The Consumer Sentiment report was crazy-awesome folks. The expectations component hit 97.8 for a 12-year high and a 13.6 point surge from May. The 13.6 gain is the biggest monthly gain since March 1991!
One thing is clear, the consumer is upbeat and is earning more and spending more. This supports the Federal Reserve’s thesis that the economic slowdown in the first half of 2015 was just a transitory phase.
As stock traders, we track the Consumer Sentiment report because it is consumer psychology that is a key influence on stock and bond markets. Consumer spending drives two-thirds of the economy and if the consumer is not confident, the consumer will not be as willing to spend. Consumer confidence impacts consumer spending which affects economic growth. Strong economic growth translates to healthy corporate profits and higher stock prices.
Consumer confidence soared during the 1990s and stock traders enjoyed huge gains during that time. Consumer confidence turned down with the stock market between 2000 and 2002, and then recovered in 2003 and 2004. In 2008 and 2009, the global financial crisis and Bear market caused confidence to plunge right along with consumer spending and the stock market.
The U.S. consumer came on strong in May with a 0.9% surge in personal outlays. Spending was the heaviest in autos and retail goods.
The surge in spending was supported by a 0.5% rise in personal income.
This is the largest increase in consumer spending in almost six years! This supports the Federal Reserve thesis that the slowdown in the U.S. economy for the first half of 2015 was transitory in nature.
Stock traders track consumer spending because it makes up more than two-thirds of the economy. If you know what consumers are up to, you will have a better chance of predicting where the economy and stock market is headed. The “smart money” also uses the Personal Income and Outlays report to see how consumers are directing their spending, whether they are buying durable goods, nondurable goods, or services. That gives “smart money” a big “early mover” advantage in terms of which companies’ shares they will buy.
The housing market has roared back to life after the great downturn through the subprime mortgage crisis eight years ago.
Home prices have risen in the first half of the year. Morgan Stanley estimates increases of between 4.1% and 6.8%. Starts and permits are just marginally higher for the quarter compared to the same period last year (+3.9%). We have seen consistent employment growth in a key demographic that’s essential for the housing market: the 25-to-34-year-old age group that includes young families and millennials.
At the peak of the home market crisis, more than 15 million homeowners were underwater on their houses. Foreclosures, short sales and increasing home worth freed almost half of those homeowners, leaving 7.9 million homeowners upside down at the end of the first quarter of 2015. Other surveys show 4 million homeowners are underwater. Zillow says the homeowners who remain submerged will likely be the toughest to free from negative equity.
As we head into the second half of 2015, many economists are convinced the housing market will be one of the strongest sectors. Also, economists believe an improving housing market will be the catalyst that strengthens the entire economy and raises GDP. Existing home sales are picking up steam, 6.6% higher for the first three months of this year than the first quarter of 2014. Morgan Stanley notes that all regions of the country have seen growth. The performance of the home market in the first quarter has economists psyched about the remainder of the year.
Housing Market ETF (ITB)
The best way I think to play an improving U.S. economy and housing sector is in the housing market ETF ITB.
On the P&F chart we had a Triple Top Breakout on Janury 13, 2015:
Disclosure: I do not hold any position in any stock mentioned in this article. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Total orders fell -1.8 percent in May. April was revised to -1.5 from an initial -0.5 percent. This negative report for manufacturing supports the thesis that the Philly Fed Business Outlook survey was an outlier.
On the slightly positive side, capital goods (excluding aircraft) rose 0.4 percent in May vs a 0.3 percent slip in April.
Once again, aircraft played a big role in the bad the number this month with a 35% plunge in bookings for expensive commercial aircraft.
As a review of why we track durable goods orders, orders for durable goods show how busy factories will be in the months to come, as manufacturers work to fill those orders. The data provides insight into demand for cars, refrigerators, and also business investment such as industrial machinery, electrical machinery and computers. If businesses start spending more on equipment and other capital, they are obviously experiencing sustainable growth in their business.
Existing home sales rose 5.1 percent in May to a 5.35 million annual rate. The year over year, existing home sales are up 9.2 percent. Prices are rising too, up 7.9 percent year over year.
An updated chart of existing home sales shows a bullish breakout:
The GDPNow forecast for Q2 2015, was raised from +1.9% to 2% today because of the existing home sales report.
The existing home sales increase is good, but it’s not too good. A number REALLY good would have resulted in traders buying the USD because it would have raised the probability that the Federal Reserve was going to raise rates sooner rather than later.
A lot of day traders were watching the existing home sales report this morning and their buyin level was anything above a 5.67 million figure.
Conversely, if the existing home sales number came in at 4.87 million or below, traders would have sold the USD because it would lower the probability that the Federal Reserve was going to raise rates sooner rather than later.
Looking at how the USD responded to the existing home sales report this morning tells us if most traders believe the number was good enough to prompt the Federal Reserve to raise rates sooner rather than later. We can use the chart of UUP to do this:
Looking at the chart of UUP as a kind of voting/poll, we can say that most traders believe that the existing home sales number today was good, but not so good that it changes the Federal Reserve’s time table for a rate hike.
Manufacturing has surged in the June Philadelphia Fed Business Outlook Survey report. The Philly Fed index has surged higher to hit 15.2 for the strongest reading since December. New orders came in at 15.2 which was the highest reading since November.
The Philly Fed index survey was so good that some are defining it as an “outlier”. An outlier is an economic data point that is way outside the group of economic data points and way beyond the standard deviation economists expect.
What gives some credibility to this opinion is that Monday’s Empire State report went negative to -1.98.
Here is what traders and investors will be doing to confirm or deny if today’s Philly Fed survey report is just a bizarre outlier. Any report tied to manufacturing will have more influence for the next few weeks over markets. Specifically, traders will be focused on the Richmond report next Tuesday, followed by the Kansas City report next Thursday. Both of these reports have been very weak as of late and so we will see if they rebound in spectacular fashion like the Philly Fed survey did today.
Stock traders and investors use the Philly Fed survey report as a sign-post for healthy economic growth because that translates to higher corporate profits. The Philly Fed survey gives a detailed look at the manufacturing sector, how busy it is and where things are headed. Since manufacturing is a major sector of the economy, this report has a big influence on market behavior. This is why the stock market exploded higher today, at market open, on the Philly Fed survey report.
Jobless claims in the June 13 week fell 12,000 to 267,000. This was the 15th straight week that claims have come in below 300,000, a level historically associated with a firming labor market.
Below is an updated infographic. Move your mouse over the line to see the underlying number:
As stock traders and investors, we track jobless claims because it is an easy way to gauge the strength of the job market. The less people filing for unemployment benefits, the more have jobs, and that tells us a great deal about the economy. Nearly every job comes with a wage and that income increases a household’s spending power. Consumer spending boosts the economy and keeps it growing. Put simply: a stronger job market generates a healthier economy.
Here is a quick break down of the FOMC announcement on June 17, 2015.
The FOMC can be summarized as:
Information received since the Federal Open Market Committee met in April suggests that economic activity has been expanding moderately after having changed little during the first quarter… On balance, a range of labor market indicators suggests that under-utilization of labor resources diminished somewhat… Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations have remained stable.
For economic growth, participants lowered their projections for this year after the disappointing economic data in Q1 2015, as you can see in the graph below:
The unemployment rate projections for this year are a little higher than they were in March.
FOMC participants project inflation to be very low this year, largely from lower energy and lower import prices, but then inflation rises rapidly in 2016.
The FOMC Announcement Word Cloud
The Top 5 Themes of the FOMC Announcement
1. Maximum employment
2. The current 0 to 1/4 percent target range for the federal funds rate remains appropriate.
3. Economic activity will expand at a moderate pace, and labor market indicators will continue to improve.
4. Inflation will rise gradually toward 2 percent as the labor market improves further.
5. The transitory effects of earlier declines in energy and import prices will dissipate.
The longest sentence:
Inflation is anticipated to remain near its recent low level in the near term but the committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of earlier declines in energy and import prices dissipate.
The shortest sentence:
Energy prices appear to have stabilized.
Top Two Word Phrases
14 = the committee
6 = labor market
4 = maximum employment
Top Three Word Phrases
2 = employment and inflation
2 = mortgage backed securities
2 = agency mortgage backed
2 = federal funds rate
Federal Reserve Video June 17, 2015
Housing starts came in at a 1.036 million rate in May which is down 11.1 percent from the April rate. April has been revised higher to 1.165 million which is a 22.1 percent gain from March.
Building permits came in 1.275 million, following a 9.8 percent gain in April. This is an 11.8% gain to an annualized pace of 1.1 million, the most since January 2007.
Building permits are the leading indicator in the report. The gain is centered in the Northeast followed by the Midwest.
We could see the Q2 2015 GDP forecast raised later today by the Federal Reserve Bank of Atlanta Center For Quantitative Economic Research.