Lately, everything seems pretty great.
Investors seem unfazed by turmoil in Iraq and rising oil prices.
However, we can’t ignore the fact that inflation is becoming an increasingly problematic issue.
Here’s your Monday Scouting Report:
Inflation: Last week, we learned that the consumer price index (CPI) grew by 2.1% and core CPI increased by 2.0%. Both metrics reflected acceleration.
This is significant since higher inflation rates put pressure on the Federal Reserve to tighten monetary policy. But with one word, Fed Chair Janet Yellen crushed concerns that one report might force the Fed to adjust its plans.
“The CPI index have been a bit on the high side, but I think it’s — the data that we’re seeing is noisy,” said Yellen.
“The Fed’s characterization of recent inflation readings as “noisy” and the preponderance of evidence to the contrary leave us feeling as if the Fed is likely to dismiss most economic data deviations from slower-moving trend processes,” said Morgan Stanley’s Matthew Hornbach. “Under the ‘dismissive’ framework, implied market volatility should increase less for a given economic surprise than under our previous framework — a ‘reactive’ framework based on the idea that the Fed would be more data dependent.”
- Markit US Manufacturing PMI (Mon): Economists estimate this activity index slipped to 56.0 in June from 56.4 in May. “We forecast another rise in the Markit PMI in June,” said UBS’s Sam Coffin who forecasts an increase to 57.5. “Early indications of June factory activity have pointed to continued strength, as the NY and Philadelphia Fed measures rose from already high levels.”
- Existing Home Sales (Mon): Economists estimate sales climbed 1.7% to an annualized rate of 4.73 million. “Existing home sales have slumped since August of last year due to a low inventory of homes, less investor buying, and recently, adverse weather conditions,” said Nomura economists. “The pending home sales index, which tends to lead existing sales by a couple of months, has increased for two consecutive months after slumping for the previous eight, and suggests that the existing homes market may be stabilizing.”
- S&P/Case-Shiller Home Prices (Tues): Economists estimate home prices climbed by just 0.85% month-over-month in April or 11.73% year-over-year. “With the past year’s uptrend in home prices, distressed sales have been shrinking as a proportion of total sales,” noted UBS’s Coffin. “At the same time, however, distressed properties have been appreciating somewhat faster than non-distressed. The net effect has been an increased contribution to overall prices from distressed sales. Broader measures of prices, such as the SP/CS, have benefited, while narrower measures, such as the FHFA, have lagged somewhat.”
- Consumer Confidence Index (Tues): Economists estimate the Conference Board’s index of sentiment improved to 83.5 in June from 83.0 in May. “A variety of factors combine to suggest consumer confidence, as measured by the Conference Board, rose in May,” said Credit Suisse economists. “These include a pause in gasoline price increases, improving news on the job front, and the continued uptrend in the broad stock indices.”
- Richmond Fed Manufacturing Index (Tues): Economists estimate this regional activity index slipped to 6 in June from 7 in May. “Early indications of June factory activity have pointed to faster expansion, as the NY and Philadelphia Fed measures rose from already-high levels,” said UBS’s Coffin.
- New Home Sales (Tues): Economists estimate sales climbed 1.6% to an annualized pace of 440,000 in May. “There was a modest pickup in the NAHB index of prospective buyers traffic on the month, and mortgage rates declined to their lowest levels of the year in May, both of which suggest a modest rise in sales after a soft start to the year,” said Barclays economists.
- Durable Goods Orders (Wed): Economists estimate orders fell 0.2% in May. However, nondefense capital goods orders excluding aircraft is estimated to have climbed by 0.5%. “Our expectation is that durable goods orders likely reversed course in May, declining 0.2 per cent with the volatile transportation component weighing down the headline number,” said Wells Fargo’s John Silvia. “However, once transportation goods are excluded, we expect new orders to rise 0.1 per cent for the month, further reflecting a more broad-based firming in manufacturing sector activity.”
- GDP (Wed): Economists estimate the final estimate of Q1 GDP growth will be -1.7%, down from an earlier estimated of -1.0%. Morgan Stanley’s Ted Wieseman explains: “Data released since the first revision to Q1 GDP growth to -1.0% from +0.1% point to a significantly lower number again. Indeed, Q1 looks to have been the worst quarter outside of an actual recession on record by a wide margin. BEA had been assuming strong growth in healthcare spending based on significant expansion of insurance coverage this year under Medicaid and insurance exchanges, but the Census Bureau’s quarterly services report instead showed a pullback in healthcare spending after strong growth in Q4, and BEA’s incorporation of the Census Bureau data should account for most of a cut in consumption growth to 2.1% from 3.1%. The other big expected revision is to trade. Annual revisions pointed to the Q1 net exports contribution being revised down to -1.5pp from -1.0pp, we estimate.”
- Markit US Services PMI (Wed): Economists estimate this services index slipped to 58.0 in June from 58.1 last month.
- Initial Jobless Claims (Thurs): Economists estimate claims fell to 311,000 from 312,000 last week. “Initial jobless claims continue to linger below 320k,” said Nomura economists. “This suggests that layoffs have bottomed out and that more hiring will be needed to spur job growth.”
- Personal Income And Spending (Thurs): Economists estimate income and spending each climbed by 0.4% in May. “A decent increase in personal income in May will probably be the most positive part of this report, as it would suggest that households will be able to spend more freely in the coming months,” said Capital Economics’ Paul Ashworth and Paul Dales. “The 0.3% m/m rise in retail sales in May implies that personal spending on goods increased at the same pace last month.”
- Univ. Of Michigan Confidence (Fri): Economists estimate this measure of sentiment improved to 82.0 in June from 81.2 in May. This “would reflect equity markets, which have moved higher and experienced a modest reduction in volatility relative to May, as well as gasoline prices, which have largely moved sideways after increasing through the first quarter,” said Barclays economists. “A rise in consumer confidence would also be in line with recent steadily improving labour market indicators such as initial jobless claims.”
Citi’s Tobias Levkovich published his mid-year U.S. equity strategy report, which included his initial forecast for the S&P 500 in 2015. From the report:
“Higher profits compel a modest pickup to the 2014 S&P 500 year-end objective and a mid-2015 target is being introduced. Given index appreciation thus far this year and better earnings, the 2014 year-end S&P 500 target was just edged up to 2,000 from 1,975 while a more detailed analysis generated a mid-2015 objective within the 2,040-2,060 range (or a single point figure of 2,050). The bigger challenges facing investors in 2015 might involve a significant change from the Fed and Chinese economic trends. It is reasonable to wonder about a forthcoming tightening in monetary policy once tapering is completed and the focus shifts to rate hikes. The timing and intensity of such moves will be somewhat dependent on inflation pressures but there is also concern about the impact of any rate hikes on emerging economies.”
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