This week’s economic calendar includes the most important housing data, but the market context will prove irresistible to the pundits. Stocks continue at the top of the trading range, and even broke through for a few minutes. Even more interesting is the bond market. Interest rates decisively broke their trading range and also showed a lot of volatility.I expect the interest rate story to have legs in the week ahead, particularly considering the implications for housing. Putting that together with the stock market trading range, the theme will be:Will the interest rate spike pressure stock prices?
Prior Theme Recap
In my last WTWA (two weeks ago, since I took a weekend off) I predicted that market discussions would once again focus on the Fed with special attention to the employment report. That was a good call for the next week and even for the following one. There is plenty of interest in when the first rate hike will come. Better than expected employment data brought opinions about the Fed move back into the June or September time frame.Feel free to join in my exercise in thinking about the upcoming theme. We would all like to know the direction of the market in advance. Good luck with that! Second best is planning what to look for and how to react. That is the purpose of considering possible themes for the week ahead.This Week’s Theme
This week’s light economic calendar competes for attention with the market context. The housing story has not been very exciting this year. Stocks continue to make new highs, to the amazement of many observers. Interest rates showed an upside breakout in spite of relatively weak economic data.The interest rate story is a mystery, particularly for those who explain everything via Fed policy. Why the sudden spike in rates at the long end of the curve? What will happen to mortgage rates? And stocks are testing new highs. Analysts will be asking:Will the spike in interest rates threaten stock prices?
This week’s theme is one of the most interesting we have seen this year, but it is also complicated. There is plenty of opportunity for debate. Let us split the topic into two parts – why rates moved higher and what it means for stocks.
Why the spike in rates? Here are the viewpoints.
- It is all “technical” since rates broke the trading range. (WSJ. This explanation is popular, but it seems to beg the question).
- The hedge funds did it. (WSJ).
- There is no liquidity in the bonds (mostly thanks to central banks). John Authers (ft.com) has a nice, balanced presentation of this issue.
- Regulation has increased bond volatility (Dealbook).
- Demand for corporate bonds has increased, pulling up the government rates. “Davidson” via Todd Sullivan supports this idea, including the following chart:
- The bond vigilantes are sending a message to the Fed.
What is the implication for stocks? More opposing viewpoints.
- Stock prices will crash as bond prices rise. (Wolf Street).
- Stock prices will be fine as long as underlying growth in the economy and corporate earnings continue. (Ben Levisohn, Barron’s).
As always, I have my own ideas in today’s conclusion. But first, let us do our regular update of the last week’s news and data. Readers, especially those new to this series, will benefit from reading the background information.Last Week’s Data
Each week I break down events into good and bad. Often there is “ugly” and on rare occasion something really good. My working definition of “good” has two components:
- The news is market-friendly. Our personal policy preferences are not relevant for this test. And especially – no politics.
- It is better than expectations.
There was some good news in a very mixed week.
- The JOLTs report was strong. Some try to use this as a proxy for net job gains. It is not designed for that and is also “slower” than the regular monthly employment reports. It is better to look at job openings and separations, signs of structural unemployment, and most importantly – the quit rate. (A Fed favorite). 2.8 million people quit their jobs in March. Keep this in mind when you read about a 50K “miss” in the monthly job numbers. Doug Short has helpful analysis and his collection of great charts, including this one:
- Bullish sentiment hit the lowest point in two years. This is bullish on a contrarian basis. Bespoke has the analysis and this chart:
- Initial jobless claims hit the lowest four-week moving average since 2000. This is the best concurrent indicator of the job market, and it continues to show strength.
- Earnings and revenue growth beat expectations on a year-over-year basis. Brian Gilmartin updates his look at the data while taking out energy stocks and Apple. Very interesting and positive results for both earnings and revenue.
The news also included some negatives.
- Gas prices moved higher by three cents, the fourth consecutive week of increases.
- Industrial production dropped by 0.3% versus flat expectations. See Eddy Elfenbein, who notes the decline in mining and utilities. This is the fifth consecutive monthly decline.
- Michigan sentiment missed expectations at a disappointing 88.6 for the May preliminary reading. These surveys provide information about spending and job gains that you do not see until later in the government data. Doug Short’s article and charts provide the best historical perspective and also show the economic correlation.
- The student loan story gets worse. More students are becoming delinquent on loans. (MarketWatch).
- Retail sales missed expectations, coming in flat with a slight increase in the core rate. I am rating this as a negative, although analysts saw some positives in the data. Steven Hansen at GEI does his typical analysis of year-over-year, non-seasonally adjusted, and inflation adjusted results. His conclusion is more positive. Diane Swonk is also more upbeat, emphasizing the core results. Retail earnings news was mixed.
The Avon fiasco. Someone successfully posted a false filing on the government’s EDGAR system. It did not take much reading to see that the filing had inconsistencies and spelling errors. A little more checking showed false addresses. Those who traded first and read later learned a costly lesson. $91 million worth of stock changed hands in less than thirty minutes as the price spiked from about $7 to $8. An additional consequence is the reduced confidence in official government filings, which can apparently be hacked or spoofed pretty easily. (Dealbook
The Silver Bullet
I occasionally give the Silver Bullet award to someone who takes up an unpopular or thankless cause, doing the real work to demonstrate the facts. Think of The Lone Ranger. No award this week, but nominations are welcome.
Whether a trader or an investor, you need to understand risk. I monitor many quantitative reports and highlight the best methods in this weekly update. For more information on each source check here.
Recent Expert Commentary on Recession Odds and Market Trends
Bob Dieli does a monthly update
(subscription required) after the employment report and also a monthly overview analysis. He follows many concurrent indicators to supplement our featured “C Score.”RecessionAlert
: A variety of strong quantitative indicators for both economic and market analysis. While we feature the recession analysis, Dwaine also has a number of interesting market indicators. He recently noted an increase in his combined measure of economic stress
, although the levels are still not yet worrisome. Recently Dwaine wrote
about the relationship between global leading indicators and US recessions, concluding that the signals helped for global recessions, but were less useful for the US. Here is the key chart:
: An update of the regular ECRI analysis with a good history, commentary, detailed analysis and charts. If you are still listening to the ECRI (3½ years after their recession call), you should be reading this carefully. This week the ECRI finally admits
to the error in their forecast, but still claims the best overall record. This is simply not true. I rejected their approach in real time during 2011 and also highlighted competing methods that were stronger. Until we know what is inside the black box (I suspect excessive reliance on commodity prices and insistence on unrevised data) we will be unable to evaluate their approach. Also see Doug’s important Big Four
summary of key indicators, updated regularly.Q2 Economic forecasts are dropping. The Atlanta Fed’s GDPNow shows growth below 1%. Tim Duy
provides context and discussion. Matthew Klein (FT
) notes the peculiar seasonal effects, with a regular rebound in Q3. We shall see.
The Week Ahead
There are fewer reports than usual this week, with a focus on housing.The “A List” includes the following:
- Housing starts and building permits (T). Still waiting for an uptick in this important sector.
- FOMC minutes (W). Whether there is anything fresh or not, expect the pundits to find something.
- Initial jobless claims (Th). The best concurrent news on employment trends, with emphasis on job losses.
- Leading indicators (Th). Continued strength expected in this widely-followed measure.
The “B List” includes the following:
- CPI (F). Remains of little importance until the time that inflation perks up.
- Existing home sales (Th). All things housing are interesting, but less economic importance than new construction.
- Crude oil inventories (W). Maintains recent interest and importance.
It is a light week for Fed speakers, but look for news from Europe from Chicago’s President Charles Evans. Earnings season is winding down.
How to Use the Weekly Data Updates
In the WTWA series I try to share what I am thinking as I prepare for the coming week. I write each post as if I were speaking directly to one of my clients. Each client is different, so I have five different programs ranging from very conservative bond ladders to very aggressive trading programs. It is not a “one size fits all” approach.To get the maximum benefit from my updates you need to have a self-assessment of your objectives. Are you most interested in preserving wealth? Or like most of us, do you still need to create wealth? How much risk is right for your temperament and circumstances?My weekly insights often suggest a different course of action depending upon your objectives and time frames. They also accurately describe what I am doing in the programs I manage.
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