the still high (in absolutely terms) manufacturing PMIs.

Bottom line, economic data wasn’t outright “bad” last week, but it didn’t help reinforce the expected reflation trade, and that did at least partially stoke concerns about the pace of growth. Meanwhile, economic data didn’t help close the gap between hard and soft.

This Week in Economics – 4.24.17

The slow drip of economic data continues this week (next week is the big one), although given the precarious nature of the bond market (10-year yields signaling a potential slowdown) all economic data is at least partially important.

With that in mind, the most important number will be Friday’s Employment Cost Index. Inflation is a key component of the reflation trade, and any broader uptick in inflation has to come from increased wages. In Q1, wage data in the government jobs report wasn’t particularly strong. So, if the Employment Cost Index shows no real uptick in wage pressures, that will further undermine the reflation trade.

Other important data next week includes the first look at Q1 GDP (which will be lucky to hit 1%) and Durable Goods. Starting with GDP, it’s not going to be a strong report, but if consumer spending (PCE) is stronger than expected that will be a silver lining. Meanwhile, Durable Goods offers yet another opportunity for hard economic data to meet surging sentiment surveys, and in doing so close the gap between strong soft data and lackluster actual data. Other notable data points this week include Pending Home Sales and Existing Home Sales, both of which will be under more scrutiny following the disappointing Housing Market Index and Housing Starts numbers from last week.

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Last Week and This Week in Economics, April 17, 2017

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Week of April 17th and April 10th in Economics

Last Week in Economics – 4.10.17

The two important economic numbers came out Friday when markets were closed, so they didn’t receive much attention, although they should have. Both numbers (CPI and Retail Sales) further eroded the reflation trade thesis and will increase worries the economy is losing momentum.

Starting with retail sales, the headline on this number was plain ugly. March retail sales declined 0.2% vs. (E) 0.0%. Almost as importantly, February retail sales were revised down to -0.3% from the previous 0.1%. As longer-term readers know, we generally disregard the headline and instead look at the “control” group retail sales, which is retail sales ex autos, gasoline and building materials. That control group gives us a better read on truly discretionary spending.

Here the numbers are a bit better. Control retail sales rose 0.5% in March vs. (E) 0.3%, but February was revised lower from 0.1% to -0.2%. So, considering revisions, the March number wasn’t a beat.

Bottom line, this number is not good for stocks. Consumer spending was the engine powering the Q3/Q4 2016 economic acceleration, and the sluggishness in consumer spending now is extending beyond what we would consider normal slack following a big acceleration. These are not the kind of numbers we would see if a bigger economic acceleration is looming.

Turning to CPI, it also undermined the “reflation” trade in the near term. Headline CPI dropped -0.3% vs. (E) 0.0% while core CPI declined -0.1% vs. (E) 0.2%. Additionally, the year-over-year core CPI reading dipped from 2.3% in Feb. to 2.0% in March. This soft CPI reading isn’t a damning number, and clearly the trend of inflation is higher. Yet markets need modestly higher inflation and better growth to power stocks higher, and last week’s numbers did not suggest that’s happening.

Bottom line, this week now is very important, as it will go a long way to resolving the now-glaring discrepancy between still sluggish “hard” economic data and surging “soft” economic sentiment surveys.

Finally, to make this a bit more real, Friday’s numbers resulted in the GDP Now for Q1 dropping to just 0.5%. That type of economic growth simply cannot support stocks at these levels, and as such we should expect Friday’s data to further pressure bond yields and the dollar, which will increase stock headwinds.

This Week in Economics – 4.17.17

This week is important for markets because we will get a much more definitive answer to the question of whether the pace of economic growth is losing momentum. How that question is answered will go a long way to determining whether the S&P 500 takes out the March low of 2322, or if stocks can bounce.

To that point, the most important economic releases this week all contain March data, and the most important report will be the flash manufacturing PMIs out Friday, followed (in importance) by Empire Manufacturing (today) and Philly Fed (Thursday). The reason those numbers are so important is because it’s April data, so they will give us the most current view of the pace of economic activity in the US. If they further imply there is a loss of momentum, that will further undermine the reflation trade and hit stocks. Conversely, markets need strong data this week to help reinvigorate the reflation trade thesis.

Looking beyond those March data points, the next most important report this week is March Industrial Production. This number is important because a wide gulf still exists between “soft” sentiment -based data, and “hard” economic numbers. Industrial production is the next opportunity for some of that “hard” economic data to move higher and begin to close that gap.

Bottom line, we’re coming to a head on the debate over soft vs. hard economic data, and whether the recent economic acceleration can last. While there aren’t a lot of numbers this week, what data we do get is important to resolving that debate… and that will move markets.

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Last Week and This Week in Economics, April 3, 2017

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“Last Week and This Week in Economics”—an excerpt from today’s Sevens Report: everything you need to know about the markets in your inbox by 7am, in 7 minutes or less.

Last Week

Sevens Report - April 3, 2017 - This Week and Last WeekEconomic data was sparse again last week, but what data did come beat expectations (although it didn’t do a lot to bridge the gap between survey-based indicators and hard economic data). Still, the numbers did continue to be enough to offset growing Washington noise.

Consumer confidence was the highlight of the week, and it blew away expectations. The number rose to the highest level since summer 2001, coming in at 125.6 vs. (E) 113.8. While a strong number, that is another sentiment survey, and these soaring sentiment surveys need to start reflecting in the hard data starting in Q2 (remember, Q1 GDP is still expected to be around 1%).

The other notable number last week was Pending Home Sales, which also beat estimates, rising 5.5% vs. (E) 2.5%. The biggest takeaway from the March housing data is that it appears higher mortgage rates are not hurting the residential housing market, and that’s an important but underappreciated tailwind on the economy, generally speaking. Going forward, a stable housing market remains critical if there’s any hope to seeing a material economic acceleration.

Bottom line, the last two weeks have been light on economic data, but what numbers we’ve got have generally been good, and as a broad statement the economic data has continued to offset lack of progress in Washington… but that trend will be put to the test this week.

This Week

After two quiet weeks of economic releases, we more than make up for it this week, as the three most-important economic releases of the month all come over the next five days. From a broader context standpoint, with Washington stuck in neutral and hopes of big tax reform fading, economic data needs to stay firm to support stocks. If the data disappoints this week, don’t be surprised if we test last week’s lows.

The most important release this week is Friday’s jobs report. We will do our typical “Jobs Report Preview” later this week, but again it’s important this number is Goldilocks, in that it’s strong enough to support the market, but not so strong that it makes a May rate hike more likely.

The next most-important release this week is the global manufacturing PMIs (out today). The European and Asian numbers have already been released, and focus now turns to the March ISM Manufacturing PMI at 10 a.m. today. This number is taking on a bit more significance due to the disappointment of the flash manufacturing PMI of two weeks ago. It hit a surprise six-month low, so markets will want to see the ISM Manufacturing PMI refute that reading.

The manufacturing PMI is followed by the global manufacturing PMIs out Tuesday night/Wednesday morning. Those reports will again potentially confirm the uptick in global growth, and especially in Europe, where numbers have been strong lately. Domestically, it’s the same story. Economic data needs to support this market in the face of disappointment from Washington. Failure to do that puts this rally at risk.

The only other notable event this week will be the ECB minutes. If the minutes read hawkish, that could put a temporary headwind on HEDJ and long Europe positions. But a dip will likely be a buying opportunity in HEDJ.

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