Investor focus should shift this week from the statements and actions of the Federal Reserve to the economic reality of today. Actually, the shift began last week, when first quarter GDP was revised sharply lower, to 1.8% growth, down from 2.4%. Several critically important data points reach the wire on this holiday shortened week, including the all-important monthly Employment Situation Report, so the focus will be squarely on the economy.
Stocks took back some ground last week on the commentary of several Federal Reserve officials, who seemed determined to hedge market concerns about the Fed Chief's prior week statements regarding the tapering of asset purchase programs this year and next. The market was happy to hear that the Fed would not likely raise interest rates anytime soon.
However, my response to that is that Fed talk is cheap, and that their actions continue to speak louder than words in the mortgage and bond markets. While recent housing data seemed to show a short-term surge in activity, likely the result of panicked real estate buyers previously on the fence seeking to lock in mortgage rates before they push target properties out of reach, much of the real estate data to reach the wire was dated last week and should be discounted for that.
Week Ending June 28
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This week we will get a firsthand look at how rising interest rates are affecting business when the monthly Motor Vehicle Sales data comes to the wire. You see, the sales of Ford (F) and General Motors (GM) are critically tied to auto loan interest rates. Economists surveyed by Bloomberg see the annual pace of domestic vehicle sales increasing slightly to 12.2 million in June, up from 12.1 million in May. Total vehicle sales are expected to rise as well, to 15.5 million for June, versus 15.3 million for May. It is unlikely that rates have risen far enough to start meaningfully impacting auto sales, but if they continue rising, they will. Whether we get an indication of that this week or not is of no matter, as it should be on your ongoing radar screen as a barometer of the impact of this Fed failure to communicate.
THIS WEEK'S ECONOMIC REPORT SCHEDULE
Economic Data Point
Expected this Period
International Trade (Deficit)
Independence Day Holiday
Employment Report (RATE)
-Private Nonfarm Payrolls
Investors are also wise to take heed of the ISM Manufacturing Index, which is slated for release Monday. It will follow last Friday's disappointing news from the Chicago Purchasing Managers Index, which fell to a mark of 51.6 for June, down from 58.7 in May; it was also well short of the economists' consensus expectation. While some regional manufacturing barometers flash higher from time to time, like the Richmond Fed Index and Dallas Fed Index did last week, most are mimicking the downward trend seen in ISM's national measure.
The ISM Manufacturing Index fell to a reading of 49.0 in May, marking economic contraction there. Economists surveyed by Bloomberg see the measuring breaking back into expansion in June, to a mark of 50.5, but that would not be so impressive a result, just barely above breakeven. The trend seen in the longer-term chart of this index is one of clear deterioration in the pace of growth. It is disturbing and contradictory to the Federal Reserve's economic forecast, though, our economy is primarily service oriented. The week ahead will also offer manufacturing news in the form of the Markit Economics' PMI measure and Factory Orders, so there will be enough to chew on for industrials investors.
There will not be much on the housing front, outside of the monthly Construction Spending data for the month of May. It will provide a good measure of the health of the economy, showing activity in private and public construction segments and in single family versus multi-family residential building. Single-family growth would reflect a healthy housing market, but multi-family projects could show the shift to renting we have discussed in the past, the result of recession, real estate collapse and tighter standards in lending and living. We will also of course be attuned to the weekly mortgage activity data to see just how applications tied to home purchases are fairing considering the rising rate trend.
It's a light earnings week, due to the holiday and the fact that we are still ahead of the start of earnings season for Q2. However, there are a couple major earnings reports due this week, including from Ford Motor . It will be interesting to hear management commentary regarding rising interest rates and how and where they might affect car sales for Ford and GM .
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Obviously, the most important news of the week will come in the form of the monthly data on the labor market. Most critical of those is the Employment Situation Report. Last month, the unemployment rate remained essentially unchanged at 7.6%, though we estimated the true unemployment rate could be as high as 11.7% and underemployment might be upwards of 17.6%. So with the qualifier that the real state of labor is likely a lot worse than the government is reporting, economists' see that version of the truth reflecting further improvement for June, with the rate dipping to 7.5%. We will tell you what it really is in our regular reporting of true unemployment next week, so you might want to follow along with the column.
Economists see non-farm payrolls rising by a net amount of 161K in June, which would be less than May's 175K and likely bother markets. Within that figure, the important private non-farm payroll estimation is for an increase of 175K jobs, versus 178K in May. It is hard to say how the market might digest the data, because of the change in Fed stance. In the past, bad news was good news because it meant the Fed would continue to accommodate us. However, now that the Fed seems stubbornly set on what I believe is the wrong path, this conflict of data and Fed plans might depress investors. Of the rest of the month's jobs reports coming to the wire this week, the Challenger Job-Cuts data will probably be the only relevant bit. However, it probably will not offer anything market-moving, as the decision of corporate America to fire is much more difficult than the decision to hire, and so this data-point will lag as a result.
In conclusion, as the Fed failure fades, the market has no choice but to focus on the economic barometers that reach the news wire monthly. This week in particular offers some heavy hitters, and should be the focus of investor attention. Unfortunately, the news will not likely enthuse. Parties interested in receiving this report weekly should follow my column here.