Macro Data from Early Last Week:
April Building Permits (final) and New Home Sales point to mixed implications for the housing market:
Building Permits (final) were 1,417K, up slightly from the preliminary 1,416K and short of the original 1,425K estimate. Also down from the previous month's 1,437K.
New Home Sales came in at 683K, beating the 660K forecast and upwards of March's 656K.
The Markit Manufacturing PMI (preliminary) printed 48.5 in May, missing the 50.0 consensus and declining from the prior month's 50.2 reading. The index is once again in contractionary territory after increasing beyond 50 last month for the first time since October 2022, suggesting deterioration in the manufacturing sector.
The Markit Services PMI (preliminary) registered 55.1 in May, surpassing the expected 52.6 and rising from April's 53.6 measure. Notches the highest print since April 2022 and signals continued improvement in the servicing sector.
The Richmond Fed Manufacturing Index came in at -15.0 in May, worse than the predicted -9.0 and decreasing from the prior month's -10 reading. Indicates weakening factory activity in the Fifth Federal Reserve District given declining demand.
The Chicago Fed National Activity Index printed 0.07 in April, beating the -0.32 forecast and rising from March's -0.37 reading. Suggests US economic growth has increased relative to the previous month.
Pending Home Sales were flat MoM in April, short of the expected 0.8% increase but up from the previous month's 5.2% decrease. Signals slowing in the housing market amid inventory challenges and uncertainty around mortgage rates.
The Kansas City Fed Manufacturing Index registered -1 in May, well above the -9 estimate and up notably from the prior month's -10. Indicates improving factory activity in the Tenth Federal Reserve District but the print still lies in contractionary territory.
Last Friday’s Update:
Inflation remains stubborn via PCE (Personal Consumption Expenditure) data as all April measures came in hotter than expected and rose from the previous month:
Headline PCE Deflator rose 4.4% YoY, slightly above the 4.3% estimate and exceeding March's 4.2% reading. It gained 0.4% MoM, printing upwards of the 0.3% forecast and greater than the prior month's 0.1% gain.
Core PCE Deflator was up 4.7% YoY, coming in greater than both the consensus and March's 4.6 reading. It increased 0.4% MoM, surpassing the predicted 0.3% and rising from the previous month's 0.3% measure.
Personal Spending gained 0.8% MoM, up from March's 0.1%. Personal Income was up 0.4% MoM, also increasing from the prior month's 0.3% gain.
Durable Goods Orders (preliminary) increased 1.1% in April, coming in higher than the forecasted 1.0% drop but down from March's 3.3% rise. Suggests resilience in industrial activity and the economy.
The Michigan Consumer Sentiment Index (final) came in at 59.2 in May, upwards of the preliminary 57.7 but still missing the original 63.0 consensus and decreasing notably from April's 63.5. Indicates consumers' outlook on the health of the economy has weakened.
1-year inflation expectations revised down to 4.2% final from 4.5% preliminary and falling from the previous month's 4.6%. 5-year inflation expectations also cut to 3.1% final from 3.2% preliminary but still up from the prior month's 3.0%.
Today's Update:
The Conference Board Consumer Confidence Index printed 102.3 in May, topping the 99.8 estimate but down from April's 103.7. Signals consumer views on current and short term business / labor conditions have weakened.
The Dallas Fed Manufacturing Index printed -29.1 in May, coming in worse than the expected -19.5 and declining from the prior month's -23.4 reading. Indicates deterioration in Texas factory activity.
Additional Content:
The fed funds rate remains below Core CPI which historically suggests a decrease in interest rates will likely have to wait until inflation eases further. Moreover, the implied fed funds rate at the end of 2023 has recently moved back to levels last seen since SVB’s collapse given investors’ confidence in the Fed to provide liquidity to the banking system. At its recent 5% predicted level, this implies as much as 125 bps less in rate cuts than what was expected in March when bank fears were at their highest.
As inflation isn’t coming down fast enough, Fed officials have expressed uncertainty regarding additional rate increases in the most recent FOMC minutes. As of May 14th, market participants were calling for a skip rather than an all-out pause in which the Fed would pause raising rates in June but would likely hike again in July. However, after last week’s release of stronger than expected GDP and hotter inflation via the Personal Consumption Expenditure Index, 66.6% of traders are currently (as of May 30th) expecting the Fed to hike interest rates by 25 bps at the June FOMC meeting.
While leading indicators and the yield curve continue to signal a recession is near, other indicators relating to GDP, housing, and manufacturing appear to be approaching a bottom or have started to improve. Additionally, recession risks have been well communicated for months, unspent stimulus from the pandemic is keeping the consumer strong, and recent AI breakthroughs, which has allowed Nvidia Corp to become the first $1 trillion dollar chip company, have sparked optimism given the potential productivity benefits for such companies. As a result, hopes for a soft landing have increased. However, inflation remains stubbornly high, and a mild recession would likely lead to higher rates for longer.
The 1970s saw multiples waves of “spikeflation,” where inflation periodically increased, returned to more normal levels, then spiked again. As seen in the chart below, stocks with low P/E ratios outperformed stocks with high P/E ratios in such an environment. Given still-elevated inflation, bad relations with China, and deglobalization, is the US headed for a similar landscape where such stocks will again outperform?
Best,
Nick
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