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It was simply a sensational week for economic news. Housing is beginning to take off and consumer expectations are at their absolute heights. All this at the same time – in what is music to the ears of the bulls – that key inflation readings appear to be moderating, not accelerating, pointing to no urgent need for the Federal Reserve to raise rates.
There was a one-two punch this week out the housing sector where positive indications of a springtime surge were already brewing. First let's look at sales of existing homes which jumped 5.1 percent in May to a 5.35 million annual rate that hit the top end of the Econoday consensus. The year-on-year rate tells the story, at plus 9.2 percent which, outside of March' s 11.9 percent, is the strongest rate in nearly two years. And prices are rising, up 7.9 percent year-on-year to a median $228,700.
 In a special sign of strength, sales are strongest for the more expensive single-family category, up 5.6 percent in the month to 4.73 million. Year-on-year, single-family sales are up 9.7 percent. Condo sales have been flat in recent reports though they did rise 1.6 percent in May to a 620,000 rate for a year-on-year gain of 5.1 percent. And in yet another special strength, first-time buyers are back in the market, making up 32 percent of all sales vs 27 percent this time last year.
Holding down sales has been a lack of supply which, relative to sales, is at 5.1 months vs 5.2 in April. In another sign of tight supply, the median sales time held steady at a very low 40 days. But the rising sales rate together with the rise in prices is certain to bring new homes to the market. And homes are coming onto the market, to 2.29 million vs 2.20 and 2.01 million in the prior two readings.
Not to be outdone by any means is the new-home side of the housing sector where May sales rose 2.2 percent an annual rate of 546,000 which exceeded the top end of the Econoday consensus. Add to this was a big 27,000 upward revision to the two prior months with April now standing at 534,000 for a very prodigious monthly jump of 8.1 percent.
The surge in sales is making for a very strong seller's market for new homes with supply relative to sales down to a very thin 4.5 months vs 4.6 months in April. Total new homes on the market stood unchanged at 206,000. Lack of supply appears to becoming acute and will likely speed up construction activity led by permits which, in previously released data, are already in the stratosphere, posting historic monthly gains of 9.8 percent and 11.8 percent in April and May.
The housing sector, like much of the economy, stumbled at the beginning of the year but is now finding its pace and quickly becoming the economy's greatest prospect for the second half of the year. The strong jobs market is the most important factor behind housing strength, strength which is not being fed, like it was in the sub-prime loans of 2005, by an over-extension of credit. Credit readings are showing qualitative improvement, not erosion. There is one question, though, and that's whether expectations for the Fed's rate hike are driving buyers into the market in anticipation that mortgage rates will be going up. Such a squeeze is very possible, moving sales forward at the expense of later sales. Sales of new homes and especially of existing homes did hit a short-term peak in 2013 amid expectations of tapering down in the Fed's quantitative stimulus program. But with the timing of the Fed's next anti-stimulus move up in the air, there appears plenty of time to make 2015 a stellar year for the housing sector.
 Readings on consumer confidence jumped at the beginning of the year, well preceding what finally turned out to be a mid-spring jump in consumer spending. The latest readings on confidence are now posting a second-leg higher, especially for expectations.
Optimism in the closely watched consumer sentiment report from the University of Michigan is as strong as it can get. The overall index is up sharply this month and well beyond Econoday's high-end forecast. But it's the report's expectations component, reflecting strong optimism for the jobs market, that is an absolute standout, at 97.8 for a 12-year high and a 13.6 point surge from May. The 13.6 point spread is the largest monthly gain since March 1991 (that's right, 1991).
The current conditions component also shows a very strong gain to 108.9 vs 100.8 for May. This index was slightly higher in January though the 8.1 point gain from May is the strongest monthly gain since December 2013. Gains in this component point to gains for May-to-June readings on jobs and consumer spending
In a further and very big surprise, all this strength isn't triggering inflationary expectations which, compared to final May, are down 1 tenth for the 1-year outlook to 2.7 percent and down 2 tenths for the 5-year outlook to 2.6 percent. Both of these are very low readings for this report and echo similar readings in other reports.
Expectations are truly stunning, lining up with other recent positive indications on the consumer including jobless data and strength in income and spending. The consumer is very upbeat – earning more and spending more.
And it's true! The consumer did come to life in May, boosted by a 0.5 percent rise in personal income and helping to support a 0.9 percent surge in personal outlays that reflects heavy spending on autos and retail goods. Components on the income side are very solid with wages & salaries up 0.5 percent in the month. Both proprietors' income and rental income show especially strong gains. Spending components show special strength for durables, again tied especially to autos, and also strong gains for non-durables, here tied to higher pump prices. Spending on services once again shows an incremental gain. And consumers, in an expression of their confidence in the jobs market, dipped into their savings to spend, with the savings rate down 3 tenths to 5.1 percent.
And the gains appear to be inflation free, at least so far, based on the very closely watched core PCE price index which edged only 0.1 percent higher in May and is at a very benign 1.2 percent year-on-year rate which actually appears to be moving in reverse, down a tenth from April and down another tenth from March.
The PCE index is the Fed's favorite inflation gauge, one where adjustments are updated frequently and where substitutions are tracked, that is consumers turning to alternative products and services when the prices of their favored products and services turn higher. The accompanying graph compares the year-on-year rate for the PCE core, the smooth line on the bottom, with average hourly earnings which are an important measure of wage inflation. If you're keeping score, this graph is a tie between the hawks and the doves, with earnings going up but not the PCE core.
But now we have to shift gears. Not all is bright and sunny. No, there's the factory sector. Big downward revisions to April data almost sank the May durable goods report where, however, important details did show some life. Total orders sank 1.8 percent in May but this was badly skewed by a 49 percent drop in aircraft orders where outsized month-to-month swings are the norm. The April revision is the big surprise, now at minus 1.5 from an initial minus 0.5 percent in an unwelcome reminder of how volatile this series is.
 Stripping out transportation, which is where aircraft orders are tracked, shows strength in the month at plus 0.5 percent which hit the Econoday consensus. But here again, the April revision swings in and takes an initial 0.5 percent gain to minus 0.3 percent.
The key area, however, that remains on the positive side is core capital goods where new orders excluding aircraft rose 0.4 percent in May vs a 0.3 percent slip in April which was initially posted at plus 1.0 percent. Shipments for this reading, in what is a plus for second-quarter GDP, show back-to-back gains of 0.3 percent.
The industry breakdown looks almost positive in this report. Many capital-goods industries have shown solid acceleration in new orders the last couple of months including machinery, fabricated metals and primary metals. Otherwise, there have been only a few industries showing weakness including electrical equipment which is a negative signal for construction where signals have otherwise been strong. Motor vehicle orders have been surprisingly flat despite the recent surge in retail sales.
Among other readings, unfilled orders were down for a second month at a heavy 0.5 percent while inventories were down 0.2 percent in a reading that's a negative for second-quarter GDP. Another negative for GDP was a second straight decline in shipments at minus 0.1 percent. Export data are not isolated in this report but weakness in exports is the prime suspect behind what is another soft report out of manufacturing. Capital goods, which had been hot late last year, are coming back up but they're coming up from a low base.
 Early indications on this month's manufacturing sector have been mixed with the previously released Philly Fed index, at plus 15.2, looking more and more like an upside outlier. In contrast, the Kansas City manufacturing index remains depressed, at minus 9 in June vs minus 13 and minus 9 in the two prior readings. If there is a positive, it's that new orders were only marginally in the negative column at minus 3. But everything else was mostly in the deep part of the negative column including production, at minus 21, and shipments at minus 15. The workweek was in contraction as was hiring.
Weakness in exports, the result in part because of the strong dollar, continues to be a major negative for the manufacturing sector. This report offers a separate reading on export orders and it was at minus 5, up a bit from minus 9 and minus 12 in the two prior reports.
But in an offset to the bad news out of Kansas City, the Richmond Fed reported a bit of strength this month with its index up 5 points in June to 6 which is pretty solid for this reading. And, importantly, new orders lead the report, up 9 points to 11. Backlog accumulation was right behind, at plus 6 for a rare positive reading. Hiring was up with wages showing some pressure. Weakness in the report was in shipments which were flat this month, but this is far offset by the jump in new orders.
Where does the manufacturing stand right now? Readings so far for June are mixed with the Philly Fed and Richmond reports on the upside but the Empire State and Kansas City reports on the downside. Turning back to the durables report, indications were also mixed with most readings soft except for capital goods which is a key group. Being mixed in sum points to no better than flat conditions, again in sharp contrast to housing data which are now uniformly strong.
Markets showed little life this week, holding in mostly narrow ranges in slightly risk-averse trade. The euro held remarkably steady despite a string of disappointments in the Greek debt talks where the next battleground will be the sidelines of an EU leaders summit in Brussels over the weekend (June 27-28). But that's the official talk. Unofficially, talk is popping up that all the June deadlines we've heard about the last four months were not, as it turns out, really deadlines at all. Now the talk says there will be a new whole month of on-and-off deadlines during July. Why didn't everyone just say July in the first place?
 Greece may be uncertain but a Fed rate increase, remember, is "inevitable" as described by Janet Yellen at her last press conference. And perhaps the inevitable was brought a little closer to home following the week's strong data including the consumer sentiment report which seemed to sink bonds at week's end. The 10-year Treasury yield jumped 22 basis points in the week to 2.48 percent, now nearly at the 2.50 percent mark that many earlier in the year predicted the note would be after, not before, the Fed's coming rate hike. The week's move in the bond market is nothing to sneeze at and is raising the question whether there is a disconnect between the market and the Fed's expectations for the market. Stocks ended the week mixed with the Dow down 0.4 percent and, at 17,898, still stubbornly below 18,000. The Nasdaq fell 0.7 percent with the S&P posting a fractional loss. Turning to commodities, oil has been hitting hard resistance at $60 and ended the week at $59.50 for WTI. Gold continues to drift lower, ending lifeless near $1,175.
Let's put aside the factory sector and ask ourselves whether the strong signals coming out of the housing and consumer sectors are foreshadowing an upward surprise for Thursday's June employment report? Perhaps so. And if so, would a robust June report cement expectations for a rate hike at the September FOMC meeting? Not necessarily as long as average hourly earnings don't show heat.
Housing data have been very strong and start the week off with pending home sales on Monday, which are expected to climb, and S&P Case-Shiller home price data on Tuesday which are also expected to rise. Construction spending comes out on Wednesday where another gain is expected. Vehicle sales will also be a key reading on Wednesday, offering the first clue on whether May's consumer spending surge extended to June. Employment will top off the holiday shortened week on Thursday and is expected to show, despite the run of stronger-than-expected economic reports, no more than moderate growth.
Pending home sales are expected to offer a leading indication of building strength for the housing sector, specifically final sales of existing homes which last week showed strong gains for May. A fifth straight gain is expected for pending sales, at a very solid plus 0.6 percent.
Pending Home Sales - Consensus Forecast for May: +0.6%
Range: 0.0% to 3.0%
The Dallas Fed manufacturing survey has been signaling perhaps the weakest conditions of any report on the calendar, the result of the plunge in oil prices and major downturn for the energy sector.
Dallas Fed Manufacturing Survey - Consensus Forecast for June: -13.5
Range: -16.0 to -11.0
The S&P Case-Shiller home price index is closely watched as a key measure for home prices, but perhaps less so with the latest report. Home sales in May shifted sharply higher which will limit the impact of Case-Shiller's April data. The April forecast, nevertheless, is solid with the Econoday consensus at plus 0.8 percent month-to-month and plus 5.4 percent year-on-year.
S&P Case-Shiller Home Price Index 20 City, Adj. M/M - Consensus Forecast for April: +0.8%
Range: +0.5% to +1.8%
S&P Case-Shiller Home Price Index 20 City, Not Adj. Y/Y - Consensus Forecast for April: +5.4%
Range: +4.8% to +5.8%
At what was a much lower-than-expected 46.2, the Chicago PMI sent out an errant red flag in May, signaling trouble for what was mostly a strong month for the economy. A bounce back to slight growth at 50.6 is expected for June.
Chicago PMI - Consensus Forecast for June: 50.6
Range: 48.5 to 55.0
Econoday's 97.4 consensus for consumer confidence is very strong and would return the index back near recovery highs set earlier in the year. Keep an eye out for the expectations component which posted a record gain in last week's consumer sentiment report.
Consumer Confidence - Consensus Forecast for June: 97.4
Range: 94.5 to 99.0
The ADP employment report has been way off the past couple of months, predicting a 201,000 rise for private payrolls in May that actually came in far higher at 280,000. April was no better. Only an earth shaker, something below the Econoday low estimate of 200,000 or above the high estimate of 245,000, could make this indicator change any June forecasts for Friday.
ADP Employment Report - Consensus Forecast for June: 220,000
Range: 200,000 to 245,000
The PMI Manufacturing Index has been on the soft side as have most factory indicators. Still, new orders were strong in the flash report despite continuing export troubles tied to the strong dollar.
PMI Manufacturing Index, Final - Consensus Forecast for June: 53.7
Range: 53.4 to 55.2
The ISM Manufacturing Index has been soft this year, pulled down by weakness in export orders. The Econoday consensus is calling for 53.2, a moderate growth rate but slightly better than May's 52.5.
ISM Manufacturing Index - Consensus Forecast for June: 53.2
Range: 52.8 to 54.0
Construction spending in May is expected to add to April's 2.2 percent jump, with the Econoday consensus at a solid plus 0.5 percent. Watch the residential construction component, up 0.6 percent in April, for signs on the new home sector.
Construction Spending - Consensus Forecast for May: +0.5%
Range: +0.1% to +1.2%
Motor vehicle sales have been one of the major strengths of the economy so far this quarter. Janet Yellen, in her FOMC press conference, specifically attributed strength in unit vehicle sales to pent-up demand from the heavy winter weather. A fallback from May's 17.8 million is expected, but anything above 17 million is still a very strong rate.
Motor Vehicle Sales, Total - Consensus Forecast for June: 17.2 million
Range: 17.1 to 17.8 million
Motor Vehicle Sales, Domestic - Consensus Forecast for June: 13.6 million
Range: 13.5 to 14.0 million
The employment situation report is not expected to catch fire in June with the Econoday consensus calling for a moderate 230,000 rise in nonfarm payrolls following May's surprisingly strong 280,000. Janet Yellen, at her last press conference, specifically cited 280,000 as the average over the second half of last year, an unfavorable contrast she noted with the current trend at 210,000. The June consensus is much closer to the latter than the former which suggests that a 230,000 result wouldn't press the doves at the FOMC. The unemployment rate, which ticked 1 tenth higher in May, is expected to tick 1 tenth lower in June to 5.4 percent.
Employment, Nonfarm Payrolls - Consensus Forecast for June: 230,000
Range: 202,000 to 252,000
Employment, Private Payrolls - Consensus Forecast for June: 225,000
Range: 203,000 to 249,000
Employment, Unemployment Rate - Consensus Forecast for June: 5.4%
Range: 5.3% to 5.5%
Employment, Average Hourly Earnings - Consensus Forecast for June: +0.2%
Range: +0.1% to +0.3%
Employment - Average Workweek - Consensus Forecast for June: 34.5 hours
Range: 34.5 to 34.6 hours
Jobless claims have been the highlight of the economic calendar all year long, signaling unusually favorable conditions on the unemployment side of the labor market. Continuing strength is expected with the consensus calling for only a small increase from 267,000 to 270,000
Jobless Claims - Consensus Forecast for June 27 Week: 270,000
Range: 270,000 to 275,000
With the economy as a whole doing fine, it's surprising to see how weak the factory sector has been. Factory orders are expected to post their ninth decline in 10 months, at minus 0.3 percent for the Econoday consensus. Tentative strength in capital goods is the only positive right now in the sector, one that is taking the full brunt of the export slowdown.
Factory Orders - Consensus Forecast for May: -0.3%
Range: -1.2% to +0.7%
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