Introduction

April was the first talk for the big rate hike, followed by June, then September. Now September is no longer a sure thing following this week's meeting of the Federal Open Market Committee where policy makers were still looking for solid evidence of increasing improvement in the labor market. But the Fed after all is data dependent and a look at the week's economic news may be hinting at unexpected strength to come.

The Economy

Rock-a-bye baby

There is absolutely no comparison between an FOMC press conference and watching paint dry, wet paint is way more interesting. But let's be fair. A funeral service is a perfect place for a certain eloquence. Fed Chair Janet Yellen very clearly stated the issues, that consumer spending has slowed, that business investment has gone into reverse, and that exports, which have been hit hard by the strong dollar, are a heavy drag on the economy right now.

And the outlook for the jobs market is no better than moderate, which isn't good enough for the majority at the Fed who want more. Yellen noted that nonfarm payroll growth over the last three months has averaged only 210,000 which, she pointed out, doesn't compare so well with the 280,000 average over the second half of last year. She also noted that the labor participation rate, now at 62.9 percent, has been flat in the water and is still below trend. And in a comment that continues to keep the hawks up at night, she used the word "subdued" to describe wage growth. Her conclusion, and she's the boss: "Cyclical weakness in the labor market remains." The rate hike may be inevitable, but inevitable can be a long time.

Press conference dependent?

The timing of the coming rate hike, we've been told again and again in the Fed's official communications, will be based on the outcome of economic data. The Fed's guidance has been explicit and deserves a few capital letters: "Data Dependent on a Meeting-to-Meeting Basis." Right? Not so fast! There's a second variable — the timing of the chair's press conference which is scheduled at every other FOMC meeting.

There's been a long assumption that the coming rate hike will be so splashy and so immense that it can only be announced at meetings with the press conference, allowing the Fed's boss to face the world and limit any resulting hysteria. Now, in a casual reference, this assumption appears to have been confirmed. When responding to a question about arm twisting from the International Monetary Fund, which is pleading for the Fed not to raise rates this year, she said, and we quote: "But again I want to emphasize, and I think the IMF would agree with this, that the importance of the timing of a first decision to raise rates is something that should not be overblown whether it is September or December or March ..." Stop there! What happened to the meetings in July, October, and January? Are these free passes?

Perhaps not given the Fed's option to call a special press conference. So if the jobs data suddenly turn super hot or if oil suddenly goes through the roof, the Fed can still act on those odd months and still have a press conference. So the Meeting-to-Meeting rule still holds.

Housing all the way!

The hawks got crushed at the latest FOMC but they may have a better chance ahead if the housing sector comes through. The week's data included two very upbeat reports. The housing market index, which measures sentiment among the nation's home builders, surged an outsized 5 points to 59 for June which was well outside Econoday's high-end forecast. The level matches last September as the strongest reading of the recovery.

Future sales lead the report with the component jumping 6 points to 69 followed by present sales at 65 for a 7 point gain. Traffic continues to lag but, at 44, is up 5 points in the month. Weakness in traffic reflects the lack of first-time buyers in the market though the improvement here is a major plus. The South, in both the latest report and in trend, is the strongest growth region for new homes and is also by far the largest region.

Data on housing starts & permits were also very strong, but a little bit harder to read. Starts came in at a 1.036 million rate in May which is down 11.1 percent from the April rate – but the April rate, which was already one for the record books, was revised even  higher to 1.165 million for, and this is no misprint, a 22.1 percent gain from March. Sealing matters was another gigantic surge in permits, up 11.8 percent to 1.275 million following a 9.8 percent gain in April. Permits are the leading indicator in the report and the latest rate is the best since way back in August 2007. Based if nothing else than on permits, the housing sector, following the heavy weather of the first quarter, is moving to the top of the economy.

Philly Fed phenomenon

But whatever gains may be building in housing look likely to be offset by stubborn weakness in the manufacturing sector, which is taking the absolute full brunt of the strong dollar. The Empire State report, compiled by the New York Fed, opened the week with a complete flop for June and actually rounded out its second-quarter average in the contraction column. This was followed by another negative score for industrial production where the manufacturing component posted its third contraction in five months. But then there came the Philly Fed.

In the first notable indication of strength of any kind in the manufacturing sector, the Philly Fed index absolutely surged in the June report to 15.2 for the strongest reading since December and way outside the high estimate. The gain was confirmed by an identical 15.2 point surge for new orders which is the highest reading since November.

Other readings were also positive including an increase for unfilled orders and a big increase in this month's shipments. Another positive was slowing in delivery times consistent with high levels of shipping activity. Showing only a marginal gain was employment, yet this may improve in the coming months given the other readings in this report that include a nearly 6 point jump in the 6-month outlook to a very positive 39.7, the best since January.

The Philly Fed, whose data go back all the way to 1968, has a special place on the calendar as the most closely watched early indication on manufacturing. But will the June report prove an outlier as indicated by the Empire State report? We'll get a clue from the other Fed manufacturing reports to come including those from Richmond, Kansas City, and Dallas.

Claims and their incredible lows

Yellen definitely sounded downbeat on the strength so far this year in the jobs market, focusing on payroll growth and the participation rate. What she didn't mention were last week's historic gains in the JOLTS report, where job openings are surging, and neither did she mention the incredibly low levels of jobless claims.

After trending slightly higher in recent weeks, claims are back down near historic lows. Initial claims in the June 13 week fell 12,000 to 267,000 which is very near the Econoday low estimate. The 4-week average fell down 2,000 to 276,750.

Continuing claims, reported with a one week lag, reversed much of their prior week's gain with a 50,000 decline to 2.222 million. The 4-week average rose but only very slightly, by 2,000 to 2.231 million. Both are very favorable readings. The unemployment rate for insured workers held unchanged at a very low 1.7 percent.

There were no special factors in the latest report where superlatives just aren't superlative enough. This data series goes way way back, back to post-war 1948, and these levels have hardly ever been lower, especially when compared against today's much larger labor force. The growth side of the labor market may not be up to snuff, but the unemployment side is very favorable.

Quiet before the storm?

Markets were quiet in the week with surprisingly measured reactions to all different kinds of headlines on the Greek talks where life-and-death deadlines keep getting pushed back day by day. Demand for risk rose on Thursday following Wednesday's dovish FOMC which did not scare anybody. But there still seems to be an elephant in the room — that is of course the inevitably pending rate hike. Let's give them credit, Fed officials are at least trying hard to warn everybody and are downplaying the relative impact that the hike should have on a rational world. Yellen said in her conference that the "importance of the initial increase should not be overstated" and that policy will remain highly stimulative for a long time after the initial hike. But however focused the Fed's  communications are, there's always the risk that the markets won't calmly embrace the obvious when it comes.

Boosted by Thursday's rally, stocks gained on the week with the Dow up 0.7 percent and back over 18,000 but just barely at 18,014. The Nasdaq did better, rising 1.3 percent to 5,117 on Friday. On Thursday, the Nasdaq posted a record close at 5,132. Money moved into the Treasury market in what may have been a safe-haven bid related to Greece as well as confidence in a dovish Fed. The 10-year yield fell 12 basis points on the week to end at 2.26 percent.

The Bottom Line

Based on the dovish feel of the FOMC, the great hike may now be more likely to hit in December than September. The week's economic news, however, may be an offset, hinting at strength for a data-dependent Fed and pulling the hike back closer. Sleep of course will be hard for any of us to come by ahead of the September meeting which, however, with its press conference, looks to be the final cure for our insomnia.

Looking Ahead: Week of June 22 to June 26

The first part of the week will offer a major update on housing and whether emerging signs of strength are confirmed in Monday's existing home sales report and Tuesday's new home sales report. Manufacturing, which has been getting hit by weak exports, is also a theme of the week with durable goods orders on Tuesday and regional Fed reports on Tuesday, from Richmond, and on Thursday from Kansas City. The consumer gets new indications on Thursday with personal income and outlays and on Friday with consumer sentiment. Of special note will be the PCE price index which is part of the personal income and outlays report, a very closely watched inflation measure that has been very soft.

Monday

Existing home sales have been lagging new home sales but a big bounce is expected for May, to a 5.25 million annual rate vs April's 5.04 million rate. Strength in this report would underscore the fundamental strength of the consumer and could put the housing sector in a leadership position of the economy.

Existing Home Sales - Consensus Forecast for May: 5.25 million rate

Range: 5.15 to 5.35 million   

Tuesday

Swings in durable goods orders are typically tied to swings in aircraft orders, which are tracked in the transportation component. The outlook for total orders is very soft, at minus 0.6 percent, but excluding transportation a very respectable 0.5 percent gain is forecast. Among details, watch closely for further gains for capital goods orders which would point to rising business confidence in the economic outlook.

Durable Goods Orders - Consensus Forecast for May: -0.6%

Range: -2.8% to +0.8%

Durable Goods Orders Ex-Transportation - Consensus Forecast for May: +0.5%

Range: -0.3% to +0.8%

The FHFA house price index has been lagging other readings on home prices but has still been moving in the right direction. The expected gain of 0.4 percent isn't spectacular but is respectable.

FHFA House Price Index - Consensus Forecast for April: +0.4%

Range: +0.3% to +0.6%

The PMI manufacturing index has been running hot compared to other data on the sector but the sample did report a fall off in orders during May that was tied to directly to weak exports. Exports are posing a serious risk to the economic outlook and direct commentary on this topic is likely in this report.

PMI Manufacturing Index Flash - Consensus Forecast for June: 54.2

Range: 54.0 to 55.5

New home sales may be one of the brightest spots for economy. They jumped sharply in April and permit data for May were very strong. But the comparison for April in this report looks very tough, with the Econoday consensus calling for no change at a 0.525 million annual rate.

New Home Sales - Consensus Forecast for May: 0.525 million

Range: 0.505 to 0.540 million

Wednesday

GDP data in the first quarter showed no life at all, the result of special factors including unusually severe weather, the West Coast port strike, and even the risk of faulty seasonal adjustments. This will be the last look at the quarter with the Econoday forecast calling for slight contraction at minus 0.2 percent.

Real GDP Third Estimate - Consensus Forecast for First Quarter: -0.2%

Range: -0.4% to +0.1%

GDP Price Index Third Estimate - Consensus Forecast for First Quarter: -0.1%

Range: -0.1% to -0.1%

Jobless claims have been the highlight of economic calendar all year long, signaling unusually favorable conditions on the unemployment side of the labor market.

Jobless Claims - Consensus Forecast for June 20 Week: 273,000

Range: 270,000 to 275,000

Personal outlays have been soft this year, a frustration for the Federal Reserve where policy makers are trying to stimulate spending. But a big 0.7% bounce, centered in vehicle sales, is expected for May. Personal income has been showing life all along but consumers, instead of spending, have been piling money into savings. The PCE index and  Core PCE index are very important in this report, the Fed's favorite inflation readings and ones that have been showing less pressure than others.

Personal Income - Consensus Forecast for May: +0.4%

Range: +0.3% to +0.6%

Personal Outlays - Consensus Forecast for May: +0.7%

Range: +0.6% to +0.9%

PCE Price Index - Consensus Forecast for May: +0.3%

Range: +0.2% to +0.5%

Core PCE Price Index - Consensus Forecast for May: +0.1%

Range: 0.0% to +0.2%

The PMI services flash for June is expected to show slight acceleration, to 56.5 from a final May reading of 56.2. This sample has been reporting very solid rates of growth and offers a reminder that the service sector has to help offset weakness in the export-hit manufacturing sector.

PMI Services Flash - Consensus Forecast for June: 56.5

Range: 56.2 to 56.8

The consumer sentiment report has been very solid, as have most readings on consumer confidence. The mid-month reading for this report was much stronger than expected and included special strength in current conditions, a component that offers hints on May-to-June change in household spending.

Consumer Sentiment, Final - Consensus Forecast for June: 94.6

Range: 94.0 to 95.2