Trade, Fed Minutes, Housing and Durable Goods
In the week ahead trade developments, and the Fed’s interpretation of those developments, will shape trading more than other factors, except possibly the positive seasonality for Treasuries now that we’re nearing summer. With nearly a dozen Fed speakers this week, along with FOMC minutes from the May meeting, the Fed will get an inordinate share of attention this week. Away from Fed-related news and trade developments April existing and new homes sales will give us clues on whether the Fed’s rate-hiking pause is paying dividends in increased selling activity. Finally, durable goods orders for April will give us an indication about the manufacturing sector and how it’s fairing as it deals with excess inventories. Expectations are for a slowing in April activity.
|Treasury Curve||Today||Week Change|
|3 Mo LIBOR||2.52%|
|6 Mo LIBOR||2.55%|
|12 Mo LIBOR||2.64%|
|Date||Statistic||For||Briefing Forecast||Market Expects||Prior|
|May 21||Existing Home Sales||Apr||5.35m||5.35m||5.21m|
|May 21||Existing Home Sales (MoM)||Apr||2.7%||2.7%||-4.9%|
|May 22||FOMC Meeting Minutes||May 1||NA||NA||NA|
|May 23||Bloomberg Consumer Comfort||May 19||59.9||59.9||59.9|
|May 23||Markit US Manufacturing PMI||May P||52.8||52.6||52.6|
|May 23||New Home Sales||Apr||677k||671k||692k|
|May 23||New Home Sales||Apr||-2.2%||-3.0%||4.5%|
|May 24||Durable Goods Orders||Apr P||-2.0%||-2.0%||2.6%|
|May 24||Durable Goods Ex-Transports.||Apr P||0.2%||0.1%||0.3%|
Top 5 Events for the Week
May 20 - 24, 2019
1. Trade Developments –All Week
2. Fed Speak –All Week
3. FOMC Minutes –Wednesday
4. April Existing & New Home Sales –Tues/Thurs.
5. April Durable Goods Orders -Friday
1. Trade Developments —All Week
The fallout from the breakdown in U.S./China trade negotiations continues to reverberate. On Friday, the official state run newspaper was quoted as saying, “China is not interested in talking with the U.S. for now.” That initially created a risk-off mood with Treasuries rallying on the increased bellicosity but the news that the U.S. would rescind steel tariffs with Canada and Mexico calmed markets. The latest China dust-up, however, illustrates that any resolution is probably a long-time coming with the late June G20 meeting between Trump and Xi the next real opportunity for some announcement. In the meantime, markets are likely to be buffeted by competing statements and claims. That should provide a bid to Treasuries until a deal is announced. In the meantime, the dollar continues to strengthen against all currencies including the Chinese yuan which will depress import prices and increase export costs. That will stymie any increase in inflation from higher tariffs while also tilting the balance of trade towards cheaper imports which will be an ongoing headwind to GDP.
2. Fed Speak —All Week
We get a double-dose of Fed news this week with nearly a dozen Fed speakers as well as minutes from the May 1st meeting. The Fed speak last week didn’t really delve too much into the possible global headwinds generated off increased tariffs and tit-for-tat retaliation. In fact, most Fed speakers continued to express confidence in the economy and confidence that inflation would move towards the 2% target. The University of Michigan Survey last Friday should have also brightened their mood as inflation expectations, as expressed in the survey, ticked up after trending lower for the past few months. The Fed is big on believing inflation expectations lead actual inflation so seeing expectations reverse a falling trend will probably garner a mention or two by some of the speakers. Chair Powell headlines the speakers and will be in Atlanta tonight so his address should set the tone, but we are expecting a generally upbeat assessment of both the economic and inflation trends with a nod to the potential negatives from the geo-political issues (i.e., China trade, Middle East saber-rattling, and E.U elections).
3. May 1st FOMC Meeting Minutes —Wednesday
The minutes from the May FOMC meeting are likely to be less important than usual minutes for a couple reasons: (1) the meeting was widely seen as a placeholder for the June meeting that will come with refreshed rate and economic forecasts, and (2) there has been plenty of Fed speak since the meeting (including this week) such that we’re getting a good read on the Fed’s current outlook. In any event, the minutes will be perused for any lean in either the hawkish or dovish direction that may have gone undetected in the statement, press conference and subsequent public comments.
4. April Existing & New Home Sales –Tuesday/Thursday
The housing market has started to recover from the slumber that it took for much of last year under the weight of quarterly rate hikes. Improvement will be a key tell on whether the Fed’s rate-hiking pause has aided the sector which has recently been helped by moderating home prices and increasing wage gains. Existing home sales account for nearly 90% of the residential market and as such gives us the broadest view of its health. April existing home sales are expected to have increased to 5.35 million annualized units versus 5.21 million in March. The average over the past year has been 5.27 million annualized so the April sales are expected to show both a sequential increase and above-average activity. On Thursday, the April New Home Sales Report will give us the second piece of housing data for the week. Expectations are for new home sales to fall –3.0% to 671,000 annualized versus the robust 692,000 in March. The March print was the highest since November 2017 when it posted an annualized sales figure of 712,000. The average over the past year for the series has been 618,000 so despite an expected sequential decline, April results should be well above the twelve-month average.
The April Durable Goods Orders report due on Friday will provide another bit of evidence on whether the manufacturing sector will be a drag on second quarter GDP. Recall the inventory overhang has been a headwind to the sector since the fourth quarter last year and the first quarter of 2019. Expectations are for the report to reflect a falloff in April orders. The overall orders number is expected to be down –2.0% versus up +2.6% in March. Orders less the volatile transportation sector are expected to be up 0.1% versus –0.1% the prior month. Shipments of non-defense ex-air items (a proxy for business investment) are expected to be down -0.2% versus unchanged in March. In summary, much like the retail sales numbers from last week, durable goods orders are expected to show a softening in activity versus the March results.
Investment Yield Ranges Over Last Year
Thomas R. Fitzgerald
Director, Strategy & Research