Introduction

The Fed, back in their April policy meeting, warned us that first-quarter weakness was due to "transitory factors." And here we are, on the other side of transitory and the economic data, first with the May employment report and now with the May retail sales report, are looking pretty solid. Yes, the bounce is here, but high is the bounce, really? 

The Economy

Get out and shop

The consumer definitely showed some bounce in May, driving up retail sales 1.2 percent with gains sweeping nearly all components. A leading component in the month was motor vehicle sales which jumped 2.0 percent, excluding which retail sales still rose a very strong 1.0 percent. Another component showing special strength was gasoline sales which got a boost from higher pump prices. But even when excluding both of these components, retail sales ex-autos & ex-gasoline gained a very solid 0.7 percent.

Standouts on the plus side, apart from vehicles and gasoline, were building materials & garden equipment stores, up 2.1 percent in what is a good sign for the housing sector. Clothing & accessories stores rose 1.5 percent while nonstore retailers rose 1.4 percent. Department stores, which sank a steep 2.9 percent in April, rebounded with a 0.8 percent gain. There was only one component showing contraction in May and that's the usually solid health & personal care stores which dipped a modest 0.3 percent.

But the good news doesn't stop. There were solid upward revisions to the two prior months with total sales in April moving from unchanged to plus 0.2 percent and March moving from plus 1.1 percent to 1.5 percent. The May burst and April revision have forecasters raising their second-quarter GDP estimates while the March revision has them raising their first-quarter revision estimates.

I feel good!

And the week had a solid follow-up punch! Consumer sentiment rose nearly 4 points to 94.6 in the mid-June reading which was well above the Econoday consensus for 90.3. The current conditions component, up 6.0 points to 106.8, is at the center of the gain which offers an early signal for June-to-May consumer strength. The expectations component showed a smaller but still healthy gain, up 2.6 points to 86.8. The gain here points to confidence in the jobs outlook.

Gas prices have been edging higher but are not affecting inflation expectations which ticked lower, down 1 tenth to 2.7 percent for both the 1-year and 5-year outlooks.

Consumer sentiment is back near its best readings of the recovery that were posted earlier in the year, and the gain in current conditions specifically hints at another strong month for retail sales. The FOMC is closely tracking readings on consumer confidence and the sentiment report for mid-June is a little bit more ammunition for the hawks.

But the relationship between retail sales and consumer confidence isn't airtight. This raises the question of longer trends in retail sales. Let's turn back to the retail sales report. Monthly readings have been coming alive but what do the year-on-year rates look like? Not very strong at all is the answer. On this basis, total retail sales were up only 2.7 percent in May with April at plus 1.5 percent. When adjusted for inflation, this is hardly any growth at all. The core ex-autos & ex-gasoline rate does look a little more convincing at least by a bit, at plus 4.3 percent in May from April's plus 3.8 percent. But even here, a comparison with the beginning of the year doesn't show any improvement at all, at plus 5.7 percent for January and plus 4.3 percent for February. 

More jobs than applicants

The hawks may get better traction from jobs data than consumer spending data. The latest JOLTS report is one for the history books with job openings surging to 5.376 million, far above the Econoday consensus for 5.038 million and also far above the high estimate at 5.050 million. This is the highest reading in the history of the series going back to 2000. The job openings rate rose to 3.7 percent from 3.5 percent.

And jobs are opening faster than employers can fill them with the hires rate actually slipping 1 tenth to 3.5 percent. This report will boost talk among the hawks that slack in the labor market is evaporating and that employers will have to raise wages to fill positions.

And sending the strongest signals of all employment indicators are initial jobless claims. Initial claims did rise marginally to 279,000 in the June 6 week and the 4-week average did rise for a 3rd straight time but only slightly to 278,750. But these readings, last approached 15 years ago, are so low that it's becoming difficult to show improvement.

There is a little less strength, however, in the latest data for continuing claims which are suddenly moving in the wrong direction, up a steep 61,000 to 2.265 million in data for the May 30 week with the 4-week average up a less severe 11,000 to 2.227 million. The unemployment rate for insured workers ticked 1 tenth higher but to a still very low 1.7 percent.

Continuing claims aside, the unemployment side of the labor market is as favorable as it has ever been, a contrast with the employment side of the market which may only right now be building up steam.

Markets: Jawboning for exports

Presidents always get accused of a lot of things but this may be new – jawboning the dollar down. President Obama denied a press report in the week that quoted him as saying the dollar was "a problem." Sure, strength in the dollar has been hurting exports and sure some would rather see a less competitive dollar – that is devaluing the currency the Somalia way as Lawrence Summers once said. But trying to talk down the dollar is like trying to tell your cat to behave. It's guaranteed not to do any good and everyone knows it.

But the week wasn't a story about the dollar, rather the euro which has been getting hit back and forth on whatever the latest headlines are out of Greece. Will there be a Grexit? Do the Greeks want it? Maybe not, having to choose between a nice solid currency like the euro for the unknown of the drachma. But do the Germans want a Grexit? Weak economies in Europe help hold down the euro which, very directly, helps keep up foreign demand for German exports and helps keep Germans employed. Right now it's a cliff hanger and whatever the outcome, it's time for the final scene to now play out.

Back to the president. Late Friday Democrats in the House, that's right members of his own party, brought down legislation that would have expanded the president's authority to negotiate trade deals separately from Congress. The vote apparently scuttles Obama's chances at establishing a Pacific trade accord. The markets showed little immediate reaction to the news.

Stocks had a bumpy week, and one surprisingly not tied to the strong run of economic data but instead to day-to-day reports on Greece. Wednesday was the biggest plus day for stocks, with indexes gaining more than 1 percent on uncertain reports that Germany and Greece were moving toward an agreement. Stocks then reversed on Friday on the increasing likelihood that a Greek default of some kind is now unavoidable. The Dow posted a 0.3 percent gain on the week with the S&P 500 showing an even smaller gain. The Nasdaq fell 0.3 percent.

The Bottom Line

The second quarter is proving to be solid but not exactly stellar. Revisions to March retail sales are lifting estimates for the next first-quarter GDP revision to the no change area, which after all isn't that great to say the least. Second-quarter estimates are now trending at about plus 2.5 percent. Split the difference, what do you get? Maybe something in the low 1 percent range for the first half of the year. Not much there. Looking back at last year when first-quarter GDP was also depressed by heavy weather, at minus 2.1 percent, the second-quarter bounce back was at 4.6 percent. Splitting this difference comes out to twice of what we can expect this year. The hawks may have good arguments but this year's results so far just aren't that good.

Looking Ahead: Week of June 15 to June 19

Manufacturing, hit by weak exports, is a focus of the week, starting off with Empire State on Monday and Philly Fed on Thursday, both of which will offer the earliest indications on June's conditions. And the first hard data on manufacturing in May will come from Monday's industrial production report. Housing is also center stage with the housing market index on Monday, which will offer a sentiment reading among homebuilders, followed on Tuesday by hard data on housing starts & permits which have been way up one month, and not so up the next. But stand back! The real focus will be FOMC events on Wednesday. The Fed may not be changing rates but will very likely make changes to their quarterly economic forecasts. But the week's big question, will Janet Yellen, in her press conference, specifically mention September as the likely month for action?

Monday

The Empire State manufacturing survey has been dead in the water in the low single digits, offering every month for each of the last eight months the first indication of what would turn out to be another weak month for manufacturing. The dollar is still strong and exports are still weak, pointing to what is very likely to be another weak Empire State report.

Empire State Manufacturing Survey - Consensus Forecast for June: 5.90

Range: 4.00 to 8.00   

Industrial Production can swing back and forth on utility output but a look at the other two components tells the real story: mining, hit by low commodity prices, has been down for five months in a row while manufacturing, hit not only by low commodity prices but also by weak export demand, has been down in three of the last five which does not include an unimpressive no change reading for April. The Econoday consensus is calling for a little strength in May, at plus  0.2 percent for the headline which is very little, but a respectable 0.3 percent manufacturing gain.

Industrial Production - Consensus Forecast for May: +0.2%  

Range: +0.1% to +0.5%  

Manufacturing Component - Consensus Forecast for May: +0.3%

Range: +0.2% to +0.4% 

Capacity Utilization - Consensus Forecast for May: 78.4%  

Range: 78.2% to 78.7%  

Credit has to be given to the NAHB housing market index which month after month has been signaling strength in the new home market that never materialized – that is, not until recently. Another solid mid-50s reading could build expectations for a second-half stretch run for new home sales and new home construction.

NAHB Housing Market Index - Consensus Forecast for June: 56

Range: 55 to 57

Tuesday

To say housing starts & permits have been swinging wildly would be a big understatement, though lately they've been swinging in the entirely correct direction: straight up. The monthly comparison for the May report is extremely difficult to say the least given April's 20.2 percent surge in starts (no typo) and 10.1 percent surge in permits, which puts the emphasis on the data's trends. For May alone, the Econoday consensus for starts is calling for a 4.0 percent reversal to a 1.090 million rate and a 3.3 percent decline in permits to 1.105 million.

Housing Starts - Consensus Forecast for May: 1.090 million

Range: 1.044 to 1.155 million

Building Permits - Consensus Forecast for May: 1.105 million

Range: 1.065 to 1.200 million

Wednesday

The FOMC announcement is expected to leave policy rates unchanged with fed funds still at a range of zero to 0.25 percent. But you never ever know and the hawks can put up a good argument, citing May strength in the jobs market and May strength in retail sales (not to mention upward revisions to both). This will be a discussion not about economic weakness, but economic strength.

FOMC Consensus Forecast for policy vote on fed funds target range: Unchanged at a range of zero to 0.25 percent.

The Chair press conference will begin shortly after the FOMC meeting statement, about 2:30 p.m. ET.  Janet Yellen will take questions about policy and also about the Fed's updated economic forecasts. If there is indeed no hike at this meeting, all attention will be focused on whether Yellen specifically sets up expectations for September as the rate-hike launch.

Thursday

The consumer price index has been showing some pressure, specifically the year-on-year core rate which has been approaching no man's land near 2 percent. For the monthly reading, Econoday forecasters are expecting a strong 0.5 percent gain for the headline but a benign 0.2 percent gain when excluding food and energy.

Consumer Price Index - Consensus Forecast for May: +0.5%

Range: +0.3% to +0.6%

CPI Less Food & Energy - Consensus Forecast for May: +0.2%

Range: +0.1% to +0.3%

It's beginning to become difficult judging jobless claims because they're so low! They may rise in any given week but that means very little. The unemployment side of the labor market is as favorable as it has ever been.            

Jobless Claims - Consensus Forecast for June 13 Week: 275,000

Range: 265,000 to 280,000  

The nation's current account deficit for the first quarter is expected to rise slightly from the fourth quarter, to $116.5 billion vs $113.5 billion and reflecting the quarter's widening trade gap tied in part to the port slowdown.

Current Account - Consensus Forecast for first quarter: -$116.5 billion

Range: -$123.5 to -$110.0 billion

Philadelphia Fed business outlook survey has, like its front-runner the Empire State manufacturing survey, been offering early signals on each month's weakness in the manufacturing sector. A little less weakness is expected for the June report with the Econoday consensus at 8.0 vs May's 6.7.

Philadelphia Fed Business Outlook Survey - Consensus Forecast for June: 8.0

Range: 7.5 to 10.5

Leading indicators are sometimes the hostage of single components that can spike or plunge in anyone month, such as the April report when a big surge in building permits inflated the headline gain to plus 0.7 percent. This month the Econoday consensus is calling for a less spectacular gain, at plus 0.4 percent.

Leading Indicators - Consensus Forecast for June: +0.4%

Range: +0.2% to +0.5%