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June Existing Home Sales

KEY DATA: Sales: +3.2%; Prices: +6.5%

IN A NUTSHELL: “Dear Janet: The housing and labor markets are in great shape, so what are you waiting for? Your friend. –Joel”

WHAT IT MEANS: Well, so much for issues with the housing market. Yes, conditions weakened early this year but are there any doubts left that the problems were weather related? I don’t think so. Housing starts and permits jumped in June and existing home sales did the same. The National Association of Realtors reported that home sales hit its highest annualized rate since early 2007. All parts of the country took part in the party. Since June, demand is up by nearly 10%, with every region posting an increase of 7% or more over the year.   While sales are rising, inventories are barely budging and that mismatch is having the expected impact: Prices are soaring. Indeed, the median cost of an existing home hit its highest level on record. And with mortgage applications up solidly over the year, it looks like the housing market surge will be sustained.

MARKETS AND FED POLICY IMPLICATIONS: The FOMC meets next Tuesday and Wednesday and while there is almost no chance (I never say never when it comes to the Fed) that a rate hike will be announced, that doesn’t mean some serious signals that the Fed will finally pull the trigger will not be sent. We do get two more jobs reports and the second quarter GDP numbers before the September 16-17 meeting, so there is still some uncertainty about a move, but the odds of an increase continue to rise. If we see payroll increases in the 225,000 to 250,000 range in July and August, even just one downtick in the unemployment rate and any acceleration in wages, it will be hard for the Fed to say they need to see more good news. What would they be waiting for? Not a recovery in housing. That is here and indeed the issue is rising prices, not weak demand. Consumer spending? If wages keep rising, can retail spending be far behind? We may not have robust growth, but it is clearly solid enough to absorb a rise in short-term rates from 0% to 0.25%. I mean, seriously people, would that really crash the economy? A rate hike in September looks more and more likely.

July Home Builders Index, Philadelphia Fed Manufacturing Survey and Weekly Jobless Claims

KEY DATA: NAHB: 60 (unchanged)/ Phil. Fed: -9.5 points/ Claims: down 15,000

IN A NUTSHELL: “The housing sector is moving to the forefront and if manufacturing can ever get its act back together, this economy could really accelerate.”

WHAT IT MEANS: The economy continues to expand at a moderate pace even as we would like to see it grow more rapidly. One of the factors in this decent but not great expansion has been a rotation in sector leadership rather than broad based growth. Housing has been a laggard, but that looks like it is changing rapidly. The National Association of Home Builders/Wells Fargo Housing Market Index is now at a level not seen since November 2005. From January 2001 to December 2005, the housing bubble period, the index averaged 63. Given that the current reading is 60, it appears that builders are getting bulled up once again. We are not talking a new bubble here, but we are looking at significant gains in activity, especially in the single-family segment. Also, it looks like the long-suffering Northeast will be seeing a lot more construction as that region’s index has finally broke into the black.

While housing is coming back, manufacturing continues to decelerate. The Philadelphia Fed’s manufacturing index dropped sharply in July. The sector is still growing, but not strongly. And with backlogs going nowhere and payrolls largely flat, it doesn’t look as if manufacturers in the Philadelphia region will be ramping up production soon. Confidence about the future is picking up, but it is still below recent high levels.

On the labor market front, last week new unemployment claims jumped, raising questions about future job gains. Well, never mind. This week, most of the rise was wiped out. While the level is still a touch higher than it had been for much of the past year, it is now back to where solid job gains should be expected.

MARKETS AND FED POLICY IMPLICATIONS: Fed Chair Yellen keeps repeating that a rate hike is coming, probably this year. She also keeps warning that the first one doesn’t matter: It is the pathway going forward that is critical. But markets keep focusing on hike number one and the data keep telling us that it is unclear which meeting this year it will occur. I have not ruled out September, as I believe the labor market data, including compensation gains, will be strong enough to convince the members that the economy can absorb a rate hike. In particular, follow the compensation numbers reported in the quarterly Employment Cost Index. Second quarter data will be released on July 31st. These data are much more comprehensive than the monthly hourly wage numbers and have been accelerating.   If that pick-up continues, and the unemployment rate falls even a little over the next two months preceding the September 16-17 FOMC meeting, the Fed could consider making its first move then. As for investors, when you get divergent economic numbers, the best thing is to punt, especially since earnings are coming out.

June Retail Sales, Import and Export Prices and Small Business Optimism

KEY DATA: Sales: -0.3%; Excluding Vehicles: -0.1%/ Import Prices: -0.1%; Nonfuel: -0.2%; Export Prices: -0.2%; Farm: -1.5%/ NFIB: -4.2 points

IN A NUTSHELL: “With consumers not buying, inflation decelerating and small businesses worried, the greatly expected second half boom may turn out to be a little less robust.”

WHAT IT MEANS: While not all economic indicators were showing a rapid recovery, there were many signs that the economy was really picking up some speed. Well, it might be time to sit back and rethink this a bit. May retail sales were robust and while June vehicle demand was strong, it was below the huge May sales pace. So most economists, including myself, expected consumer spending to grow minimally in June. Well, it didn’t. Instead, demand declined, even when vehicles were excluded. Sales at electronics, appliances and general merchandise stores were pretty solid, but demand for furniture, clothing, building materials was off, we didn’t buy anything online and we didn’t go out to eat. Weird. Worse, gasoline purchases rose and that was likely due to a rise in prices. In other words, this was not a very good report.

The gap between the Fed’s inflation target and the inflation rate has been widening slowly and today’s import price report indicates that trend could continue. Import prices fell in spite of an increase in energy costs. Food costs dropped sharply, while consumer and capital goods as well as vehicle prices were flat. Only energy related products showed a rise. On the export side, prices fell as well and the long-suffering agricultural sector continued to see its prices drop.

As for small businesses, confidence took a major hit last month. It had risen back to normal levels in May, but it seems June was a bummer, reflecting the lack of consumer spending we saw in the retail sales report. Firms didn’t hire anybody and kept wages stable.

MARKETS AND FED POLICY IMPLICATIONS: Today’s reports were disturbing as they point to an economy that may not be picking up as much steam as seemed to be the case. Why the downturn in consumption occurred is baffling. Plenty of jobs are being created and confidence picked up, so why households stayed home is unclear. With the FOMC meeting in two weeks, reports that show modest consumer spending and moderating inflation play into the hands of those who want to push off hiking rates. No one expects the Fed to do anything at the July meeting, but there was the possibility that the Committee would signal that the economy was strong enough to absorb increases in rates. That may not occur. Even if it doesn’t, a September rate hike cannot be ruled out as we get two more jobs report before then, but they will have to be strong. As for the markets, who knows what will drive activity today. The weak reports would normally be taken as a positive for stocks as they could delay the inevitable. There is also the Iran agreement and that would point toward lower energy costs. Regardless, we need the consumer to get back into the game and soon.

May Durable Goods Orders and New Home Sales

KEY DATA: Orders: -1.8%; Excluding Aircraft: +0.7%; Capital Spending: +0.4%/ Home Sales: +2.2%

IN A NUTSHELL: “Businesses are investing again and the housing market is shifting gears, so why is the Fed so unsure about the economy?”

WHAT IT MEANS: And the hits keep coming, except in this case, it’s the good kind – the ones that make lots of money. The data seem to be moving to the top of the charts and while all the songs are not that great, they are making sweet music. Today, we saw that durable goods orders improved in May, though the April gain disappeared. Still, when you exclude aircraft, the rise in demand for big-ticket items was strong and the increases were pretty much across the board. Primary and fabricated metals, communications and machinery were up solidly. There was a decline in computers and appliances and electrical equipment, while vehicles were flat. Importantly, business capital spending, excluding defense and aircraft, was up solidly for the second time in three months. Still, there was a warning sign in the report: Order books are thinning. That does not bode well for a strong improvement in production.

Housing is getting better, no if, ands or buts about it. Yesterday we saw that existing home sales rose solidly in May and that result was duplicated in the new home market. While the percentage increase was not huge, it came on top of a sharply upward revised April sales pace. The level was the highest since February 2008, so we are starting to claw our way back toward more normal levels. We still have a long way to go, though. The long-suffering Northeast finally showed some strength. While total sales for the first five months of this year compared to last year are up by 24%, they are down by 23% in the Northeast. The West was also strong in May but there were declines in the South and Midwest. Interestingly – or strangely – median prices declined even though inventory is largely nonexistent. These data are volatile and given the existing home price increases, the decline will likely turn around next month.

Two other reports indicate that the economy is running strongly. The Richmond Fed’s June manufacturing index jumped while the Philadelphia Fed’s June non-manufacturing index eased but remained at a very high level. Both surveys point to strong job and wage gains.

MARKETS AND FED POLICY IMPLICATIONS: I love to poke fun at the Fed’s inability to forecast and right now, the monetary authorities are easy targets. The economy may not be soaring, but it is hard to say that conditions haven’t rebounded strongly from the winter downturn. I will wait until Thursday when the consumer spending numbers come out before I say the central bankers are clueless. We aren’t certain what households are thinking right now and while they are clearly buying big-ticket items such as homes and vehicles, they also have to doing something other than borrow money. If Thursday’s consumption report is as strong as I expect, and if the inflation data point to a continued move upward toward the Fed’s target, then there is every reason to think that at the July 28-29 meeting, the FOMC will start to signal a rate hike is near.

June 16-17 ‘15 FOMC Meeting

In a Nutshell: “Conditions for the first rate hike have not yet been met.”

Rate Decision: Fed funds rate maintained at a range between 0% and 0.25%

The FOMC concluded its two-day meeting this afternoon and the statement basically told us nothing we didn’t already know. The economy picked up from the winter downdraft but there is still a way to go before we get back to strong growth. Yes, 2015 growth was downgraded from the March forecasts, but few expected a negative first quarter at that time. It was just math. Otherwise, there was little change in the comments as the Committee kept the funds rate range the same and there was no change in its investment policy.

So, does that mean there was nothing to be gleaned from today’s news? Absolutely not. First, and maybe most importantly, most members expect there to be at least two rate hikes this year. According to the “dot chart” of forecasts, the “central tendency” is for the funds rate to be at 0.625% at year’s end. The only way to get there is if the rate hikes start in either September or October. Since there is no press conference in October (it’s that dumb press conference calendar issue again), the target month looks like September.

Chair Yellen’s press conference also provided some good information. First, she made it clear, time after time, that the conditions for a rate hike had not yet been met – but they could be soon. While the labor market has gotten a lot better, there is still some slack that needs to be taken up. A reduction in the number of people working part-time but wanting full time jobs needs to fall while wage gains and the participation rate need to rise. She seemed to think the participation concern is less of an issue now that it has stabilized.   Stronger growth, which most members expect, would resolve the labor slack issue.

Chair Yellen noted often that almost all members expect rates to rise this year. However, she tried to persuade everyone that there was no set pathway once the first rate hike occurred. She pointed out that most members expect something on the order of 100 basis points rise each year. Even with my challenged mathematical abilities, I can figure that to be a 25 basis point rate hike every other meeting. She is trying to dissuade people from assuming there had to be 25 basis point moves every meeting. I don’t believe it because at that pace, a neutral fed funds rate of 3.75% will not be reached until sometime in 2018. If it takes that long, I fear for the economy.

Okay, what is the takeaway here? Barring some negative international event, such as Greece hurting European growth, the Fed remains on track for a September rate hike. I suspect that most market participants don’t believe that. People still want to see it before they believe it. So, don’t be surprised if there is some real volatility if the Fed does what it says it will likely do.

(The next FOMC meeting is July 28-29, 2015.)

May Challenger Layoff Estimates and Weekly jobless Claims

KEY DATA: Layoffs: down 20,548/ Claims: down 8,000

IN A NUTSHELL: “The turnaround in oil prices is also turning around the labor market data as layoffs are declining.”

WHAT IT MEANS: Tomorrow is Employment Friday, so any labor market data will be swamped once the numbers are released, but you can get some insight into the pressures that are developing by looking at things other than the unemployment rate. The latest employment numbers point to further tightening in the labor market. Layoff announcements had been soaring as the oil patch started drying up. To put things in perspective, Challenger, Gray and Christmas reported that for the first four months of this year, layoff notices rose by a little over 28,000 from the same period last year. Meanwhile, the energy sector’s announcements rose by nearly 57,000. About 30% of all layoffs were in Texas. In other words, except for the energy firms have been holding tightly to their workers. With the rise in oil prices, energy sector layoffs have largely stopped – and so have overall layoff announcements.

Despite the weaknesses in energy and related industries, jobless claims have been low and they stayed down. Keep in mind, layoff announcements don’t necessarily become layoffs. The rise in energy prices may reduce actual payroll cut backs. Jobless claims declined last week and the level remains so low that payroll gains are highly likely to accelerate as we go forward.

MARKETS AND FED POLICY IMPLICATIONS: Payroll cuts in mining and machinery (support industry for the energy sector) totaled 20,000 in April and there still was a 223,000 rise in total employment. Don’t be surprised if in tomorrow’s employment report, we see a lot smaller job loss in those two industries. That should help drive the total gain to well above what we saw last month. The Fed will be watching the employment report closely, not just when it comes to employment but also what is happening with wages. But the hourly wage number doesn’t account for lots of other, more imaginative ways businesses are compensating employees. When you consider total compensation, it is clear that the upward trend is accelerating. In today’s revised first quarter productivity report, inflation-adjusted compensation per hour soared at a 6.5% rate over the quarter and was up a decent 2.2% over they year. Labor costs are reflecting the tight labor market and if hourly wages in the employment report doesn’t reflect that yet, we should be asking if we should even follow that number. For businesses, it’s all about total compensation and that is what we need to watch. If investors are focusing on the right numbers, they will have to start thinking that Fed has all the ammunition needed to start doing what the members really want to do: Raise rates.

Revised First Quarter GDP Growth and Corporate Profits

KEY DATA: GDP: -0.7% (down from +0.2%); Profits: -8.7%

IN A NUTSHELL: “The winter, a dock strike, lower energy prices and a strong dollar combined to hurt growth.”

WHAT IT MEANS: Oh, my, the economy contracted in the first quarter. Get out the towels for all those crocodile tears that I am shedding. Yes, my sarcasm has reached new heights. As it was in 2014, first quarter growth was negative. It wasn’t a big deal last year and it isn’t a big deal now. The biggest reason for the negative number was a widening in the trade deficit that subtracted nearly two percentage points from growth. The ending of the dock strike led to a sharp increase in imports and the strong dollar hurt some sales. The dock strike’s impacts are fading and the dollar seems to have largely peaked. Don’t be surprised if the April trade deficit, which comes out next Wednesday, is much lower than the huge gap recorded in March. The second big problem was business investment in structures. Lower energy prices led to a collapse in oil patch spending on rigs. But the rising energy prices have largely halted that reduction. The recent durable goods orders report points to rising business investment. Finally, the cold restrained consumer spending. That segment of the economy remains somewhat uncertain as the latest retail sales numbers were unimpressive. Those numbers, though, don’t include services, which just happens to account for nearly 40% of the economy. Services demand was solid in the first quarter. Also, the “softness” in vehicle sales is hardly supported by the positive comments coming out of the vehicle makers. May sales come out early next week and I suspect they too will point to improving household demand. Interestingly, the income side of the ledger actually posted a 1.4% rise, so maybe things really weren’t that bad in the first part of this year. Inflation remains in check.

Corporate profits tanked, also not a major surprise. The strong dollar in the first part of the year affected sales and currency translations.

MARKETS AND FED POLICY IMPLICATIONS: There are all sorts of issues with the first quarter GDP numbers that have been highlighted recently. It seems the economy is always weaker to start the year, for whatever reason that may be. It could be seasonal adjustment issues or measurement issues or whatever, but this has been a pattern for quite some time and the Bureau of Economic Affairs is trying to figure out why. That said, the real issue for the Fed, interest rates and the equity markets is where do we go from here. Recent data point to the economy picking up steam and next week we get May vehicle sales and job growth and April consumer spending and trade deficit. Most of those could be pretty good and that would change the thinking about the state of the economy. Basically, if you don’t like the economic numbers, wait a week and they will change. The decline in first quarter activity happened last year and the economy was strong for the final three quarters and I would not be surprised if a similar pattern was repeated this year.

April Existing Home Sales, Leading Indicators and Weekly Jobless Claims

KEY DATA: Sales: -3.3%; Prices (Year-over-Year): +8.9%/ Leading Indicators: +0.7%/ Claims: +10,000

IN A NUTSHELL: “While housing sales are still yo-yoing, an improving economy and rising prices should lead to better activity in the months ahead.”

WHAT IT MEANS: It’s the housing two-step: One month up, the next month down. That said, the market is improving as the trend in demand is up. In April, the National Association of Realtors reported a small drop in existing home sales. But demand did jump in March to the highest rate in eighteen months. One major reason for the failure of sales to rise more consistently is a lack of supply. The inventory of homes for sale did jump, but it is still lower than last April. It is hard to sell homes when product is limited. That may change as prices are surging in almost all regions. The lack of available houses for sale is forcing buyers to bid up prices. While that may seem to be a negative for the market, it is not. As equity increases, more people will be able to move and that will raise supply and increase sales. Also, rising prices, in a manner similar to rising mortgage rates, would force buyers to make decisions more quickly and that too could increase the sales pace.

But maybe the biggest impact on the housing market could come from the economy itself. The Conference Board’s Leading Economic Index surged in April after a strong rise in March. If you believe this measure does portend future activity to at least some extent – and I do – it looks like we are in for strong growth in the months ahead. The Conference Board’s measure of current activity improved, further pointing to an end of winter slump.

Jobless claims rose last week but that is hardly the story. The level remains quite low and the four-week moving average, which smooth’s out the weekly ups and downs, is at historic lows when you adjust for the size of the labor market.

MARKETS AND FED POLICY IMPLICATIONS: We still have not fully recovered from the damage done by the housing bubble and the biggest problem remains home values. You cannot sell your home if you are under water and if you want to buy a new house, you need enough equity to put down on your next home. The worry about rising prices, at least for now, is misplaced. We need higher prices to reduce the biggest impediment to higher sales: Low inventory. Thus, I welcome higher prices. The jump in the leading indicators points to improving activity ahead and the claims numbers show that firms are holding on to their workers as tightly as possible and that combination can only lead to higher wages. The Philadelphia Fed’s May Manufacturing Business Outlook report indicated that to attract workers, nearly half the firms are raising wages. It is not the case for all new workers, but with a majority of the respondents hiring, how they will get those workers without raising salaries is anyone’s guess. Solid job gains and a further rise in wages would be enough to push the Fed to tighten. The members want to get back to a more normal rate structure and the sooner the better.

April Industrial Production

KEY DATA: IP: -0.3%; Manufacturing: 0%; Oil and Gas Well Drilling: -14.5%

IN A NUTSHELL: “The energy sector contraction is slowing things down, but there are other sectors where the economy’s underlying strength is showing through.”

WHAT IT MEANS: No good deed goes unpunished and that is the case with the lower energy prices. The precipitous drop in oil prices has led to a massive reduction in energy sector activity that has yet to be offset by consumers spending their windfall. Nothing shows that more than the April industrial production numbers. Output fell for the fifth consecutive month, led by declines in utilities and mining. Oil and gas drilling is down 46.5% over the year. But there were some solid output gains, especially in durable goods manufacturing. Strong demand led to a ramping up of assembly rates in the vehicle sector. There were also robust increases in the electrical equipment and appliances sector, wood products and minerals. This helped the durable goods segment post a modest rise. But there was weakness in the non-durables component. In addition to energy, the food sector also came in with a large decline. I cannot say for certain, but the growing avian influenza epidemic may be having an impact on that segment of the economy. That offset decent gains in printing and petroleum products. In other words, there were a lot of ups and downs in this report.

Two other releases added to the uncertainty about the economy. Surprisingly, the University of Michigan’s mid-month reading of consumer sentiment dropped sharply. What is totally bizarre is despite some of the lowest jobless claims numbers on record, workers are once again worried about losing their jobs. It used to be that if you looked to your left and someone was gone, you got worried. If you looked to your right and that person was also no longer there, you panicked. Now, even though everyone is still working next to you, people are concerned. A second report, the New York Fed’s Empire State Manufacturing Index, indicated that activity and orders picked up in early May, but the rate of growth was nothing spectacular.

MARKETS AND FED POLICY IMPLICATIONS: Today’s numbers raise the possibility that the expected spring sprint is turning into a slow walk. The economy is growing, but the hangover in the oil patch and consumer uncertainty is keeping activity from expanding at a strong pace. Second quarter growth should be good, but the hopes for a repeat of the over-4% rise posted in the spring of 2014 are becoming dashed. That should keep the Fed on hold at least through June. With the FOMC being data driven and given it is unclear how long the data have to be strong to actually elicit a rate hike, it is hard to rule out any future meeting. But we will have to have strong May and June employment and consumer spending numbers if July is to come into play. That is probably how investors will read today’s data as well.

April Producer Prices and Weekly Jobless Claims

KEY DATA: PPI: -0.4%; Goods: -0.7%; Services: -0.1%/ Claims: 264,000 (down 1,000)

IN A NUTSHELL: “Despite an even tightening labor market, inflation is totally under control, complicating the Fed’s decision-making.”

WHAT IT MEANS: Life would be so much simpler for the Fed members if there was “normal” inflation, but alas, that is not the case. Yesterday we saw that import prices declined and today it was producer prices that were negative in April. The wholesale cost declines were really broadly based as both goods costs and services prices dropped. At the final demand level, which is the most processed, you have to search long and hard to find any product where prices rose and even there, the gains were relatively modest. Even in the services sector, which is about 63% of the index, the price increases we had been seeing have largely dissipated. There is some pressure at the intermediate level for services, but the pipeline for goods inflation starts all the way back at the crude component. And we know that the pathway from crude costs to finished goods costs in rarely straight. About the only measure that showed some inflation was the special index which excludes food, energy and trade. This was up modestly and over the year, the gain was less than one percent. Basically, there are no inflationary pressures the Fed has to worry about.

As for the labor market, unemployment claims remained at a level that we haven’t seen in fifteen years. Adjusting for the size of the labor force, we are now at record lows. That clearly indicates firms are holding onto workers as much as possible.  As labor needs keep expanding, firms will have to look to other methods to fill the growing job openings, so it is just a matter of time before wage gains jump. And don’t expect a slow acceleration. We are talking about a dam breaking here and the longer companies hold by the waters, the greater the flood.

MARKETS AND FED POLICY IMPLICATIONS: To hike or not to hike, that is the question. Right now, the economic and inflation data are mediocre enough that the Fed can stand pat. But Janet Yellen and her band of not so merry monetary policy makers are also concerned about the labor market. Looking just at the monthly hourly wage numbers, there doesn’t seem to be any compensation pressures building. But that is not the case when you look at the much more comprehensive employment cost index. That measure is accelerating and the rate of increase is back to the average for the last expansion. The unemployment rate is at or very near full employment, jobless claims are at record lows and job openings are near record highs. Oh, and it looks like the dollar has peaked. What this tells me is that the Fed must keep its finger on the trigger, even if it doesn’t have to pull it just yet. That said, investors love weak economic or inflation data, as it implies no immediate Fed rate hike, so the wholesale price numbers should make lots of traders happy.