Monday Update: More of the Same

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Jun 20, 2016 2:55:56 PM

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monday updateSpanning the whole economy, last week’s reports were positive overall but mostly more of the same. Manufacturing continues to slog along with no indications of recovery, despite the first signs of stabilization in the oil-drilling sector. Retail sales, on the other hand, show the consumer driving even faster economic growth.

Last week’s data

Retail sales beat expectations. The retail sales report came out on Tuesday—an important indicator of whether or not Americans continued to spend in the face of a possible job-growth slowdown.

  • Headline retail sales beat expectations, increasing 0.5 percent versus an expected healthy gain of 0.3 percent. Although down from last month’s exceptional 1.3-percent figure, the headline number remains very strong.
  • Core retail sales, excluding gas, autos, and building materials, met expectations, increasing by 0.4 percent in May. The previous month was also revised up to a gain of 1 percent.

With the three-month annualized gain exceeding 5 percent, retail sales should continue to bolster economic growth.

Industrial and manufacturing sectors struggle. Industrial production numbers fell short of expectations, with a drop of 0.4 percent instead of 0.2 percent for overall industrial output. The loss included a pullback in utility output as weather normalized after an unusual April, but it was primarily due to an unexpected slump in manufacturing output. This wasn’t a complete surprise, as the drop in hours worked in this sector suggested a decline, as did the weakness in regional surveys. Good news included a small recovery in mining and drilling, the first increase since last August.

Housing data more positive. The National Association of Home Builders survey on Thursday surprised to the upside, with an increase to 60 from 58, beating expectations of a smaller increase to 59. Expected home sales were particularly strong, with the largest increase since last October. Housing starts were down slightly, from 1.172 million to 1.164 million, but still beat expectations of 1.15 million. Following a surge in the previous month, the slight decrease is not particularly concerning, especially as the actual number beat expectations and as building permits rose for the second month in a row.

Inflation holds steady. Consumer price data remained substantially unchanged from last month. Headline inflation growth dropped slightly, from 0.4 percent to 0.2 percent, and also dropped slightly over the past year, from 1.1 percent to 1 percent. Core inflation, excluding energy and food, remained at 0.2 percent monthly and rose slightly from 2.1 percent to 2.2 percent over the past year.

Fed doesn’t make a move. The Federal Open Market Committee met last week, and, as expected after the last jobs report, no rate increase was announced. The real news was in the statement released after the meeting and in Janet Yellen’s press conference. Both seemed substantially more dovish than prior statements, indicating that the Fed may be reluctant to raise rates. Markets immediately took down the chances of multiple rate hikes for 2016 substantially.

A look at the week ahead

This week, we’ll see two housing reports, a business report, and two other events of significance.

Housing. Sales of existing homes will be released Wednesday, followed by sales of new homes on Thursday.

  • Existing home sales are expected to increase from 5.45 million to 5.55 million, a strong gain possibly driven by expectations of higher mortgage rates. In any case, such an increase would signal continued strong effective demand.
  • New home sales are expected to drop back, from 619,000 to 565,000—a normal adjustment after a shocking increase last month. This result would still signify strong demand.

If expectations are met, housing will continue to help drive economic growth.

Durable goods orders. Durable goods orders are expected to decline, from an April increase of 3.4 percent to a decline of 0.8 percent for the headline index, and from an April increase of 0.5 percent to a gain of 0.1 percent for the core index, which excludes transportation. The decline in the headline number reflects the very volatile sales of commercial aircraft and is therefore less concerning. The expected continued slow growth of the core index shows that, although the sector may be stabilizing, growth is not happening yet. These numbers would continue the weak trend for the industrial and manufacturing sectors that we've been seeing for months.

Yellen’s testimony. Federal Reserve Chair Yellen will testify before Congress Tuesday and Wednesday. Since last week’s Fed meeting and press conference, essentially nothing has changed, which should mean there will be little new information. But as always, markets will be watching just in case.

Brexit. The more important event will be the UK's referendum on whether or not to leave the European Union. Polls have swung back toward Remain, but the issue remains close. A successful Leave vote could rock financial markets around the world on Thursday and Friday.

Have a great week!

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