The economic data last week became a bit of a Rorschach (ink blot) test. Depending what camp you’re in (bull or bear), you could see last week’s data as supporting your case. But, that aside, the takeaway is that nothing last week changed anyone’s expectations for economic growth domestically or internationally.
For the bears, April industrial production and retail sales both missed estimates. By themselves those data points weren’t that consequential, as they weren’t big misses. But, they were disappointing because they imply that the strong gains we saw in the economy in February and March were just part of a “bounce back” effect from the weather-related drop in December/January. And, now that the “bounce back” is over, we’re returning to the recent norm — data that imply 2% GDP growth, not 3% (which is what everyone expects and the stock market needs). So, the IP and retail sales data were taken to potentially mean we’re not seeing a sustained acceleration in economic activity.
For the bulls, while the April data were disappointing, the May data released last week were strong, implying the economy is picking up speed again. The Empire State and Philly Fed manufacturing surveys (the first two May economic releases) both beat estimates, with Empire State coming in at 19.01 vs. (E) 5.0, and Philly registering 15.4 vs. (E) 14.3. Additionally, jobless claims fell below the 300K mark (297K) for the first time since September (and only the second time for the recovery). So, the current data imply we are seeing re-acceleration in the economy.
On balance, I’d say last week went in the bears’ favor, as investors and analysts remain very, very skeptical regarding the U.S. economy’s ability to reach “escape velocity” and finally move toward 3%+ GDP growth.
That’s important because if the bears are right (and data last week does not make them right) and the economy does indeed return to the recent “new normal” of 2% GDP growth annually (and not the expected 3%), then the stock market is extended and will correct.
So, this remains an economy that is short on confidence. Despite current data coming in strong, until we see a more-extended trend, the benefit of the doubt will remain with the bears (but again, that doesn’t mean they are right).
In Europe, the big surprise last week was the weak Q1 GDP report (they can’t blame the weather). Q1 GDP was just 0.2% quarter-over-quarter vs. (E) 0.4%, and year-over-year was 0.9%.
That’s a touch weaker than the market expected (the market is expecting a little over 1% this year from the EU, so this stoked some fears about a slower than expected EU economy). But, the focus remains more on the ECB and what they’ll do next, so this one number didn’t really change the outlook.
There’s not a lot of data this week, but Wednesday night and Thursday will be important, especially given the context of the economic confidence problem we seem to have.
Wednesday/Thursday bring the May flash manufacturing PMIs, with China coming Wednesday night and the EU and U.S. Thursday morning. Again, the confidence problem isn’t limited to the U.S. There are ongoing concerns about EU growth given the soft Q1 GDP print, and obviously China remains (and will remain) an ongoing concern. So, if these flash PMIs can meet expectations or even beat, that will provide a nice confidence boost for the global economy.
Outside of the flash PMIs, the minutes from the April Fed meeting are released Wednesday, although I don’t think there will be too much revealed in those minutes (perhaps some discussion on inflation and how/when to continue to exit QE, but the policy outlook for the Fed shouldn’t change). Staying with the Fed, Chair Janet Yellen speaks Wednesday. But it’s at the NYU commencement, so I doubt there will be any revelations about monetary policy.
Finally, housing will remain in focus. The housing starts number last Friday looked a lot better than it actually was, so the market remains focused on seeing housing rebound from the winter dip like the other parts of the economy. Existing home sales come Thursday morning, while new home sales come Friday.
Bottom line: This week won’t definitively alter the outlook for the global economy, but given the continued strength in the bond market (and the potential signal it is sending), strong flash manufacturing PMIs will help give investors a badly needed boost of confidence.