There’s a huge wave of economic data coming this week.
The all-important April U.S. jobs report will be published on Friday. Before that, we’ll get an estimate of Q1 U.S. GDP growth. We’ll also get the results of manufacturing surveys (PMI and ISM) from around the world.
On Tuesday and Wednesday, the Federal Open Market Committee will meet and then update us on the direction of monetary policy.
We’ll also get two report on the housing market, which has suddenly come up on everyone’s radar screens.
Here’s your Monday Scouting Report:
No, The Housing Market Isn’t Doomed: Last week, we learned that new home sales plunged 14.5% in March to an annualized pace of 384,000 units, an eight-month low. This was much worse than the 450,000 level expected by economists. The pace of existing home sales has also been trending lower since last July.
As with everything, we shouldn’t take these numbers at face value. “Low supplies of homes for sale probably contributed to softer recent sales and boosted prices, but much of the recent volatility in sales is likely sampling noise, and a record increase in prices mostly resulted from a large shift in the mix of homes sold,” said Morgan Stanley’s Ted Wieseman of the new home sales report.
Regarding existing home sales, it’s important to note that we’ve cleared out much of the cheaper distressed inventory, which is a good thing. “[T]he share of distressed sales has declined to 14% from 21% last March,” said Bank of America Merrill Lynch’s Michelle Meyer. “Distressed sales are down 38.3% yoy and have been falling on an annual basis since the middle of 2011. In contrast, non-distressed sales are still rising slightly, up 0.7% yoy, but the growth rate has slowed.”
Wieseman and Meyer identify supply issues. But what about demand? “The fading of the housing recovery is mainly due to two factors; the effects of the severe weather and last year’s rise in mortgage rates,” noted Capital Economics’ Paul Dales. “With the weather returning to normal and mortgage rates having fallen back a bit, the housing recovery will come back to life before long.”
- Pending Home Sales (Mon): Economists estimate sales climbed 0.8% in March, or -10.2% year-over-year. “Mortgage purchase applications have picked up, suggesting an increase in housing demand,” said Bank of America Merrill Lynch economists. “Moreover, weather conditions have improved, making the search process easier and allowing for more transactions. That said, even if pending home sales tick up in March, the trend has still been quite weak since last summer.”
- Dallas Fed Manufacturing (Mon): Economists estimate this regional activity index climbed to 6.0 in April from 4.9 in March. “On balance, manufacturing surveys have suggested some slight acceleration in activity in April,” said UBS’s Sam Coffin.
- S&P/Case-Shiller Home Price Index (Tues): Economists estimate home prices climbed 0.7% month-over-month in February or 13.00% year-over-year. “The CoreLogic data have been surprisingly strong, with prices up 1.5% mum in February and 1.7% mum in January,” said BAML economists. “We think there are likely some seasonal adjustment issues, potentially related to the shrinking share of distressed sales. That said, we do see signs that the housing market has remained tight as inventory has remained lean, keeping upward pressure on prices.”
- Consumer Confidence (Tues): Economists estimate the Conference Board’s index of sentiment climbed to 83.0 in April from 82.3 in March. “With declines in jobless claims and increases in Rasmussen and University of Michigan consumer measures, we forecast a further rise in the Conference Board measure in April,” said UBS’s Coffin.
- ADP Employment (Wed): Economists estimate U.S. companies added 210,000 private payrolls in April. “ADP has been a decent predictor of BLS private payrolls in recent months,” said Credit Suisse economists. “Last month’s ADP was a virtual bulls eye (192K vs 191K BLS). Over the prior three months, the average absolute error against first-reported BLS private jobs is a modest 19K. Over the prior year, the average error is 44K.”
- GDP (Wed): Economists estimate GDP growth decelerated to 1.2% in Q1 from 2.6%. This includes personal consumption growth of 1.9%. “Despite GDP likely growing at an anemic rate of around 1.0% in Q1, we remain optimistic about the rest of 2014,” said Goldman Sachs’ Kris Dawsey. “The core narrative for a pickup in growth this year has not changed. The fiscal drag is still lower, consumer spending should still strengthen, and business investment seems poised for a comeback. We see the weakness in Q1 as mainly driven by temporary factors, including a large drag from weather and inventories. The recent encouraging dataflow — with the exception of some of the housing numbers — appears consistent with our forecast for a near-term pickup. For the remainder of 2014, 3%+growth remains our baseline.”
- Chicago PMI (Wed): Economists estimate this regional PMI climbed to 56.5 in April from 55.9 in March. “Strong auto selling in March will likely help boost manufacturing in the Chicago region; however the full impact of the rebound in auto sales probably will take some time to register,” said Citi’s Peter D’Antonio.
- FOMC Rate Decision (Wed): The Federal Open Market Committee is expected to announce no change in its benchmark interest rate. However, economists expect them to further taper quantitative easing by reducing monthly purchases of Treasuries by $US5 billion and mortgage-backed securities by $US5 billion.
- Vehicle Sales (Thurs): The big automakers will announce their April sales stats throughout the day. Economists estimate sales slipped to an annualized pace of 16.20 million. “Mid-month industry surveys for April indicate that the momentum coming out of March continued in further upside in retail sales, but a pullback in fleet deliveries is expected to the leave the overall selling rate slightly lower,” said Morgan Stanley’s Ted Wieseman.
- Initial Jobless Claims (Thurs): Economists estimate jobless claims fell to 320,000 from 329,000 a week ago. “The four-week moving average of initial jobless claims has fallen below 320k, and continuing claims have trended lower,” said Nomura economists. “These movements point to steady improvement in the underlying labour market trend. However, we may continue to see some volatility in claims due to difficulties in adjusting the data around the Easter holiday.”
- Personal Income And Spending (Thurs): Economists estimate income personal income climbed 0.5%.in March and spending increased by 0.6%.”Both vehicle sales and retail sales improved significantly in March relative to their February levels, with the former reaching a post- recession high and the latter posting its largest monthly increase in more than a year,” noted Barclays economists. “On the income side, we look for wage income to receive a boost from a rebound in the March workweek following weather-related headwinds at the start of the year.”
- Markit U.S. Manufacturing PMI (Thurs): Economists estimate PMI was 55.4 in April, down from 55.5 in March.
- ISM Manufacturing (Thurs): Economists estimate ISM’s index climbed to 54.2 in April from 53.7 in March. “The regional PMIs have been somewhat mixed,” noted Wells Fargo’s John Silvia. “Strong gains in the factory sector were reported by the Richmond and Philadelphia Federal Reserve Banks. On the down side, the Kansas City Fed and Empire survey fell back some, though both remained in expansion territory.”
Construction Spending (Thurs): Economists estimate spending climbed 0.6% in March.
“This would reflect a modest pickup in private residential construction, as evidenced by an uptick in housing starts on the month, and broadly neutral contributions from the nonresidential and public components,” said Barclays economists.
- The Jobs Report (Fri): Economists estimate nonfarm payrolls increased by 215,000 in April, with 210,000 coming from private payrolls. The unemployment rate is estimated to have fallen to 6.6% from 6.7% a month ago. From Credit Suisse: “Most employment barometers moved in the right direction over the recent period. Easter holiday-related volatility in initial claims increased in the weekly data, but the smoother trend improved over the month; the 4-week average in the April payroll survey period finished at 312K, below the 329K in the previous month. Job openings rose sharply in the latest data. Retail sales and industrial production, which tend to lead employment, have picked up strongly over the last two months (although reversal of weather effects is part of the story there). PMI readings have been generally improving.”
- Factory Orders (Fri): Economists estimate orders climbed 1.5% in March. “In addition to the solid durable goods report in March, which showed the strongest pace of % m/m improvement since the end of last year, this would reflect a more modest rise in nondurable orders,” said Barclays economists.
The price-earnings multiple on the stock market is well above average. And over the long run, these multiples tend to revert to the historic average, which means either prices will fall or profits will eventually catch up to prices.
In the short-run, however, there’s no telling what these multiples will do.
Morgan Stanley’s Adam Parker pushed back on the belief that we were doomed for multiple-mean reversion: “At nearly every meeting we have done lately, we have heard that multiple contraction is more likely than multiple expansion. People could be right that the market multiple will contract, but we doubt they can provide empirical evidence to support this claim… Low management hubris in terms of capital spending, hiring, inventory, and M&A, and high interest coverage make the top of the cycle unlikely to occur in the next 12 months. Hence, we think the multiple can creep toward 16x or more 12 months out. We can’t show that with data, but we know the counterfactual can’t be shown either. The part of the argument we really don’t like is the part where people say that the multiple expanded a lot last year, so that increases the odds of less or no multiple expansion or even contraction this year. That’s baloney. Analysis please? The fact is that knowing that there was a large change in last year’s multiple does not forecast a down or even a lower expansion in this year’s multiple. The only three times in history that the market multiple expanded as much as it did in 2013 (by 3 turns), the subsequent year saw strong market performance all three times. We aren’t claiming statistical significance, just saying that a large rally can be followed by a nicely up market again the subsequent year…”
Parker has a 2,014 year-end price target for the S&P 500, which is 8% higher than current levels.
For more insight about the middle market, visit mid-marketpulse.com.
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