THE KEY ECONOMIC LANDMARKS WE PASSED
1. Housing – there were a lot of data points related to housing so I’ll sum them up in quick bullet points.
- Housing Starts: 1093K vs. 965K est.
- NAHB Index: 55 vs. 53 est.
- Building Permits: 1052K vs 1000K est.
- Existing Home Sales: 5.15M vs 5.02M est.
Looking at these numbers, the housing market seems to have started drinking whole milk and is getting stronger. Starts and permits both exceeded estimates by a large margin and although much of the gains in these two have been in multi-family units, single-family saw healthy increases as well. Existing home sales moved the line closer to where we were in mid-2013 but remain 4.3% off last year’s peak. Median prices moved up to $222,900.
2. CPI: 0.1% vs. 0.1% est. (MoM)
Signs of inflation are starting to appear. While the headline number appears to be fine in relation to Fed targets (2.0% YoY), the annual rate using the last few months is notably higher. A drop in energy prices (-0.3%) in July helped subdue a 0.3% rise in food prices. Any strain on oil prices from geopolitical tensions could reverse this trend in the coming months. More information will be seen in the release of PCE this coming week.
In short, labor markets need to show more signs of recovery before the Fed will start deciding whether rates should rise. Yellen has emphasized concerns about labor market slack for the last few months. Many viewed the Fed minutes last week as slightly more hawkish. A decent portion of the Street thinks the Fed is behind the curve and will let inflation run above target in order to give other measures of the economy time to straighten up.
LAST WEEK’S MARKET IN THE REAR-VIEW: “Bid, Bid, Bid”
Equities caught fire last week. Comments from the Fed fell in the range of expectations and strong housing data helped propel stocks higher. Large and mid cap stocks put in a solid charge all week long while small caps bounced above and below to come back in line at Friday’s close. Traders bumped the S&P 500 within a few points of 2,000 while the NASDAQ continues to move closer and closer to all-time highs reached in 2000 (how many times can I use 2000 in a sentence?). Bond yields continue to remain under pressure although the strong buying action in equities helped alleviate some of it. What was sure to be a winning trade at the start of the year (i.e. short bonds) has turned out to be a head-scratcher for those who initiated the position.
LOOKING THROUGH THE WINDSHIELD
We have a full week of data ahead of us with additional insight into housing, manufacturing, consumer confidence, and GDP. There should not be much of a surprise in the second release of Q2 GDP and any revision will likely be to the upside (trade balance narrowed). I am keeping my eye on the CaseShiller 20 City Composite YoY number. Recent months have shown a steady decline in the rate of price increases. Additionally, July durable goods data will help set the tone for Q3 GDP.
Geopolitical issues were shrugged off by traders and investors last week and it appears the market wants to push over 2,000 on the S&P 500. A solid move off Friday’s close of 1988 could provide the fuel to break through the resistance. With small caps barely positive on the year in terms of price change, there could be further upside to narrow the spread between the Russell 2000 (another mention of 2000!) and the S&P 500 which stood just shy of 8% as of Friday’s close.