Weighing The Week Ahead: Will Incipient Headwinds Derail The Economy? -

Weighing The Week Ahead: Will Incipient Headwinds Derail The Economy?

Jun 24, 2018Jeremy ParkinsonFinance0

The economic calendar is loaded. The many reports include several of the most-watched. The data may even generate enough fresh news to break the summer slumber. There is plenty of skepticism about the most recent economic data. I expect pundits to be asking: Will incipient headwinds derail the economy?

Last Week Recap

In my last edition of WTWA I guessed that a boring week would lead to reviews of what strategies had been working in the first part of the year. There was some of that, and it certainly was not an exciting week for financial news. The focus turned to stories with great human interest, ranging in importance from family separation at the border to a CEO replacement for violating fraternization rules, to what Mrs. Trump was wearing on her trip to visit detained children. And of course, continuing rounds of escalation in the growing trade war.

The Story in One Chart

I always start my personal review of the week by looking at a great chart. I especially like the version updated each week by Jill Mislinski. She includes a lot of valuable information in a single visual. The full post has even more charts and analysis, including commentary on volume. Check it out.

The market was down 0.88% with opening gaps in both directions on several days. Despite the seesaw appearance, the trading range was less than 1.2%. I summarize actual and implied volatility each week in our Indicator Snapshot section below. Volatility is back into the long-term range.

Personal Note

It is very nice to be recognized as one of the 100 Most Influential Advisors of 2018 by Investopedia. Their criteria emphasize several important communication factors, not just the size of the business. While we have been growing nicely, we are agile enough to provide great service and specialized programs for each investor.

Noteworthy – Worldwide Corporate Debt

Timothy Taylor observes that overall world debt is at an all-time high when measured as a share of GDP. The components of the debt have shifted from government borrowing (during and after the Great Recession, to corporate borrowing. He writes as follows:

Moreover, this corporate borrowing has two new traits. One is that as bank regulators all over the globe have tightened up, this rise in corporate borrowing tends to take the form of bonds rather than bank loans. The other interesting trait is that this rise in corporate borrowing around the world can be traced back to developing economies–and especially to China.

Prof. Taylor has a good summary of a recent McKinsey Global Institute paper. He also reaches several investment conclusions, including care in buying this debt.

The News

Each week I break down events into good and bad. For our purposes, “good” has two components. The news must be market friendly and better than expectations. I avoid using my personal preferences in evaluating news – and you should, too.

The Good

Housing starts grew at a SAAR of 1350K, up from 1286K and beating expectations of 1323K. Calculated Risk notes that the increase is 20.3% compared to May 2017 – but observing that it was an “easy” comparison. Bill’s key point is that the starts now reflect single family much more than the flattening multi-family results. Check out the full update for the expected excellent charts.

Initial jobless claims were only 218K, once again beating expectations and maintaining the extremely low level. (Bespoke)

Manufacturers’ optimism is at a record high. David Templeton (HORAN) provides careful analysis, data, and several charts. Here is one.

Architectural billings strengthen to 52.8. Calculated Risk notes that this is a leading indicator (about 9-12 months).

Foreclosure starts are the lowest in 17 years. (Black Knight via Calculated Risk)

The Bad

Leading economic indicators increased only 0.2% versus 0.4% last month and expectations of another 0.4% increase.

Existing home sales registered only 5.43M (SAAR) down slightly from April and missing expectations of 5.55M. Calculated Risk notes that the small decline does not tell us much about the effect of interest rates or tax law changes. One reason I regard Bill as my top source on housing is his open-minded approach to data. In addition, he is willing to move with the evidence, uses a wide variety of sources, and has been quite accurate through more than a full market cycle.

Building permits increased 1301K down from April’s 1364K and expectations of 1350K. These are all seasonally adjusted numbers.

Hotel Occupancy declined, although the series maintains a lead over the 2017 record. (Calculated Risk).

The Philly Fed index for June was only 19.9 with expectations for 27.0. I do not pay much attention to this measure, but some academic studies show that many market participants do. Perhaps it is because of its status as the first report for the current month. Bespoke’s analysis includes a look at the components.

The Ugly

The largest US asset is……? This has a bad feeling about it for both borrower and lender. See the post by Jill Mislinski for more charts and analysis.

The Week Ahead Calendar

The calendar is loaded with releases, including several of the most important. Consumer confidence and sentiment from the major sources, home sales, income and spending are all important. The third estimate of Q1 GDP is “old news” but many will contrast it with the strong real-time indicators for Q2. The PCE price report gets less attention than the CPI, but it is the Fed’s favorite measure.