Economic data last week was generally in-line with expectations, and ahead of this critical week, none of the data materially shifted the current consensus expectation for slowly rebounding global growth or Fed policy.
The “highlight” of last week was the revised Q1 GDP report, which missed expectations and showed a 1% annual growth rate—the first negative reading in three years. But, as usual, the devil is in the details.
Despite the bad headline, the GDP report wasn’t all that bad. PCE (consumer spending) was revised +0.1% higher to 3.1%, while final sales of domestic product (GDP excluding inventories) was little-changed.
The big drop in headline GDP came from inventory depletion (which will be a tailwind for Q2 GDP as manufacturers have to re-stock) and from increased exports (which obviously isn’t an economic negative, either).
So, while certainly this wasn’t a good report, the market didn’t really focus on it that much because the details were better than the headline, and economic data since Q2 started 2+ months ago has trended better.
Speaking of which, the more timely data points released last week were generally “OK” and reflective of a U.S. economy that is seeing the recovery slowly accelerate. April durable goods were a mixed bag—the key sub component, non-defense capital goods ex-aircraft, declined slightly. But that was following a sharply revised higher gain in March, which more than offset the decline in April. So, net-net it wasn’t a bad number.
The other report, April pending home sales, grew at 0.4% vs. 1.0% expectations. While that was a “miss,” the important thing was that there was further improvement in sales. And, it’s now safe to say that the April housing data implied that housing may finally be joining other parts of the economy in rebounding from the winter dip.
Finally, there was one other number last week that I want to point out. In Friday’s Personal Income and Outlays report, the “Core PCE Price Index” (the Fed’s preferred measure of inflation) showed a year-over-year increase of 1.4%, up from 1.2% in March.
That number hit expectations and remains well-below the Fed’s 2% “target,” but I point it out because it’s another piece of anecdotal evidence that inflation is slowly starting to tick higher. And, an uptick in inflation would be a significant shock to the market, as it would have implications for Fed policy that no one is pricing in right now.
So, in an effort to point out what’s in “left field” so we don’t get blindsided, an uptick in inflation remains a potentially surprising occurrence to watch for.
Turning back to the economy at large, the bottom line is nothing last week (internationally or domestically) changed the outlook for U.S., Chinese or EU growth heading into this critical week.
This is a big week as we will (hopefully) finally have some clarity on what the European Central Bank is going to do about its dis-inflation problem. We’ll also get more data that (hopefully) confirms the market’s expectations for the major economies: stabilization of growth in China, continued slow recovery in Europe and acceleration of the recovery in the US.
The biggest event all week is the ECB meeting—and its announcement on Thursday, June 5—where the market will finally see what the central bank plans to do to help spur growth.
I’ll preview what to expect as we get closer to announcement, but this is critical in regard to the recent bond rally … and for the potential of a bond sell-off to become a tailwind on stocks.
As a preview to the ECB meeting Thursday, we get the “flash” EMU HICP reading tomorrow. HICP is critical because it’s reflective of the dis-inflation threat in the EU. If this number remains low (well below 1% year-over-year), then it’ll put more pressure on the ECB to act forcefully on Thursday.
Outside of the ECB, it’s also “jobs week” here in the U.S. So, we get ADP Wednesday, claims Thursday and the government report Friday. This report isn’t as critical as previous reports have been, because it would take either a huge number or a total disaster to potentially alter the course of Fed tapering. But for a market constantly needing positive reinforcement that the economy is actually getting better, the jobs number matters.
We also get the May final global PMIs this week. Manufacturing PMIs for Asia and Europe were out this morning, while we get the U.S. ISM manufacturing PMI at 10 AM, and the global composite and U.S. non-manufacturing PMIs Wednesday.
Again, these numbers represent an opportunity for the market (and investors) to become more confident about the global economy, and to confirm the current growth outlook for each region.
Bottom line is this week could be quite critical to the market. The two large “unknowns” to the market at the moment are “What will the ECB do?” and “Is the global recovery for real?” Data this week will help to more definitively answer those questions. If things go well, we could see a new tailwind for stocks.