Stocks rebounded off last week’s sell-off and again made new record highs this week.
Treasury bonds, on the other hand, aren’t behaving like all is rosy in our economy. Long-term yields are just above 2.9% but, more concerning, the yield curve is flattening.
That means the difference between short-term and long-term rates is narrowing. This often foretells a slowing economy, so stay tuned.
For now, the Fed wants to believe the suddenly weak data is just temporary and its plan to hike rates twice more this year are still supposedly a go. We’ll see in less than three weeks if Fed plans change, or the data strengthens.
Thanks to Dent Research, provided here is our weekly information roundup ending the week of May 26, 2017. We start each subject with what you hear in the news and finish with what that information means to you. We hope this information will help you separate the noise from the news.
Federal Reserve Likely to Raise Rates in June… The minutes of the latest Fed meeting reveal that committee members think it’s appropriate to raise rates if the economy continues apace.
What it means – This is a lot like December 2015 and December 2016. If the Fed wanted to telegraph this move any louder it would have to hire skywriters and rent billboards. And what constitutes continued economic growth? The 1.2% GDP, like we got in the first quarter? Slower lending growth? It’s not about the data. It’s about credibility. Unless the economy falls off a cliff in the next 20 days, the Fed will push short-term rates higher.
But here’s the rub. Bond investors are holding down long-term rates, even in the face of higher rates at the short end of the curve. This flattening of the curve implies limited economic growth and hurts bank income.
April Durable Goods Orders Down 0.7%, Off 0.4% Excluding Transportation… The headline number was expected to fall, but the report excluding aircraft missed expectations of 0.4% growth.
What it means – The disappointment went deeper, with non-defense orders excluding aircraft unchanged last month and revised lower for March. Businesses aren’t quite ready to break open their bank accounts to invest. Their hesitation will hold back GDP in the second quarter.
This report should cause the Atlanta Fed to lower its second-quarter GDP estimate from 4.1%.
April New Home Sales Down 11.4%... February and March totals were revised higher, softening the blow of the dramatic drop.
What it means – The ugly April report comes on the heels of weak housing starts. A down month might be an anomaly, but that big of a drop definitely gets your attention. Adding in the upward revisions to the prior months, the three-month average remains above 600,000 units, which is near the highs since the downturn. As builders turn toward lower-priced homes aimed at first-time buyers in the months ahead, we’ll see if new home sales take another step higher.
Existing Home Sales Down 2.3%... Sales dropped more than expected, following the trend set by housing starts and new home sales.
What it means – Is this baseball? It sure feels like three strikes and you’re out! This is springtime, when home selling is supposed to reach frenzied levels and real estate agents sleep less than four hours per night. Instead, it’s been something of a snooze fest.
Existing home sales increased a mere 1.6% in both the single-family and multi-family markets over last year. I guess the higher prices haven’t drawn out the sellers like they were supposed to, and buyers aren’t as confident as people thought. That makes sense, given that first-quarter GDP clocked in at a measly 1.2%.
Still, it’s not as if real estate is crumbling. Prices remain high, up 6.0% over last year, and the rate of sales remains steady. Instead of baseball, it’s more like laundry – wash, rinse, repeat.
Bitcoin Trading Above $2,700… The digital currency rocketed higher over the past month, up more than 150% this year.
What it means – Last month, Japan authorized using Bitcoin for payment. Since then, Asian use of the currency has soared. But the underlying issues remain. What’s it worth? $3,000 per unit? $30,000? $300? $0.30?
I’ve long noted that I see Bitcoin as a flash in the pan. Not because I don’t see the value in what it offers (anonymity, free of government influence, easily transferable across borders), but because of those attributes. Governments won’t like losing control. Bitcoin looks like a classic bubble, but like all such bubbles, the question is, “When will it pop?”
Ringling Brothers and Barnum & Bailey Circus Held its Last Show… Amid cries of animal cruelty and after removing elephants from its performance, the circus was no longer economically viable.
What it means – Maybe this should be a philosophical debate about the ethical treatment of animals (captivity, spectacle, training methods, etc.) and our civil evolution. Do we need such entertainment, or does it move us forward as a society? That’s more than we can solve or even address here.
I liked the circus as a kid, but I understand the concerns. Still, I’ll miss the bearded lady, the crazy guy that pounded nails into his body, the acrobats, and, yes, the elephants.
Next Week – The week starts with markets closed for Memorial Day in the U.S., and ends with the U.S. Employment Situation report. In between, we get the S&P CoreLogic Case-Shiller Home Price Index.
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