A Preview of this Week’s Headlines
As the second quarter winds down, investors are shifting their sights to macro themes. We’re about to get a better sense of whether the economy is building steam, or stalling out. Here’s a look at three economic items to watch this week:
Housing: New vs. Used
On Tuesday, we’ll get the latest reading on sales of existing homes for the month of May. A day later, sales of new homes will be in the spotlight. Economists think existing sales rose +5% sequentially, thanks to tax credits (that have since expired). But new home sales likely fell sharply, according to a consensus of economists’ forecasts.
The ratio of existing homes for sale compared with the number of new homes has never been larger. The glut of unsold existing homes on the market needs to be whittled down before more new homes get built. Of these two data points, the existing homes figure is the one to track. If the number shows a surprising dip in the inventory of existing homes, then home builders may start to identify the time when they will start making more new homes — and that would give a solid lift to the economy as housing construction supports so many ancillary industries.
What say You, Mr. Bernanke?
The Federal Reserve meets once again on Wednesday, June 23 to discuss interest rates. The odds of a rate hike are nil. But investors should be aware that any change in wording about their economic sentiment could move the market — to the downside.
For quite some time, the Fed has made it very clear that interest rates will stay low for the foreseeable future, and they have noted that the risks are greater that the economy will weaken rather than strengthen. At some point, they will start to reflect a more neutral tone to help telegraph that the time for rising interest rates may be on the visible horizon. Investors are likely to treat such language with great caution. And some will start to identify the specific meeting in which rates will start to rise.
Investors hate rising interest rates, but rates have never before come off such a low base. When the Fed starts hiking rates, it may do so moderately, and end its rate-tightening long before it chokes off economic activity or makes bonds more appealing than stocks. If history is any guide, any market sell-off related to any change in language could trigger a nice rebound after that, as calmer investors know that moderate rate hikes are likely a healthy sign in the long-run. Right now, some are concerned that ultra-low rates are creating conditions for the next asset bubble. As rates rise, those concerns should abate.
Hard Goods — a Mixed Picture
The Fed gets to see economic data before the rest of us, so it will already be aware of the data from the monthly durable goods report to be released the next day, Thursday, June 24. Economists think that the report, which measures production of all items meant to last for a number of years (think cars and dishwashers), fell back a bit in May after rising in preceding months. This will be the first month that incorporates a much weaker euro, though it’s unclear if factory output can respond that quickly. But as Europe stays in a funk throughout the summer, durable goods readings are likely to be weak. And that may lead the Fed to keep its interest rate language intact. As noted earlier, maintaining the current body language is unlikely to help stocks, but a change in language could hurt stocks.