Sunday, June 1, 2014

May ISM manufacturing guesstimate and more ...

This week will be somewhat busy when it comes to market-moving macro indicators.  Along with the weekly initial jobless claims, ISM manufacturing and the BLS employment report for May will be released.  

We will publish our NFP (employment) estimate on Wednesday, 6/4.  Regarding the ISM manufacturing (to be released on Monday, 6/2), based on the regional surveys, we expect the overall index to come in at 55.8, slightly above the latest 55.5 consensus.  

In terms of how the equity market may react to any big surprises, that question has become more difficult to answer.  It used to be that bad news was good news as it increased chances of further QE policies, which would likely push asset prices higher.  However, tapering talk began putting at risk some of that hefty 'QE premium' that is still priced into the equity market, in our opinion.  

Then came the 'tapering of the taper-talk', which diluted impact of actual tapering, at least psychologically.  But with continuing tapering, many believed the economy will soon be back at full-speed, or 4.5%+ growth rate.  Then the 'weather factor' popped up which did impact economic growth negatively.  And that diluted the impact of the very disappointing Q1 GDP growth (on the equity market), which turned out to be a 1% decline, at least based on the second estimate released by BEA last week.  April's durable goods numbers offset the weakness we saw in Q1 GDP inventories and may indicate that Q2 has gotten off to a better start.  

However, with personal savings having declined to a mere 4% of disposable income in Q1, even with the bad weather impacting personal consumption negatively, overall PCE in Q2 may not jump as high as some economists expect.  With continuing slow growth in wages, it is more likely that consumers will bump up their personal savings to 5%+ in Q2.  The April personal income and consumer spending numbers indicate a not-so-great start to Q2 as they grew only 0.3% and -0.1% m/m respectively, both below expectations.  And consumer confidence hasn't been as strong, with the latest Reuters/UMich consumer sentiment index coming in below expectations.  

We think higher savings and stagnation in wage growth could slow down growth in the real estate market, especially among the first-time buyers that may not be able to handle  continuing increase in home prices.

Those housing numbers have been mixed lately with prices rising, although at much lower rates, but pending home sales in the very important West region declining slightly.  Then again, new home sales, housing starts, and permits for April came in better than expected.    

Simply put, there are still many questions about whether or not the economy will get up to full-speed; however, the equity market continues to hit new highs, while US treasury yields get lower.  The only consistency we have been seeing in these markets is: confusion.

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