Economic data last week was largely supportive of the current market trends (improvement in global economic growth & tapering of QE in the U.S. to begin this fall). But the one glaring exception was Friday’s new home sales report, which implies higher mortgage rates are indeed acting as a headwind on the housing recovery.
FOMC minutes from the August meeting was the most-watched item last week, although they failed to provide any insight into when the Fed might taper QE or how they might do it (size of the taper and split between Treasuries or mortgage-backed securities). The minutes showed a divided Fed that lacks consensus on every aspect of tapering QE … other than the fact that they all agree QE does need to be tapered starting this fall.
The bottom line from the Fed minutes (and the outlook for Fed policy) is that the market “consensus” (and I use that term lightly because it’s not a big majority that see tapering in September) is that the Fed will announce a small tapering ($10 billion-$15 billion) to start in October and it will occur entirely in Treasury purchases. That represents a slightly more “dovish” outlook than we had going into the meeting (the expectation for a September taper was a bit higher, and the amount of tapering was expected to be around $20 billion). But, the key is that tapering is still on schedule for later this year.
The second big release last week was the flash global PMIs, and they were universally better than expected. Importantly, China’s flash manufacturing PMI got back above 50 for the first time since April, and Germany and the EU’s flash PMIs beat estimates. This data further implies we’re seeing a stabilization of global economic growth, which should continue to benefit European and Chinese markets.
Finally, housing was in focus last week, and here’s where an otherwise good week of data hit a speed bump.
Existing home sales for July largely met expectations, but the new home sales data released Friday was a big miss. Not only did the headline badly miss, but we also saw a revision of negative 64K to the prior three months’ sales data.
While this report doesn’t show the housing recovery has stalled, this report has to make investors and the Fed nervous that higher mortgage rates are indeed acting as a headwind on the recovery. And if the housing data continues to appear to be getting soft, we could see an even smaller “taper” in September than currently expected.
Although there are numerous releases this week, the data is largely “second-tier” and unless it’s horrid, it shouldn’t really change current Fed expectations.
Revised 2Q GDP is released Wednesday, and there aren’t expected to be any major positive or negative revisions from the 1.7% annual rate that was announced at the preliminary look back in July.
Personal income and outlays is the second most important report this week, but not because of the headline data. Instead, the core Personal Consumption Expenditure price index, which is the Fed’s favorite measure of inflation, is contained in the report. Markets will be looking to see if we get any uptick in that price index, which would imply we are seeing the seeds of inflation.
Given last Friday’s report, housing also remains in focus this week as we wrap up the July housing data. Pending home sales is released Wednesday, and this will be a more closely watched report than usual given last Friday’s New Home Sales miss.