Weighing The Week Ahead: Chinese Fireworks?

The economic calendar is a big one, featuring the employment situation report on Friday. The rest of the data – ADP employment, auto sales, and the ISM surveys – will be released over 2 ½ days. The US Independence Day celebration on Thursday will provide one type of fireworks. And of course, we have Canada Day on Monday. The combination of events, data, and the calendar make the week ahead even murkier than usual. I expect an initial focus on the US/China trade truce, a shift to discussion of the implications for Fed policy, and a fast exit for the beach. The all-important employment report will be covered by the “B Team” with further reaction next week.

This leaves the remaining pundits to sort out the implications of the trade truce: Will the market see fireworks from the trade policy shift?

The markets will vote, and the pundits will pontificate. Let the spinning begin.

Last Week Recap

In last week’s installment of WTWA, I predicted a focus on the upcoming G20 meeting and US/China trade talks. I also wrote, “It is absolutely crazy to guess the outcome, and I will not try! Those who think they understand Chinese motives and decision processes are too confident. Those who think they can predict the President’s next move are even further off base”. That did not slow the pundits down at all. Two China experts on Friday afternoon financial TV agreed that Trump and Xi were both benefiting from the standoff and would keep it going through the next Presidential election.

Being an expert on China is not the same as assessing the politics behind decisions in the US, particularly those made by President Trump. I’ll offer more on this topic in today’s “Final Thought.”

The Story in One Chart

I always start my personal review of the week by looking at a great chart. This week I am featuring Jill Mislinski, who conveys a lot of key information in her picture worth more than a thousand words.

The decline for the week was 0.3% and the range only 1.4% — a very quiet week. Our weekly Indicator Snapshot provides a handy history of both actual and implied volatility.

Noteworthy

The Presidential election season has started with two debates among Democrats last week. Viewership was 14 or 15 million households, a bigger audience than expected. The Pew Research Center has a recent poll about the state of political discourse in the U.S. You will be surprised to learn what people find as unacceptable. It seems like the public reaction to negative campaign ads. Voters condemn them, but they work.

I did an early analysis of what the early election news means for investors. Hint: Don’t make the mistake of taking it too seriously.

And FiveThirtyEight presents The First Democratic Debate In Five Charts. Here is one of them.

The News

Each week I break down events into good and bad. For our purposes, “good” has two components. The news must be market friendly and better than expectations. I avoid using my personal preferences in evaluating news – and you should, too.

New Deal Democrat’s high frequency indicators are an important part of our regular research. There are three different groups. Long-term indicators remain positive and the nowcast is weakly positive. The short-term message is neutral. This is an improvement over our last update, but NDD emphasizes that the Fed and the trade wars “remain crucial.”

The Good

  • Home prices increased 0.4% on the FHFA Index, beating expectations of 0.2% and March’s 0.1%. The Case-Shiller increase was 2.5% (YoY), in line with expectations and down slightly from March’s 2.6%. (Calculated Risk). Bill notes that it is important to go beyond nominal pricing and consider changes in real terms.

  • Michigan sentiment was 98.2 for June slightly higher than May and expectations – both 97.9.
  • Pending home sales for May increased 1.1% beating expectations of 1.0% and April’s decline of -1.5%.
  • Mortgage rates declined.

  • Mortgage applications were up 1.3% last week versus a decline of -3.4% the prior week.

  • The PCE price index increased 0.2% on both headline and core, roughly in line with past trend and expectations. This leaves the Fed with a free hand.
  • Personal income for May increased 0.5%, matching April’s gain and beating expectations of 0.3%.
  • Personal spending was up 0.4%, meeting expectations. This was a decrease from April, but that report was revised to a 0.6% gain rather than 0.3%. The spending result is excellent in this context. (Brian Wesbury).

The Bad

  • Initial jobless claims increased to 227K up from 217K the prior week and missing expectations of 219K.
  • Consumer confidence for June was 121.5, missing expectations of 132 and the May’s 131.3.
  • Negative EPS guidance is the second highest since Q2 of 2006. (John Butters, FactSet). In contrast, the Q3 2019 expected EPS growth rate has been unchanged for fifteen weeks. (Brian Gilmartin).

  • New home sales for May increased 626K (SAAR) missing expectations of 683K and April’s 679K. Calculated Risk analyzes this miss but sees a solid start to the year so far. This is especially true given that the difficult comparison period from 2018 has passed. MarketWatch notes the decline and analyzes the contrast with the results in home building stocks where the companies have managed supply. And finally, lower rates may help.

The Ugly

Where US Government Debt is Headed by economist Timothy Taylor. His level-headed analysis shows the principal sources under current law, using analysis from the non-partisan Congressional Budget Office.

The Week Ahead

The economic calendar is a big one, compressed into three 1/2 days with a holiday in the middle. Employment news is the highlight. There are also important reports on both the ISM Manufacturing and the ISM Non-Manufacturing indexes. In private data releases we’ll see updates on auto sales.

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Disclosure: [The investing prospects have definitely improved over the last month – despite the market rally. I have caught up from my trip, so this quiet time is ideal if you want a ...

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