This week’s equity market narrative has a constructive patina heading into the opening bell this morning based solely on the markets ability to muster gains in the face of increasing odds of a move by the Fed on rates within the next several months (28% odds June, 48% odds July). All three major equity market indices posted solid performances on Friday; the Dow Industrials gained 0.37%, the S&P 500 was positive by 0.60% and the Nasdaq led the pack by gaining 1.21%. Volume was mixed, rising on the Nasdaq (+7.98%) and slipping on the NYSE (-10.83%).
Our near term direction and any hope of a follow through in positive weekly price action will be heavily dependent on two factors; Fedspeak (eight appearances scheduled including Janet Yellen on Friday) and economic data. As the economic calendar below outlines, this week is relatively data-centric and virtually all of the data will be observed with a focus on inflation.
Monday’s PMI Manufacturing Index Flash is not so much a reflection or measure of inflation as it is a look into private sector manufacturing health. However, even that data has inflationary implications. Consensus is calling for a reading of 51 versus last months 50.8. A reading of 51 or higher would bolster the narrative that speaks to an uptick in economic velocity. Tuesday’s New Homes Sales - Level - SAAR figures for April are expected to range from 505k to 530k. Conesus is calling for 523k versus last months 511k. Anything meaningfully above 523k would buttress the thesis calling for a near term acceleration in economic activity as well. Wednesday’s International Trade in Goods in expected to come in at $-60.2B. If we hit consensus, or if the gap widens more than expected it should be expected that it will be blamed on a stronger dollar. The US dollar has been in rally mode for three weeks and with the prospect of a move higher in rates in the offing, the dollar should continue to gain ground relative to most major industrialized and EM currencies. Wednesday’s FHFA House Price Index for the month of March is expected at 0.5%. On a year-over-year basis consensus is calling for 5.6%. Make no mistake about it, housing prices are a major pillar for the argument that inflation in many markets warrants a bump in rates by the Fed. Thursday we receive the Durable Goods Orders figures for April. Consensus is calling for a top line reading of 0.3% for April versus March’s 0.8%. Again, anything hotter would auger for a more narrow window for a move by the Fed. In particular, an upside surprise to the core capital goods component of the reading would be impactful. Pending Home Sales for April are expected to rise by 0.8%. Q1 GDP revised on Friday is expected to move up to 0.9% from the initial 0.5%. If we see a stronger than expected revision, you can expect the odds for a rate rise in June or July to rise. To cap off the week Janet Yellen will be speaking on Friday at midmorning.
This week will certainly provide some clarity into the flightpath for interest rates. If, as I expect, we see gains in measures of inflation in the data as we continue the grind towards full employment and near inflation target of 2%, I expect a move by the Fed in July. In a perfect world, June. However as I have suggested in recent notes, with several geo-political variables on the table (Brexit, Greece) and some slack in the timeline as a result of the relative docile nature of our expansion, July seems to be a better fit from where I sit even if there is no press conference scheduled. July would also provide enough time for an additional move by the Fed by year end - if it warranted.
Though a move higher in rates is increasingly likely and though US equity markets appear to be getting positioned for that eventuality, I still suspect equity prices will remain well contained and shy of any meaningful breakout primarily due to stretched valuations, continuing contraction in corporate revenue growth and weak technicals.