WWFD (What Will the Fed Do), Is Fed “Tapering” Still on Track?

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Last Week

Economic data wasn’t the main market driver last week, as earnings have taken center stage.  But, the data was mostly positive and the big takeaway from last week is that Fed “tapering” remains very much on schedule for September.

The first look at July manufacturing data was pretty encouraging, as the Empire State Manufacturing Survey, Philly Fed Manufacturing Index and industrial production all pointed to a continued recovery in the manufacturing sector—something that, if confirmed by this week’s national manufacturing flash PMIs, would be an economic positive.

Housing was also in focus last week, but the results were more mixed than the manufacturing data.  Positively, homebuilder sentiment hit a new high, reflecting the fact that homebuilders, so far, don’t think higher interest rates will hurt the market.  Housing starts, however, had a big headline drop, which spooked some investors. However, it’s important to note that drop came from the multi-family segment.  The more-important single-family segment was basically flat month-over-month, so the number wasn’t as bad as expected.  The takeaway is that the question of whether or not higher rates might slow the housing recovery remains very much unanswered.

The one definitive negative last week was the retail sales report, which missed expectations and implies, somewhat, that the consumer might be slowing spending.  Whether consumer spending can continue through tax increases, sequestration, etc. has been a concern for some time.  And, last week’s numbers, while not definitively saying the consumer is slowing, will keep the debate, and concern, alive.  Finally, jobless claims reversed their recent increase last week (the increase was mostly due to the July Fourth holiday skewing the data), so the jobs market continues to improve at about the same pace we saw last month (which is a positive).

Internationally, there was a lot of Chinese economic data last week. Given the concern about China’s economy, it was closely watched.  But, the result was relatively anticlimactic. The data largely met reduced expectations, and 7.5% growth remains a key number to watch.  The Chinese government said they still expect ‘13 GDP growth to be 7.5%, but most believe there’s downside risk to that number.  If expected GDP growth drops below 7.5% and moves toward 7%, that’ll be a headwind for commodities and global equities.  So, the situation in China remains precarious.

Again, the main takeaway from the data last week was that nothing was released that changed the current expectation of Fed “tapering” to begin in September.

This Week

The highlight of the week undoubtedly will be the global “flash” manufacturing PMIs released in China (Tuesday night) and Europe and the U.S. (Wednesday morning).  The international data will be more market-moving than the U.S. data. In particular, markets will be looking for:

1) Stabilization of the Chinese manufacturing sector  (so the PMI doesn’t fall much further than last month’s 48.3).

2) An uptick in growth in the EU manufacturing sector (so an uptick from last month’s 48.7).

If the data reflect both those events, it’ll be a tailwind for stocks and commodities, and vice-versa.

Looking domestically, housing and manufacturing continue to be the key areas of focus this week.  Given the uncertain nature about the housing recovery, existing home sales (today) and new home sales (Wednesday) will be closely watched for more color on whether higher rates are slowing the housing market.  In manufacturing, June durable goods are released, and are expected to give further insight as to whether we are seeing a growing recovery in manufacturing.

Finally, weekly unemployment claims will be monitored to make sure they “stick” at current low levels, and that the spike higher in early July was indeed a one-off July Fourth statistical aberration.

While the international PMIs this week are pretty important with regard to sentiment toward China and Europe, domestically the data is more anecdotal with regard to WWFD. Nothing on its own this week will likely alter the present course of Fed “tapering” unless there is a big negative surprise.