US equity markets managed to post gains on Friday and in the process break a four week losing streak for the Nasdaq and a three week losing streak for the S&P 500. That said, markets remain vulnerable to a pullback and certainly compromised after a month long drought of positive price action. That pullback, if it materializes this week, could potentially come from any number of directions; heightened hawkishness present in the Fedspeak narrative, concern over Greece’s ongoing debt negotiations, heightened concern over Brexit or what’s left of earnings season.
This week’s equity market narrative has a constructive patina heading into the opening bell this morning based solely on the market’s ability to muster gains in the face of increasing odds of a move on rates by the Fed within the next several months (28% odds June, 48% odds July). All three major equity market indices posted solid performances; 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. Looking at the economic data I discussed the change in focus for the Fed with Chuck Mikolajczak on Reuters.
Monday’s PMI Manufacturing Index Flash is not so much a reflection 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. 51 or higher would bolster the economic expansion narrative. Tuesday’s New Homes Sales – Level – SAAR figures for April are expected to range from 505k to 530k. Consensus 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. Wednesday’s International Trade in Goods is expected to come in at $-60.2B. If we hit consensus, or if the gap widens more than anticipated 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% 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 know…
To cap off the week Janet Yellen will be speaking on Friday at midmorning.
This week will certainly provide some clarity into the road map 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 foresee 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 nature of our expansion, July seems to be a better fit. July would also provide enough time for an additional move by the Fed by year end – if warranted.
Though a move higher in rates is increasingly likely and even 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.