MARKET TRENDS: Summary for the Week Beginning June 22, 2015

A series of economic data is scheduled to be released this week, including reports on the Gross Domestic Product (GDP), housing, and Michigan’s consumer sentiment. With the Fed contemplating the optimum time for a rate hike, which is data dependent, all data is significant to the decision. The housing market should get more good news today, driven by better wage growth – which leads to improving home affordability. The second estimate for the GDP during the first quarter will be out Wednesday, and the market expects the GDP to contract, although less than the initial estimate.

Existing Home Sales (Mon): Existing Home Sales, which includes the number of previously constructed homes, condominiums and co-ops, accounts for a larger share of the market than new homes. Today the National Association of Realtors is expected to post a strong 4.4% month-over-month (MoM) rise to 5.26 mn in existing home sales for May.

Existing-home sales slowed in April with a slowdown in sales of single family homes but remained above an annual sales growth of five million for the second straight month. In April, existing home sales decreased 3.3% MoM to 5.04mn. Building permits for future home construction surged to a near eight-year high in May, but housing starts fell, largely due to a decline in single family home sales. Permits were driven by a large gain in multifamily construction plans.

Core Durable Goods Orders (Tues): Orders related to civilian aircrafts have decreased sharply, which should lead to a 0.5% drop in the durable goods orders in May. Durable goods orders declined 1% in April, with a steep fall in aircraft-related orders. Excluding transportation, the core orders should rise 0.6% after a 0.2% fall in the previous month, indicating growth in business investment.

New Home Sales (Tues): New home sales are expected to have climbed to 525,000 in May from 517,000 in April. The housing market is expected to continue to progress with improving wages and low mortgage rates. The housing industry impacts the economy as a whole, as it affects lenders, construction workers, and retail. Lennar Corporation, the second largest homebuilder in the U.S., is expected to report a strong second quarter.

Manufacturing PMI (Tues): The Manufacturing Purchasing Managers' Index (PMI) is expected to inch up to 54.2 in June from 54.0 in May. New orders came in at a slower pace. The May PMI was slightly better than the preliminary reading of 53.8, but below 54.1 in April.

The Index was at its lowest since January, as new order volumes grew at the weakest pace in 16 months. Slower growth in total new business resulted in a weaker rise in production volumes in May. Lower business spending, particularly in the oil and gas industry, coupled with subdued demand in external markets, led to the slower factory activities.

Gross Domestic Product (Wed): Strong manufacturing, construction and housing markets should raise the revised GDP growth estimate for 1Q15 to -0.2% from the previous estimate of -0.7%. Softer GDP growth in 1Q15 was attributed to the harsh winter weather that kept consumers at home, a strong dollar that spoiled U.S. exports, and a West Coast dock strike that disrupted supply chains.

Economists hope that the second quarter will rebound strongly. A recovery in the U.S. economy in 2Q15 will further encourage a Fed rate hike. A GDP price Index for the quarter is expected at –0.1%, unchanged from the last quarter.

Core Personal Consumption Expenditure (PCE) Prices Index (Thurs): The Core PCE Price Index is expected to rise 0.1% in May for the fourth straight month. Annual core PCE inflation is expected at 1.2% YoY in May, well below the Fed’s 2% target.

Core PCE has remained subdued, with the April number diving to the lowest level since the middle of 2014. In the June FOMC meeting, the Fed stressed the soft inflation levels due to lower energy prices. The Fed officials will be waiting for a better inflation rate before any interest rate hike.

Personal Spending and Income (Thurs): May personal income is expected to increase 0.5% in May versus 0.4% in April. Personal outlays have remained low this year. May personal spending is expected to grow 0.7%, primarily driven by higher auto sales. Consumers have been cautious of the uncertain economic conditions and saved a larger portion of their income. The Federal Reserve has been making efforts to stimulate consumer spending.

Initial Jobless Claim (Thurs): Initial jobless claims should have moved up by 4,000 to 271,000 for the week ending June 26, 2015 from 267,000 in the previous week. Unemployment benefit claims decreased by 12,000 in the week ending June 13th from 279,000 in the previous week, the lowest level in past five weeks. The 4-week moving average, a better measure of labor market trends, was at 276,750, decreased by 2,000 from the previous week's unrevised average of 278,750.

The University of Michigan Consumer Sentiment Index (Fri): Michigan Consumer Sentiment Index likely remained flat at 94.6 in June while the Michigan Consumer Expectation Index expected to increase 0.1 point to 86.9 in June, from 86.8 in the previous month. The Michigan Current Condition Index likely moved down to 106.7 from 106.8 in May. A weak economy had dragged down the May Consumer Expectation Index.

The U.S. Consumer Confidence Index fell 1.7% points in June, for the second consecutive month. This is its lowest level this year, as per a survey released last week. The Primary Consumer Confidence Sentiment Index, which comes out two days before the University of Michigan Consumer Sentiment Index, fell to 55.0 in June from 56.7 in May. There is a 90% correlation between the Index and University of Michigan survey and up to a 93% correlation with the Conference Board Consumer Confidence Index.