Join Tematica Research's Chief Macro Strategist, Lenore Hawkins, and Chief Investment Officer, Chris Versace, as they discuss and debate what's driving the market and the economy this week.
Markets last week
So much for the inflation story - after 2 days to digest the Fed’s latest decision, if the concern is the Fed raising rates, high growth should have been hit and value preferred. The opposite happened. Thursday the tech heavy Nasdaq Composite & Nasdaq 100 closed in the green while the rest of the major indices closed in negative territory again. To really emphasize the lack of inflation fears, the 10-year Treasury yield dropped 6 basis points Thursday to 1.509%. Long bond is now down 38 bp from recent peak on March 18 and back to the same level it was in February 2020 when Fed Funds rate was 1.6% and unemployment was 3.5%.
Big news was Fed
Median dot plot fo 2023 move to 0.6% from basically 0 with 13 or 18 members seeing at least one hike by the end of 2023. This was 7 in March. 11 see at least 2 hikes by end of 2023.
The market really wants some sort of Oracle to tell them what's coming, but those dot plots, they aren’t it.
- Go back to when these “dots”were first introduced by Ben Bernanke in January 2012 when the funds rate was also near-zero. For 2014, the “dots”called for two hikes to 0.75%. The Fed was all bulled up on growth back then,too. Where did we finish off 2014? Try the zero-bound on the funds rate.
- How about Powell and crew in September 2018? The dots said 3.375% for 2020. Where did we close the year? Try near-zero. Even at the peak, the funds rate never broke above 2.5%
- What about the recent notable downward drift in pending home sales?
- Homebuying plans from the University of Michigan Survey of Consumers are down to a 39-year low?
- S&P500 homebuilder index is in full-blown corrective mode?
- National Association of Homebuilder’s (NAHB) Market Index came in weaker than expected last week to the lowest read in ten months, driven by rising cost pressures and the low availability of lumber and other building materials.
- And now we have House Starts below consensus. Both Housing Starts and Building Permits for May came in weaker than expected for the second consecutive month. Starts haven’t fallen far from their March peak, but Building Permits are down more than 10% from their January peak and saw declines in every region of the country.
- Building permits fell 3.0% to a 7-month low of 1.681 million units v consensus estimate of 1.730 m - a 2.8% miss
- Rental boom perhaps - Single-family rents rose 5.3% YoY in April, the largest 1-year gain in nearly 15 years.
May Retail Sales came in below expectations by a meaningful margin, dropping -1.3% MoM versus expectations for a decline of -0.8%. Ex-autos, the miss was by more than a full percentage point. One positive note is that April’s originally reported numbers were revised upwards, so the net is pretty much a wash.
Philly Fed last week followed the NY Empire with signs of the manufacturing sector peaking out. Survey came in at 30.7% in June, below 31% e from 31.5% in May and well below April’s 50.2%. Orders softened to 6 month low & backlogs down to 3-month low. Even delivery time index fell from 41.5% to 29.3% AND workweek subindex dropped to a 6-month low.
Economic Data to Watch THIS WEEK
Tuesday, June 22
- May Existing Home Sales - (Last REPORT) Existing home sales in the US unexpectedly sank 2.7% to 5.858 million in April of 2021, compared to forecasts of a 2% rise. That’s 3 consecutive months of declines as housing supply continues to fall short of demand.
Wednesday, June 23:
- Weekly MBA Mortgage Applications Index -Last report mortgage applications in the US increased 4.2% in the week ending June 11th, the first rise in 4 weeks, data from the Mortgage Bankers Association showed. We’ll be watching because the average rate on a 30-year fixed mortgage rose to the highest level since mid-April at 3.25% in reaction to the Fed.
- May New Home Sales - Prior reports (Sales of new single family houses in the US sank 5.9 percent month-over-month to an annualized rate of 863 thousand in April of 2021, well below forecasts of 970 thousand, amid soaring prices due to rising material costs. The March reading was also revised sharply lower to 917 thousand from 1,021 thousand.)
- Markit Flash Manufacturing & Service PMIs for June
Thursday, June 24:
- Weekly and Continuing Jobless Claims - past week surprised with an increase versus expected decline
- May Durable Orders - last report - New orders for US manufactured durable goods fell 1.3% MoM in April of 2021, following an upwardly revised 1.3% rise in March and defying market forecasts of a 0.7% increase. It is the first decline in durable goods orders in almost a year
- 1Q 2021 GDP – Third Estimate
Friday, June 25:
- May Personal Income & Spending
- Personal Consumption Expenditure Price Index
- University of Michigan Consumer Sentiment Index – Final Reading
Advisorpedia's Week Ahead ... Powered by Tematica Research.
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Lenore Hawkins, Chris Versace
Chris Versace 00:04
This is the week ahead, brought to you by Advisorpedia and powered by Tematica Research Chief Investment Officer Chris Versace and joining me as always to break down the latest happenings and offer some insight as to what's ahead is Lenore Hawkins Lenore? How are things going with you? I asked that because we kind of had a big week this week, but the markets are kind of drifting.
Lenore Hawkins 00:34
Looking for direction we're hitting up on summer flounder and fury signifying nothing.
Chris Versace 00:38
Yeah, right. Right. Right, right. Little shock, no, ah, but we're also starting to hit one want one of these things that we do every time this year, which is the Friday fade, not a lot of news, kind of drifting sideways. So let's, let's talk about what we saw last week, we get some context for the week ahead, and let's drill down into what we'll be paying attention to.
Lenore Hawkins 01:04
Okay, so last week, so much for inflation. Two days after having two days to digest the feds latest decision. If the markets were really concerned with the feds raising rates, and were really concerned with this whole inflation story, then higher growth should have been hit really hard and value should have been where everybody was headed, except the opposite happened Thursday, so the release was on Wednesday. And then by Thursday's close tech, heavy NASDAQ composite and NASDAQ 100, closed in the green and the rest of the major markets closed in negative territory yet again. Now to really drive that home and emphasize the lack of inflation fears. The 10 year Treasury yield dropped six basis points Thursday to 1.509. And the long bond is now down 38 basis points from its recent peak on March 18. And it's back to get this the long bond yield is actually back to the same level. It was in February of 2020, when the Fed funds rate was 1.6. And unemployment was 3.5%. That's crazy. What what really might have been entertaining is that the Fed might have just shifted finally, to being a bit less dovish, right in time for the economy to soften and inflation and metrics to rollover. Perfect timing. Right. So for looking at like just to really emphasize this inflation. Well, last Thursday, the CRB metals dropped 3.7% copper fell 4.7% corns down 12% soybeans are down nearly 20% from a three year high in May lumber has collapsed 45% Bitcoin stuck below 40,000 it's kind of faltering around 37,000 despite all this inflation talk, and gold last week had its worst week in 15 months. Does any of this sound like the market thinking inflation is the big thing? No, not at all. Those inflation sectors like the ones that should do really well are struggling materials dropped 2.2% on last Thursday industrials down 1.5%. So even though the Fed is saying looks good, we're feeling good about employment. All the cyclically sensitive stocks are pretty much in retreat transports are off 7% from the recent high. And the Russell 2000. hasn't made a new high since March 15. None of that is screaming. We're terrified of inflation right now.
Chris Versace 03:29
No, not at all. Not at all. So how did the the major market barometers you know, close out the week almost ...
Lenore Hawkins 03:37
Well, NASDAQ 100 NASDAQ composite, those were really the top performers those were both up over one versus like one a little bit more than 1% s&p down. And what was really interesting is to see that the s&p 500 was down but the equal weight was down even more down significantly more s&p 510.4 s&p equal weight was down 1.7. Now what that's really telling you when you look at the NASDAQ is what's keeping the s&p up is those big tech boys. Right? Right. equal weight down even further, right, the Dow down almost 2%, the rustle down over 2%. What is interesting, though, is to look at the VIX, so it's sitting below 18. I mean, there's a lot of complacency.
Chris Versace 04:23
It is and I think it kind of reflects the net attitude that we're kind of seeing in the market. But But here's the thing, though, you know, it's not Oh, so far off from levels where people tend to freak out and think that a correction or you know, some volatility in the market is coming.
Lenore Hawkins 04:41
I think that's, that's a so last decade, we, we now ...
Chris Versace 04:47
Are you saying? Are you saying I'm dating myself? Is that what you're saying?
Lenore Hawkins 04:51
So last decade, I think we really have a market now that is just so confident that if there's the tiniest little wobble The Fed is going to step in and what Wouldn't you think that because that's what we've seen, every time the market gets a little wobbly, the Fed comes racing in anyone who has looked at the market and actually for the love of god thought the fundamentals and thought that those might matter was severely punished. You know, that was just an absolute lunacy fundamentals, it's really just gonna go up.
Chris Versace 05:27
I know you well enough to know that there's a hint of sarcasm in your voices, you say that. But, you know, but, but like some of the things that we've been talking about rising input costs, supply chain issues, and we'll we'll talk we'll touch more on what some companies had to say over the last couple of days about that, which only reinforced that view, you know, the markets are near, you know, at or near all time highs, you know, earnings expectations are rather robust, and we're coming up on an earnings season, that least in my opinion, I think there's probably more risk to the downside, and, and to your point about the Fed, the Fed is not going to step in and do anything, just because June quarter earnings, you know, the guidance might be a little a little weaker relative to the robust expectations the market has. So I do think that, you know, as we go through and digest quarter earnings, yeah. risks.
Lenore Hawkins 06:18
Okay, downside, what is interesting to think about that is that as we go into the June quarter, if we're talking about lack of fed support, and so there's there's monetary side is, is really talking about looking in the other direction, you know, looking towards tightening or loosening. And if we look at the fiscal stimulus side, we can see that the Biden administration is really struggling to push things, it's difficult to push through a massive spending program, when you've got on the other side, all talk of like, we need to slow this economy a bit.
Chris Versace 06:53
What do you do when the democrats say, wow, that infrastructure bill is too expensive? Yeah, you might have really ever thought that. That's crazy.
Lenore Hawkins 07:04
They're really struggling. Anyway, keep in mind that as this drags on, so here we are right now, where they're still talk of like, Oh, it's kind of a hot economy, the Fed just kind of talked a little bit more dovish, for the first time in a very long time, not really conducive to a big huge spending plan. If this keeps dragging out, and we think that the data is still gonna come in a bit hot until towards like end of summer fall. With that, that only gives you the the kind of like the last quarter of 2021, to really get some sort of stimulus through because, right, very soon after that we hit the midterm election cycle, it is very difficult, very difficult to campaign while trying to raise taxes. And this stimulus plan needs to be tied to some sort of a tax plan. And that's really not going to happen. So putting it all together. On the monitor side, that's not looking good. And the fiscal side, not so much either. So where's that extra juice to pump up this market?
Chris Versace 08:06
It's a great question. It's it's one and I'm i and i think others, as well as yourself are looking to find but let's let's circle back to the Fed meeting. Because, you know, I think heading into it, others as well as you and myself weren't really expecting any major changes. So my question to you, Chief macro strategist is, did the meeting play out pretty much as you expected? What caught you off guard? And what do you think about those economic forecasts that the Fed put out?
Lenore Hawkins 08:33
Yeah, the I wasn't terribly surprised to see a move. I mean, these are these are people, right, and everywhere you go, you're hearing inflation, inflation, inflation. And I wasn't super surprised to see the median dot plot. So the dot plot is a little chart where everybody has a voting member, they put their put a.on, where they think rates are going to be out in the future. And you put it all together, that gives you kind of a consensus idea of what the Fed officials are thinking. So the media dot plot moved 2.6% for 2023, from when previously had been basically zero. And with 13 of 18. Members seeing at least one hike by the end of 2023. So it's 13 seen one that was just seven back in March. So almost doubling the number expecting a hike in 2023 and 11. Now see at least two hikes by the end of 2023. Now, let's keep in mind 2023 as a long ways off, and on top of that, I mean, that is a really long ways off. On top of that the feds dotplot has pretty much a bout the worst track record you can imagine. Now, the market really, really wants to have some sort of Oracle to give them comfort and tell them what's coming. But these dot plots, they're just not really it. If we actually look back to when these dots were first introduced by Ben Bernanke in January of 2012. That was when the Fed funds rate was also near zero in 2014. The dots called for two hikes 2.75% and the Fed was all balled up on growth back then two. And where did we finish 2014? off? Right around the zero bound and the fed fund rate? What about in September of 20? tene. The dots said that we were going to hit 3.375. For 2020. Where do we close here, thing here? Zero. So even near the peak back then the rate never broke up. 2.5%. So we there's no track record here that says that this is really something we ought to pay attention to.
Chris Versace 10:33
It's it's kind of like the feds way of saying this is what we think we might do. This is what we're seeing today. But don't don't hold us to it.
Lenore Hawkins 10:41
Yeah, we're a little bit more open. I mean, overall, it was pretty much the same as usual. The Fed sees the economy's doing just fantastic. And this run up inflation still is just transitory, which is pretty ironic that the Fed thinks the economy is doing great, right. When the next day, the initial Unemployment Claims came considerably.
Chris Versace 11:02
Yeah, yeah. Hey, we're raising our 2020 2021 GDP forecast. Yeah, no, change the unemployment. But guess what? Boom, I mean, yeah, well, look, at least we're not making fun of the Atlanta fed, because they're such an easy target. But anyway, anyway, you were you were. So I think where you were headed with this, Lenore was, you know, at some point, the Fed is going to have to introduce the concept that it's going to boost interest rates, right. And in the past, right, some sort of taper, right. And I'm glad you use that word. Because, you know, the last time we saw a situation similar to this, it's been now known as the Bernanke temper tantrum, right? Because Bernanke was like, these are the conditions that we would need to possibly raise interest rates, and the stock market all all it heard was raise interest rates. So I guess my question to you is, do you think do you hope do you pray that Ben Bernanke and the Fed heads have learned from that mistake, and that they're going to be even more transparent in their language? I'm not sure how you can be. But do you think they're going to strive to be even more clear this time around?
Lenore Hawkins 12:21
Well, we this is a tough thing with if the Fed ever tapers, raises rates. We've only have really one example to go off of so that's not exactly a statistically significant, right. Right. Right. Right. Right. Um, and we're so used to the market going up that when they did taper, last time, the s&p fell a whopping 5%. But at the time, you know, the sky was absolutely falling. Pretty much every sector got hit. Tech, healthcare and energy were outperform. I mean, they did a little bit better, they still got hit, but they got hit a bit less. There wasn't a whole lot of difference between growth and value. So pretty much just slamming across the board. Same for large versus small cap, they got hit eat fairly, equally hard. Treasury yield spiked, the curve flattened and credit spreads. This was important thing, the credit spreads really widen dramatically, particularly in the high yield sector. And that is something to keep in mind right now. Because we're seeing that high yield credit spread is super, super, super low. If you were looking to hedge your best options were VIX gold and oil.
Chris Versace 13:32
Hey, guys, your question. So I this just occurred to me as we were talking that, if and when the Fed actually raises interest rates by a quarter point, shouldn't that send the signal that, wow, the economy is healthy, it is growing it and I liken it to almost kind of like, if you're making money and paying taxes, not necessarily a bad thing, because it means you're making money, right? This would mean that the economy is actually growing?
Lenore Hawkins 14:00
Well, there's messaging, then there's reality. Keep talking about how this economy is so strong, and yet we have unprecedented levels. We've had unprecedented levels of fiscal support. We've just never seen anything like the amount of people's wallets. And we've never seen the Fed doing what it's doing. I mean, one of the things that we keep hearing about is this massive housing boom. Might we recall the last? There's a lot of discussion about a massive housing boom. What was going on?
Chris Versace 14:34
When was that?
Lenore Hawkins 14:35
Well, back then what was going on was that Fannie Mae and Freddie Mac had been charged by the government to make housing more affordable and the way they were doing that was by making mortgages more accessible. So pretty much that's what we remember, these people might remember the liar loans. And that was just the You didn't have to give any proof of income. You could just pretty much anybody could walk into a bank and say I want Buy a house and the bank would be like, here's your loan. There you go reasons. The banks were doing that because Fannie or Freddie, they were immediately as soon as you would issue a mortgage, that mortgage would be packaged up. And Fannie or Freddie would buy the package mortgages and take it off the bank's books. So it didn't matter to the banks if they were issuing these just credit, you know, mortgages because they didn't have to do with it right, just do it to Fannie and Freddie. So it didn't really matter to them the credit worthiness now what that did, and and on top of that, housing prices just going up. So what do you really care, right? If home prices keep going up, if somebody defaults on a mortgage, who cares? You've done better, right? Because the house is worth more than when they bought it. So good. Up until the point where that isn't good. And home prices start to roll over? Well, what are we seeing now the Fed is buying massive amounts of mortgages, which is really helping to keep these mortgage rates super, super low and shocker. We're hearing talk about housing boom, but it's not quite exactly that. What do you mean? I'm glad you asked. Me, don't keep me in suspense. I know you're die, right. So we've actually seen a really material downward shift in pending home sales. And according to the University of Michigan survey of consumers Home Buying plans are down to a 39 year low. The s&p 500 homebuilder index is actually in full blown correction mode. The National Association of homebuilders market index came in weaker than expected last week and is now at the lowest level in 10 months, driven pretty much by rising cost pressures and the low availability of lumber and other building supplies. Well, now last week. Yeah.
Chris Versace 16:49
Don't you think, though, that given what happened as a result of the pandemic, anybody who's going to buy a house, practically did it? Right. And those who didn't, those who were waiting for, as you were just mentioning, are probably priced out of the market, at least for now.
Lenore Hawkins 17:05
Because the problem, what we're seeing is just really, really low supply. Yeah, so we're hearing this housing boom with the prices, but it's on a very small number. But we're also seeing because of all this, this, and this is, again, we're dealing with short term and by short term, I mean, it's going to take six to 18 months to smooth all this stuff out funkiness in all input costs. So we've have housing stars came in below consensus with both housing starts and building permits for May coming in weaker than expected for the second consecutive months. Starts haven't fallen far from their march peak building permits, which lead starts right you have to get a permit before you start building. They're down more than 10% from the January peak. And they've seen the clients across every region of the country. Yeah, starts were up month over month. But that's because April was revised sharply lower. So that kind of netted out single family starts jumped 4.2%. But if you put that in context of the 16% drop we saw in April, not so much what we are seeing a boom in his rentals, single family rents Rose 5.3% year over year in April. Now that's the largest one year gain in nearly 15 years.
Chris Versace 18:22
So I think that's very similar to what we're seeing in the automotive market. Right? We're production is cobbled because of set because of semiconductors and used cars prices are booming. You can't buy a house, you gotta go, you gotta live somewhere. So but I know we get some additional economic data out next week, including some other housing data points. I think it's existing home sales, new home sales, that sort of thing. What what what are you looking inside that new data next week to kind of complete your housing picture?
Lenore Hawkins 18:54
Whatever you think this is kind of a bit longer term on the housing picture. I want to be looking at what's going on with the jobs. Right. So last week, right after Paul's conference The day after where he was talking about I was bullish on employment, the weekly initial claims number was higher than expected, it jumped 37,000 to 412,000 verses and expectations for 360,000. Now, that's the first increase we've seen since April 24. And it's those sharpest increase since March 27. Really not a good sign. When you think about we have a level of job openings if this country has never seen over a million job openings. So what's going on with a spike like that in layoffs, that's that's just not a great sign. Continuing claims also rose and continuing claims are today at a level that's roughly twice what you would expect in a normal economy. And you can't really separate that from the housing market because again, you know, this housing market is on very small numbers. So keep that in mind. You know, it's, it's kind of like thinking about a stock price. And you go, oh, that stock, you know, look, it's it's going up so high. But if you see that it's trading on really tiny, tiny Volume Volume. Yeah, that's a very different sign. If it's if a stock is moving around on much, much, much lower volume than it normally sees. That is something to pay attention to you versus if you see those stock prices, changes occurring on normal volumes. Right? That's a very different message. And that's what we're seeing in the housing market.
Chris Versace 20:30
Well, I agree with you 100%. If I was going to Chris Versace Wayback Machine about almost 20 years ago, when he was working at Salomon Brothers in the how homebuilding and building products research group. That correlation between the housing market, whether it's repairing remodel or new construction is extremely tight with job creation. So I, I agree with you 100%, that that is something to really watch for, to get a bead on where housing is really going to go in the coming months. But we also got some ...
Lenore Hawkins 21:02
We will also look at the existing home sales, right?
Chris Versace 21:06
Yeah, yep. Because you got you got to go somewhere, right and want to trade up to new home.
Lenore Hawkins 21:09
Right. So existing home sales in the US, for the last report, unexpectedly fell 2.7% of 5.5 million, compared to forecasts for a 2% rise. So it's supposed to go up 2% and actually fell 2.7%. That's a pretty big difference, right. And that's the third consecutive month of declines. And a lot of that is driven by housing supply continuing to fall short of demand. And when you think about that, to the supply of housing, you can't, you can't disconnect that from the employment situation as well. So if you're struggling to find a job, or somebody at least if if the full household has not regained employment, and employment still continues to be a bit of a struggle for a home, are you really thinking of selling your house? Like because how are you going to get another house? How are you even going to rent if you don't have you're staying put and just hoping for those moratoriums to hold up. And this is a sign that the economy when they're such when you see housing prices going up like crazy. And you see slow volume continuing, that means people are going on not selling why that's not normally what we see. Right. So that's another indicator that nobody's really talking about that tells you there's there's more going on here. That's not great.
Chris Versace 22:31
So if you were to look in your crystal ball, may rents higher year over year. Okay. All right. Yeah.
Lenore Hawkins 22:39
Well, we'll also be looking at the mortgage applications when we're thinking, Oh, absent Wednesday, we get those the last week's report, mortgage applications increased 4.2% in the week ended June 11. And that was the first increase in four weeks, we'll be watching this time because the average rate of a 30 year fixed mortgage rose to the highest level since mid April at 3.25%. Last week in reaction to the feds announcement on the dotplot. So we'll see if that holds up and what impact they may have on mortgage applications.
Chris Versace 23:14
Now, we know that housing is a big multiplier effect on the economy. But we also know the consumer directly indirectly is a huge driver of the economy. What did you make last week's retail sales report?
Lenore Hawkins 23:28
Yeah, that was a did not come in as expected, it came in significantly weaker by a meaningful margin actually dropping 1.3% month over month versus expectations for decline of just point eight. If we take autos out of the equation, the with the Miss was by more than a full percentage point. And the only positive note is that April, the prior month, originally reported numbers were revised upwards. So the net is pretty much a wash. But at a point out that that's it's not consistent of a story that the economy is just aggressively growing. And let's just think about that. Take a step back and think what makes an economy grow, right? This is always our little mantra, like what makes them grow. It's growth in the labor market and its growth in productivity. What do we have going on right now? Okay, productivity is going pretty strong, because companies purchased a lot of tech. During the pandemic, they had to replace people with technology, they had to work remotely, they had to get creative. So productivity going pretty well, labor force, not so good. We're not seeing that really growing a lot. And when we see these expectations that Oh, the US economy is just accelerating. It's going fantastic. Okay, why when you think about what was in before the pandemic 2019 What was going on? Okay, now 2021. What is so different today that the future in 2021 is so much more spectacular than the kind of humdrum growth we'd experienced for all Have the team's waiting so much better? Oh, well, let's see, we've got way more depth across the board. A massive loss of wealth, you have all these small businesses that were forced to be closed. We had record hits to unemployment. I mean, yeah, we've got those stimulus checks. But the thing with GDP is it doesn't measure the loss of wealth across the board, and now on a global basis, and let's not forget, what what a meaningful area for for income is. Travel, right, having visitors come in? Well, just today, the European Union said, Hey, come on in, they've opened the doors to Americans who've been vaccinated. Now they were holding off on that, because the US still has a moratorium on Europeans coming into the country, if you're European, you cannot come into this country period, you got to have a really good excuse. That's still stands, that that hurts. That hurts the lodging, that hurts restaurants, right? That's still there, though. This economy is going to grow so much faster. Okay.
Chris Versace 26:10
So let's, let's circle back to the main retail sales report, because and I think this is going to tie in with what you were just kind of talking about, you know, on the big year over year guy, and we look at that, the retail sales are up about 33% year over year for the three months ending in May and year to date. 2021, over 2020, they are up about 24%. Now, dig into it, clothing, huge winner, about 200%. year over year in May. I know that there's a lot of ketchup spending going on. A lot of I want to be free, I want to go do something I want to look my best.
Lenore Hawkins 26:44
But and our numbers are kind of new, because oh, I agree. People were sitting at home going, it's all going to end.
Chris Versace 27:00
Well, so you're 100% correct on that. And I think that's why a lot of retailers, when they reported recently, they talked about comps, not just against 2020, because they knew that they were you know, you can walk over them like like like it was anything. Yeah, they talked about 2019. But so how much firepower Do you think we have left, right? And I'm gonna ask you with this little trick in mind. Next week, we have the 2021 Prime Day wars, where you've got Amazon Prime Day, you got target that's pulling out the stops, you got Walmart, once those days come and go, what, what what what is their next? And I guess a little sub question there is, do you think that back to school spending might surprise to the upside, given what we've seen with nobody going to school? After a year?
Lenore Hawkins 27:50
I think I think that could surprise to the upside. But I think just if we kind of smooth out these bumps right? Back to suits. But if we smooth out these bumps, where is the spending power going to come from? We've already seen that people pulled out fairly record high amounts of equity from their home, we don't look to be getting any of those fiscal stimulus checks back into people's checking accounts. Now, according to CEO of Bank of America, the average checking account balances about three times right now some people who were kind of the lower income levels where the the, the support was supposed to be focused, that their balances are about what used to be 2000 in 2019. Now it's about 6000, which is great, give him a little bit of cushion. But if you're looking at this job market, where employers are having a really tough time finding the right employee, and we have continuing claims, it's still about twice what is expected in a healthy market. That doesn't tell me what we've got a great tailwind for spending. When companies it's not good for a company to not be able to hire right, that hurts the company, if they have a job opening and they need to hire that person. And they can't, that's going to hurt their top line. Right? Because they're they need to grow. They need these employees. There's a reason they're hiring them. This is not good for the economy if you can't find a person and then on the other side, if somebody can't find a job, clearly that's a drag. So you've got to drag from both the corporate sector and the household sector when we look at the reality of this labor market right now. And that to me isn't saying going gangbusters.
Chris Versace 29:29
No, no. Okay. All right. Real quick. What else are you looking for next week and any other key economic reports to watch?
Lenore Hawkins 29:39
So also we will get on Wednesday next this coming Wednesday for the the main New Home Sales Report. The last month's report. Sales of new single family homes in the US sink sink 5.9% month over month to an annualized rate of 863,000 in April. That was well below forecast of 970 1000 so that was more than 100k below expectations. And again, soaring prices due to rising material costs. The march reading was also revised sharply lower to 917,000 from 1,000,021. So new home sales is that turning around is continuing to go down. I suspect that's not going to be a super exciting report either. Also on Wednesday, market flash manufacturing and service PMI is for June, we'll all be looking for there is to see further indications of what's going on in manufacturing. What we saw last week was the Philly fed follow the New York Empire report was signed to the manufacturing sector, which was like whoa, this thing is going crazy. They actually peaked out right. So the survey for Philly fed came in at 30.7% in June below the expectations for 31%, down from 31.5. In May, and well below April's 50.2%. Orders softened to a six month low and backlogs were down to a three month low and even delivery times fell from 41.5 to 29.3. And the workweek actually dropped to a six months low. So across the board there you're seeing manufacturing, which was like oh my god, this is amazing. Coming back down into reality. So I'll be looking to see from the market flash manufacturing PMI is like what what's going on there? We're seeing signs of further rolling over because this is what we warned about right? We said Oh, it's gonna look amazing. It's gonna be red hot. And then ...
Chris Versace 31:33
Yeah, whether it whether it's ketchup demand, pull forward demand. You're exactly right. And, again, when I think one of your favorite charts is going to bear that out, the Citibank economic surprise index.
Lenore Hawkins 31:45
Yeah, exactly. We looking for that one. The wells to look on Thursday for the durable orders report. That again, talking about rolling over new orders for us manufacturing durable goods fell about 1.3% in April, that was after an upwardly revised 1.3% increase in March. That was defying expectations 4.7 increase, but it was a first decline in durable goods orders in almost a year. So with I'll be looking to see is that continuing, right, because durable goods orders really went up. Is that is that also showing signs of rolling over because this has kind of been my, my picture is that you're gonna see this explosion as things open up, there's gonna be unreal acceleration, just like just like remember in last March, April, May you were looking at these charts going, Oh, my God chart going back like 15 years and, and the line just plummeted to never been seen. Yeah, we're gonna see the reverse, right? That reverse kind of massive acceleration that in and now is that really rolling over? We're seeing all around. So we're kind of timing that rollover. Finally, Friday, we get me personal income and spending and personal consumption expenditure Price Index more on the inflation bit, which I'm expecting the next month or two, the data is really gonna be rolling over.
Chris Versace 33:11
Okay. Okay. So let's quickly switch over to earnings. You know, there are a handful of ones. You know, last week, just just a couple highlights, you know, Spirit Airlines, they share that leisure demand in both domestic and international markets continues to improve. Oracle said that it is going to go after market share, particularly in the cloud market. They reported better than expected numbers, but they guided with softer margins quickly for the cloud business. We're going to watch and see what happens with Amazon and Microsoft, when they report their June quarter, we're going to really want to focus in on again, that operating margin line, perhaps signaling that there is some battling for market share. Lazy Boy, which is the company that we don't necessarily talk about, but it was kind of interesting, their furniture company and they said they expect ongoing global supply chain disruptions in headwinds related to raw materials and freight costs triple whammy there, it's going to hit them continue to hit them in the back half of the year. And I think last week, or maybe the week before, we were saying that Ford is going to war Lenore with Tesla. And now General Motors is jumping in on that. They said that they're going to raise their global spending on EBS and autonomous vehicles to 35 billion through 2025 30%. Greater than what they had said before. That's crazy. I'm telling you, man, these companies, these traditional autos are circling the wagons for Tesla. It is gonna be amazing to watch.
Lenore Hawkins 34:42
My view of back I can't remember exactly the year but I think it was honestly like 99, early 2000 when Travelocity had a bigger market cap than all of the airlines. I mean, what made no sense whatsoever. I feel like this when you've got Tesla, with a tiny fraction of the number of cars being sold having a bigger market cap than all the major automakers combined. We were almost there. It's tiny bit left. Yes. Tiny bit left. Yeah, and here. I'm always worried. I haven't. I haven't prepared enough. I was gonna say, I think you have enough. I think I have enough. Every time though. Yeah, I did. You should see my notes for when I like when I go on one of the TV. things. I mean, you know what those are? Like, all of Yeah, exactly. Like, if you're lucky to get three minutes, right. And I have like five pages where I've just this because then then I know no matter what they hit, I will have thought about it. Be prepared. And they know they tell you what they're going to ask, don't they? Oh, yeah. But they never they. So they tell you what they're going to ask. And then what actually happens when you get on the set is completely different. They never, oh, my God, I have to do such dancing. Because they'll they'll, they'll say, Okay, here's the topic and then again on set, and it's okay. Are you what actually what we'd like to discuss is this thing that like I know nothing about. So I have to figure out a way to how do I tie that to something I do actually know something about and then move in that direction? Because you don't want to? I got nothing. I got nothing, Varney. Nothing about that.
Chris Versace 37:34
In the vein of you can run but you can't hide. Facebook has been testing ads within these Oculus mobile app. And pretty soon they're gonna start to put those games in there shoot at sorry, those ads and their shooter games blast on from resolution and others. And I expect that they're going to try to do this increasingly, with these AR VR gaming apps that they have to in a bin to drive greater ad revenue as they get attacked on privacy with some of the changes that say apple and others are making in their operating systems.
Lenore Hawkins 38:45
I wonder how that's gonna go. I mean, I having an ad, you know, when you're wearing those VR goggles, having an app ad slamming into my face? Well, think about it. A little pop up.
Chris Versace 38:58
Right, exactly as that happens. Think about it. You're in the middle of this shooter game. You're about to take someone down. Did you do that? All of a sudden, hey, you deserve a break today for McDonald's. Is that gonna work? I just don't. I really just don't see it. I have a tough time with that. Anyway, let's transition to what we're gonna look at this week. Guys. As we touched on earlier, we got Amazon Prime Day that's June 2122. And again, surrounding it are going to be competing events from Target and Walmart. Here's the thing Lenore, Amazon is expected to get $12 billion alone from Prime Day 2021 this year. That compares to 10 point 4 billion in 2020. And seven point almost 7.2 billion in 2019. That is a huge event. But here's the thing. In addition to all the sales, this is a bonanza for getting new Prime subscribers as they get ready for the back half of the year. Again, the all important holiday shopping season. candidly. Do you know anybody doesn't have a prime account because I share it out.
Lenore Hawkins 40:04
Yeah. I'm trying to think of how you wouldn't have a prime account because it just it just it's so good.
Chris Versace 40:13
It's so easy. I mean, it pays for itself just like Costco membership. But enough of that. We have very few earnings next week. But let's talk about the ones that we do have Darden restaurants, look, they are going to signal along with the reopening, how are people continuing to eat? Are they continuing to shift more and more on the outside, ie not home? But I also want to hear about what are they seeing a consumer spending, ticket size, input costs and pricing? And also to are they able to attract workers, because we've heard a lot of folks talk about, Hey, I'm going out. But service is really slow, not enough servers, that sort of thing. Let's shift over to Blackberry. You know, Blackberry has repositioned itself really as a cybersecurity company. And look, the number of ransomware attacks and other attacks has just continued to escalate. In 2021, I think it's gonna have a very good outlook for the company. But I also want to see if they say anything at all about this mean stock stuff that is going on, because it's made their shares very volatile of late. The other two, and this is for Thursday, in addition to Darden and blackberry is FedEx, look package activities, it's a pretty good barometer of economic activity. And FedEx is forecast both for its own business in the overall economy will be worth noting, particularly as well, it's comments on supply chains. I also think that if Prime Day and the competing activity from Target and Walmart are really blockbuster, that they're probably going to talk about it. And the other thing that we'll be looking for as a result of that is, what is ups say anything about the success of those competing events. And then rounding out Thursday is Nike. Look, when this global foot athletic wear company reports, investors are going to be focused on their geographic comments and the pace of the global reopening, as well as those comments on global supply chains. And, like, I know you're a big fan of Lulu lemon. And I think that much like Lululemon Nikes, athleisure were benefited tremendously from the pandemic. But I want to see, what are they calling for about the back half of the year? Does that change at all? As people go back to work or go back to the office?
Lenore Hawkins 42:28
Yeah, I can't imagine that you're gonna see anywhere near the growth of like, legging purchases. Right, right. Oh, could you know what it was like? Alright, this is my new worker kind of tire. I need my yoga pants. I don't really see that kind of acceleration in the need for yoga pants continuing? Right back half. Well, 21. But But we still have, you know, a decent number of companies are still working with employees on working from home or from anywhere. So yeah, well, it's it's completely going away. No, no,
Chris Versace 43:01
it's it's it's a very much a fair point. I mean, you heard companies like Apple wanted people in a certain number of days. And the workers said, No, come. Yeah, we're gonna we're not coming in that much. I think, I think Uber or Lyft, I forget which one had a similar issue as well. So it's gonna be interesting to see. And then rounding out on Friday, we've got two others. One is car max. You know, to what degree is auto production really hampering their business? is it's used car business exploding? What are prices for that kind of, as we alluded to a little while ago, and when does car max see this auto production shortage coming to an end? And the other thing too, I thought about, I wanted to see, are they seeing a lot more demand for Eevee? So we can really gauge that shift? Is it accelerating even there?
Lenore Hawkins 43:50
And then are consumers willing to pay the big ticket because it's one thing to for us to be seeing the consumer shifting more and more towards cleaner products for their bodies for their homes, better food, but the big ticket items, that's a big investment in a cleaner environment.
Chris Versace 44:08
Totally agree, totally agree. And then the last report on Friday is paychecks. And the reason here that I want to pay attention to this is they rolled out an impressive number of tools during the pandemic, regarding you know, testing and helping companies deal with their employees. But as that anniversaries What are they looking for in terms of new business growth? So, you know, this could be another one of you know, while we're expecting the economy to grow, perhaps at least for paychecks, the back half of 2021 may not be that robust.
Lenore Hawkins 44:42
Yeah, may not be quite as exciting as a although I think we can all do with a little less excitement. 20 how's good. I'm my mom. Good for a bit. Thanks.
Chris Versace 44:54
I agree. I agree. Anything else you're watching next week winner.
Lenore Hawkins 44:58
This heatwave and Seeing Ah yes, yes. What what comes out of that as far as back to our cleaner living theme. With I believe I read there was something like 40 million Americans are expected to be dealing with three digit degree temperatures and 200 million Americans are anticipated to be living with 90 plus degrees.
Chris Versace 45:22
So that's why that's all that means is when we get the June industrial production report. Utility activity is going to spike like nobody's seen.
Lenore Hawkins 45:33
And this could be a bit of a aid to the Biden administration's push for infrastructure, given the spectacular job that Texas has been doing so far with it.
Chris Versace 45:46
And with that, here's the problem. that California is now going Wait a minute, wait a minute, what did I do? What did I do? Wait a minute. I used to complain when I got above 75. Well, with that, I think that is the week ahead.