Monday Update: Brexit Raises Economic Risks

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Jun 27, 2016 3:23:09 PM

and tagged In the News

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brexitLast week's economic news fell below expectations across the board. Although housing markets continued to grow, there are potential signs of slowing, and business spending continues to be weak. Of course, the big news of the week—Britain’s decision to leave the EU—will probably exacerbate that weakness, even if it is unlikely to drive the U.S. into a recession.

Last week’s news

Home sales disappoint but still strong. Existing home sales moved up slightly, from a downwardly revised 5.43 million to 5.45 million, but failed to meet expectations of 5.55 million. This was the third increase in a row, however, and the shortfall may have been due to a lack of supply rather than a lack of demand, as inventory was down almost 6 percent from a year ago and marketing times were the shortest since May 2011, when the data started being tracked.

New home sales also fell short, down to 551,000 from 619,000, and shy of expectations of 560,000. Nonetheless, this was considered a normal adjustment after a shocking increase last month and still signifies strong demand.

Durable goods orders weak. Durable goods orders disappointed significantly. Headline orders were down 2.2 percent, from a revised April increase of 3.3 percent, and much worse than expectations for a decline of 0.5 percent. Core orders, excluding transportation, declined by 0.3 percent, down from an April gain of 0.5 percent and below expectations for a gain of 0.1 percent.

The headline number reflects the very volatile sales of commercial aircraft and is therefore less concerning, but the drop in the core index shows that this sector may not be stabilizing after all. These numbers continue the weak trend for the industrial and manufacturing sectors that we have been seeing for months.

No news from Fed, big news from Britain. As expected, Janet Yellen’s testimony before Congress provided little new information. The Federal Reserve chair essentially repeated the comments from the post-FOMC press conference, and markets yawned.

Markets had the opposite reaction to the United Kingdom's surprise decision to leave the European Union. Expectations were for Remain to prevail, but older voters swung the total toward Leave. Shocked by the decision, markets have dropped dramatically around the world while currency markets have shown unprecedented volatility. As I noted last week, this is a story that will play out over months and years

A look at the week ahead

The focus will be back on the consumer for most of this week, with a look at the manufacturing and industrial sectors toward week-end.  

The Conference Board’s survey of consumer confidence will be released on Tuesday, with an expected small increase from 92.6 to 93.1. There is upside potential here, as many factors that affect confidence have moved in positive directions recently, but even meeting expectations would be reassuring.

The personal income and spending reports will be released on Wednesday, validating (or not) the consumer confidence numbers. Expectations are for income growth to drop slightly, from 0.4 percent in April to 0.3 percent for May, as job gains dropped but hours worked and wage growth continued. Personal spending is expected to pull back from the massive 1-percent gain in April to around 0.3 percent—still a healthy growth level.  

Finally, on Friday, the ISM Manufacturing Index is expected to improve very slightly, from 51.3 to 51.5. Numbers above 50 indicate growth, so this would be a positive result despite indicating very weak expansion—or in other words, more of the same.

Have a great week!

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