Introduction

A big jump in pending home sales leads another strong week of economic news and adds to the prior week when housing starts & permits surged and when core inflation turned up. FOMC members are no doubt tinkering some more with their statement that's coming soon — the one when policy begins to tighten and interest rates move higher.

The Economy

Housing heating up'

Pending home sales, which track contract signings for existing home sales, have been sending off the most consistently positive signals of any housing indicator. Up now for four straight months, pending home sales jumped a much higher-than-expected 3.4 percent in April following an upward revised 1.2 percent gain in March. Year-on-year, pending home sales are up a very hot 14.0 percent which contrasts very sharply with the 6.1 percent year-on-year gain for final sales of existing homes. Assuming credit issues aren't scotching deals, and there are no indications that they are, existing home sales can be expected to play catch up.

There is also good news on the new home side of the housing market where sales bounced back solidly in April, up 6.8 percent to a 517,000 annual rate. Supply rose slightly in the month, to 205,000 new homes on the market, but supply relative to sales fell to 4.8 months from 5.1 months. Low supply should encourage builders to bring more homes to the market.

Low supply is also a plus for prices and price readings are mostly favorable led by a 4.1 percent rise in the median price to $297,300 for a strong 8.3 percent year-on-year gain. But price data in the new home sales report can be volatile and gains here were only partially echoed in other price reports. S&P Case-Shiller's 20-city house price index for existing homes jumped 1.0 percent in the latest report but the year-on-year rate, at only plus 5.0 percent, is no better than moderate. Moderate is also a good description for FHFA, a report that tracks prices among Fannie Mae and Freddie Mac transactions and where the latest gain is only 0.3 percent with the year-on-year gain at 5.2 percent.

Readings from the housing sector aren't uniformly strong but gains for pending sales follow the prior week's housing starts & permits report where increases were some of the strongest on record. And there's always the possibility that the housing sector never really was as bad as it seemed this winter. The statistical noise tied to adjustments may have held down the government's economic numbers as they may have with first-quarter GDP where the latest revision is in the contraction column, at an annualized pace of minus 0.7 percent. At least noise is a possibility, and it's being raised by the FOMC and Janet Yellen as well.

Springtime strength for housing may prove stronger than expected after all and, when looking back, was perhaps first signaled by the 45,000 surge in construction payrolls of the April employment report.

Capital climb

The capital goods sector is showing life which helped to limit April's aircraft-related decline in durable goods orders to 0.5 percent. Ex-transportation, which offers a core reading that excludes aircraft, rose 0.5 percent following a 0.6 percent gain in the prior month which is a decent back-to-back gain.

The big news in the report comes from nondefense capital goods excluding aircraft, a core reading for business investment and which rose a strong 1.0 percent following an even stronger 1.5 percent gain in the prior month. The graph shows how stagnant capital goods orders have been, virtually unchanged in dollar terms over the last two years. Another plus is shipments of capital goods which, after rising 1.0 percent in March, rose another 0.8 percent in April which should give a lift to second-quarter GDP.

Capital goods are major exports for the U.S. and this report hints at some recovery for exports which have been held down by the strength of the dollar combined with weakness in foreign economies. But these factors will continue to hold back the factory sector which began stumbling long ago, halfway through last year. And a look at the Dallas Fed manufacturing index, deeply in contraction at minus 13.5 this month, is a reminder that a major drag is coming out of the energy sector as well.

Consumer confidence affirmed

Readings on the consumer's mood peaked early in the year at recovery highs but have since been coming down, that is until the May reports which confirm the Fed's assessment in April that consumer confidence is solid. The consumer confidence report for May came in at 95.4, slightly higher than April. Income expectations are up slightly and buying plans are all higher including for autos, homes, and especially for appliances.

The consumer sentiment report also showed strength, ending May at 90.7 vs the mid-month flash of 88.6. The implied reading for the last two weeks of the month is about 93 which, though down from April's 95.9 and January's peak over 98, is still very solid. Nevertheless, there is month-to-month weakness which points to trouble for consumer spending in May. The current conditions component ended May at 100.8 which is well down from April's 107.0 in weakness that also hints at trouble for May's jobs market.

However solid consumer spirits appear to be, they have yet to translate into what the FOMC is expecting, that is acceleration for consumer spending.

Markets not surprised, at least yet

It was another up-and-down week for the stock market where indexes rallied to new highs then fell back. The Dow ended the week at 18,010 for a minus 0.6 percent loss. Both the Nasdaq and S&P 500 also lost 0.6 percent on the week.

There wasn't much action this week in the bond market either though there's plenty of talk from global policy makers and regulators who are showing no alarm at all over the market's recent seizures. The FOMC appears ready to blame high frequency traders for past troubles and for any new troubles that might pop up. One thing the FOMC is not likely to blame will be its painstaking communication strategy. But even when news is expected it can still hit you by surprise, and a natural place for that surprise to express itself will be volatility in long-term rates. Rates moved decidedly lower in the week with the 10-year Treasury yield down 11 basis points to 2.12 percent.

The Bottom Line

If housing can build enough momentum to offset what appears to be stubborn weakness in manufacturing and if consumer spending can match consumer confidence, the strength of the second-quarter rebound could easily be enough to pull forward the Fed's pending rate hike. Watch for upcoming references to the housing sector in Fedspeak, and how the hawks and doves represent their cases.

Looking Ahead: Week of June 1 to June 5 

The outlook for the Fed's first rate hike is centered on September and if expectations for Friday's employment report pan out, at a moderate 220,000 for nonfarm payroll, those expectations will remain intact. Jobs indicators going into the report, including ADP on Wednesday and jobless claims on Thursday, will further center attention on Friday. A sleeper for the week is motor vehicle sales on late Tuesday which will offer the first hard consumer data on May.

Monday

Personal income and outlays are not expected to show too much life with income seen up a respectable 0.3 percent but outlays, held down by weak retail sales, seen on the soft side at plus 0.2 percent. Keep a close eye on price readings following the rise in the April core CPI. And the core PCE price index is expected to show some pressure, to plus 0.2 percent from a long run at 0.1 percent.

Personal Income - Consensus Forecast for April: +0.3 percent

Range: 0.0 to +0.5 percent

Personal Outlays - Consensus Forecast for April: +0.2 percent

Range: +0.1 to +0.4 percent

PCE Price Index - Consensus Forecast for April: +0.1 percent

Range: +0.1 to +0.3 percent

Core PCE Price Index for April: +0.2 percent

Range: +0.2 to +0.2 percent

The PMI manufacturing index has been struggling, falling back in recent months consistent with other readings on the sector. Employment has been a special strength of this report but gains here have not been justified by orders which have been slowing.

PMI Manufacturing Index - Consensus Forecast for May: 53.8 

Range: 53.5 to 54.3

The ISM Manufacturing index has slowed abruptly this year as have new orders. Regional reports for May have all been soft and forecasters see another very soft showing for the ISM, at 51.8.

ISM Manufacturing Index - Consensus Forecast for May: 51.8

Range: 51.0 to 52.7

Construction spending has been very weak but life is expected to appear in the April report with the consensus calling for a strong 0.7 percent gain. Expectations are tied to strength for private residential construction given the huge surge in April housing starts and permits. There is some uncertainty, however, as the range is wide at plus 0.3 percent to plus 1.6 percent.

Construction Spending - Consensus Forecast for April: +0.7 percent

Range: +0.3 to +1.6 percent

Tuesday

A monthly downswing in aircraft orders is expected to pull total factory orders into the negative column in April, but just barely at minus 0.1 percent. Orders had been in a deep downward slope until life started to appear in March, specifically life in the capital goods sector. The durables component has already been reported for April, at minus 0.5 percent.

Factory Orders - Consensus Forecast for April: -0.1 percent

Range: -0.6 to +1.5 percent

Motor vehicle sales have been steady but not accelerating, but acceleration is what forecasters see for May, to a 17.0 million annual rate vs a below trend 16.5 million pace in April. Vehicle sales offer the very first hard data on any month's consumer spending.

Total Motor Vehicle Sales - Consensus Forecast for May: 17.0

Range: 16.7 to 17.4

Motor Vehicle Sales North-American made - Consensus Forecast for May: 13.6

Range: 13.4 to 13.9

Wednesday

The ADP Employment Report missed by a mile in April, predicting only 169,000 growth in private payrolls which came out at a very much stronger 213,000. Forecasters see ADP coming in at 200,000 for May, in line with what are no better than moderate expectations for Friday's employment report.

ADP Employment Report - Consensus Forecast for May: +200,0000

Range: +180,000 to +239,000

The huge surge in imports was the memorable surprise of the March report, the result of the West Coast dock strike. The international trade gap for April is expected to narrow sharply to $44.0 billion vs March's upwardly skewed gap of $51.4 billion.

International Trade - Consensus Forecast for April: -$44.0 billion

Range: -$46.0 to -$39.5 billion  

The health of the economy is increasingly tied to the health of the service sector. The PMI Services Index has been solid but slowing though no further slowing is expected for May where the index is seen rising 1 tenth to 56.5. 

PMI Services - Consensus Forecast for May: 56.5

Range: 56.3 to 58.0

The ISM Non-Manufacturing index, month after month, has been signaling among the most solid rates of growth of any anecdotal indicator. May expectations for a 57.2 reading would combine with April's 57.8 to signal robust second-quarter strength through the bulk of the economy.

ISM Non-Manufacturing index - Consensus Forecast for May: 57.2

Range: 55.5 to 58.2  

Thursday

Jobless claims have been very steady at rock bottom lows. Whatever variation there has been, has been due to calendar effects and seasonal adjustments. Forecasters see initial claims holding at the high end of trend, at 276,000.

Jobless Claims - Consensus Forecast for May 30 Week: 276,000

Range: 270,000 to 300,000  

Productivity and costs have been swinging wildly with productivity plunging the last two quarters due to weak output, in turn badly inflating labor costs. The downward revision to second-quarter GDP, to minus 0.7 percent, has forecasters calling for even weaker productivity and higher unit labor costs.

Nonfarm Productivity, 2nd Est. - Consensus Forecast for Q1: -2.9 percent

Range: -3.3 to -2.2 percent

Unit Labor Costs, 2nd Est. - Consensus Forecast for Q1: +6.0 percent

Range: +4.4 to +6.5 percent

Friday

The employment situation is expected to be no more than moderate in May, at 220,000 for nonfarm payroll growth which would be virtually unchanged from April's 223,000. The forecast range is relatively narrow, from 190,000 to 289,000 which points to a sense of certainty among the sample. The unemployment rate, which slipped in April,  is expected to hold unchanged at 5.4 percent. Hawks at the Fed, keyed up on the first signs of wage inflation, will keep an eye on average hourly earnings which are expected to rise a notch but by a still moderate plus 0.2 percent.

Nonfarm Payrolls - Consensus Forecast for May: 220,000

Range: 190,000 to 289,000

Private Payrolls - Consensus Forecast for May: 215,000

Range: 185,000 to 280,000

Unemployment Rate - Consensus Forecast for May: 5.4 percent

Range: 5.3 percent to 5.4 percent

Average Hourly Earnings - Consensus Forecast for May: +0.2 percent

Range: +0.2 to +0.3 percent

Average Workweek - Consensus Forecast for May: 34.5 hours

Range: 34.5 hours to 34.6 hours

Labor Force Participation Rate - Consensus Forecast for May: 62.7 percent

Range: 62.7 percent to 62.7 percent

Consumer credit is expected to rise an intrend $16.5 billion in April. Gains in this report have been consistently centered in non-revolving credit, offsetting long-term weakness in the revolving credit component which is where credit card debt is tracked.

Consumer Credit - Consensus Forecast for April: +$16.5 billion

Range: +$14.0 to +$22.5 billion