KEY DATA: Confidence: +1.7 points/ Phil. Fed (NonMan.): -3.5 points/ Home Sales: +4%/ Home Prices (Over-Year): +6.3%
IN A NUTSHELL: “The economy seems to be settling into a solid but not spectacular growth pattern.”
WHAT IT MEANS: Consumers are upbeat, earnings are solid and the housing market is decent, so there is little to worry about, right? Yes, though the economy is hardly booming along. Households were more upbeat in April as the Conference Board’s Consumer Confidence Index ticked up after having declined in March. Both the Present Conditions and Expectations Indices improved a touch. Respondents thought jobs were still plentiful, though not as much as they had been. Still, they are confident that there will be more jobs in the future.
The Philadelphia Fed reported that non-manufacturing activity in the Mid-Atlantic region continued to expand solidly in April. That said, the pace of growth was down from March and the index level isn’t that high. There were some warning signs in the report. Hiring is slowing, costs are rising and prices are still going up. Pricing power is not great, but it looks like it is enough for firms to continue pushing through higher prices in the future.
New home sales continued on their upward trend in March despite a halving of sales in the Northeast. I guess people couldn’t make it to building sites in the snow. Sales boomed in the West and that made up for the drop in the Northeast and a moderate falloff in the Midwest. Despite solid sales in February and March, developers are still not going out and building like crazy. The supply of homes for supply is relatively low and that could constrain sales.
The S&P CoreLogic Case Shiller home price index rose solidly in February and the year-over-year gain showed that the price increases continue to accelerate. All of the twenty large cities in the survey posted gains of at least 0.5% over the month.
MARKETS AND FED POLICY IMPLICATIONS: The economy is moving forward, which should surprise no one. It was already in good shape and then Congress passed massive tax cuts and a huge spending bill, so there was little doubt we would have a good year. But no good economy goes unpunished and interest rates continue to rise. The 10-year Treasury note posted a 3-handle for a little while today and while that is still quite low, for many it is a bit of a shock. The rate has increased nearly three-quarters of a percentage point in the last six months and with inflation slowly accelerating and energy costs rising, there is little reason to think it will not continue to move upward. That said, 3% is hardly a high rate, historically speaking. But to the extent that the Fed will consider the fiscal stimulus, rising inflation and increasing rates as signs that the economy is getting a little hot, we should expect the FOMC to continue its rate-normalization process. As for investors, as long s there are strong earnings, the higher interest rates may not matter that much. The good but not great economic data, coupled with the higher rates, are warnings that earnings that are economy-driven, not tax cut-created, may be harder to come by in the future.