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Dressed Up And Nowhere To Go - By Jennifer Coombs

What seemed like the start to a difficult session quickly reversed after the market digested a mountain of economic data. The Federal Reserve's comments did little to move the market today as there were plenty more focal points. In particular, weekly initial jobless claims remained extremely low and are signaling a significant lack of layoffs in the labor market. Initial claimed edged lower in the week ended May 16th, but not by much. The focal point was on the 4-week average for initial jobless claims, which is currently at its lowest level since 2000.

Outside of the jobless claims there were plenty of market movers, although many continue to provide mixed messages about the state of the economy. First of all, it's clear that April was not the month everyone had hoped for, especially since it should've been easy to bounce off the weak data released for March. This resulted in the Chicago Fed National Activity Index (CFNAI) dropping again in the negative column for a weak -0.15 reading in April, indicating subpar growth across the US. This was well below consensus' expectation for a +0.10 reading and is still negative despite the easy comparison with March to a revised -0.36. Production was the weakest component in April, but this was expected given all of the weak region Fed surveys for the month. Ultimately, the CFNAI 3-month average points to a slowdown in the broader economy, as the reading is now at a deeply negative reading of -0.23 and not much better than March's -0.27 reading.

Next, activity in the Mid-Atlantic manufacturing sector is apparently slow, but stabilizing. The Philadelphia Fed's general conditions index came in at a reading of 6.7 for May which was down slightly from 7.5 in April, but far below consensus at 8.0. The best news in this report is a slight uptick in new orders to 4.0 from 0.7 in April. Employment is also in the plus column again at 6.7. However, manufacturers in the Philly region are continuing to report price contractions, especially in costs, which is a surprise since oil prices are slightly higher from the early-year lows. The reading for inflation, if repeated across other manufacturing reports, will keep the advantage with the Federal Reserve doves. One big positive in the report is a healthy reading of 33.9 for the 6-month outlook, down only slightly from April, but nicely higher than March. Clearly, the manufacturing sector has yet to find its footing this year, but this report out of the Philly Fed points to stability that in turn hints to a rebound for industrials in the months ahead.

In addition, existing home sales are not living up the springtime expectations that were clearly met by the reading on housing starts from Tuesday. Existing home sales were down 3.3% in April to a seasonally adjusted annual rate (SAAR) of 5.04 million units, which is just below the low-end of the consensus range. Three of the four major geographic regions showed contraction in April, with the sharpest decline in the South (the largest region) at -6.8%. However, on a year-over-year basis, total sales of existing homes are still up by a respectable 6.1%. Another positive component of the report is the rise in supply with 2.21 million existing homes on the market compared to 2.01 million in March. This increase, together with a drop in sales, increases the supply relative to sales for 5.3 months up from 4.6 months. Additionally, the median price of an existing home increased 4.1% to $219,400 which is up 8.9% over last year. While the components of the report seem strong, overall we believe it to be a disappointment. The report fails to point directly to any momentum in the housing sector, but there is an early indication that buyers may be switching their focus from existing homes to new homes, as the housing starts and permits report noted earlier this week. Nevertheless, housing data on a month-to-month basis is always volatile, but it's clearly too early to determine what the spring housing season will be like.

Last but not least, the historic surge in building permits gave a sizable boost to the Conference Board's Index of Leading Economic Indicators (LEI). The LEI jumped 0.7% in April and well above the prior revised reading of 0.4% and consensus' expectation for a 0.3% gain. Other positive data from the month contributed to be the yield spread (reflective of near-zero interest rates). Smaller positive contributions come from unemployment claims, the credit index, and consumer expectations (though readings on this latter component have been sinking noticeably so far in May). One remaining negative is the new orders component of the Institute for Supply Management (ISM) manufacturing report, which is reminder that weakness continues to be concentrated in this sector. Overall, the LEI may be over-signaling economic strength, especially given just one particularly strong reading in the housing sector.