Weighing The Week Ahead: A Seinfeld Market?

Trading desks will be closer to normal staffing. Chair Yellen’s biannual Congressional testimony will be a feature on Wednesday and Thursday, but the economic calendar is light. With little going on, the punditry will be wondering:

What should we expect for the rest of 2017?

Last Week Recap

The big economic news last week featured employment – as expected. The start of the G20 meetings and North Korean missile tests grabbed some headlines, but without much effect on stocks.

The Story in One Chart

I always start my personal review of the week by looking at this great chart from Doug Short via Jill Mislinski. Despite the Thursday selling, the result for the week was essentially unchanged (up 0.07%). Not much in the way of fireworks!

Doug has a special knack for pulling together all the relevant information. His charts save more than a thousand words! Read the entire post for several more charts providing long-term perspective, including the size and frequency of drawdowns.

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 economic news last week was good.

The Good

ISM Manufacturing registered 57.8, both an increase and a beat of expectations. The ISM notes that this level, if annualized, corresponds to a GDP increase of 4.6% and the figures for the YTD suggest a gain of 4.1%. (I think it is time for them to update their regression model). To provide some color, let’s look at the comments they cite.

“Overall, business is strong. We are seeing price increases for packaging and handling materials as well as some MRO supplies” (Plastics & Rubber Products)

“Overall, demand is up 5-7 percent and expected to continue through the end of the year, at least. ” (Transportation Equipment)

“Demand is picking up; meeting budget expectations.” (Electrical Equipment, Appliances & Components)

“Business is still very robust. Have continued to hire to match increased demand.” (Computer & Electronic Products)

“Business [is] steady; not great, but good and fairly solid.” (Furniture & Related Products)

“Business globally continues to show improvement.” (Chemical Products)

“Environmental regulations have strong effects on our business. We continue to watch for any changes as a result of the new administration.” (Paper Products)

“Dry weather helping demand.” (Nonmetallic Mineral Products)

“International business outside North America on the upswing.” (Machinery)

“Metal pricing continues to drag down our profit margins, but we are very busy quoting new business, so our customers have a good outlook on the rest of the year.” (Fabricated Metal Products)

“Business is strong both domestically and internationally. Supplier deliveries are quick domestically, international supply chain is slowing. We are in a hiring mode.” (Food, Beverage & Tobacco Products)

Q2 Earnings are off to a good start. Only 7% of companies have reported so far, but FactSet notes the strong comparisons.

ISM Services both increased and beat expectations with a reading of 57.4. Jill Mislinski digs into the data with useful details. Here is a key chart:

Employment – Establishment Survey beat expectations. The gain of 222K net jobs handily beat expectations and the prior two months were revised higher. Calculated Risk calls it a “solid report.” Check out Bill’s full discussion and charts. Instead of charts from the NYT or WSJ and opinions from sell-side researchers, I suggest something different this month. The BLS has an interactive chart where you can look at various questions and zoom in for details. It is educational and fun (at least for data wonks). Since I believe that people take this report too seriously, I would like to emphasize the sampling error. This is not something that disappears after two revisions (although the benchmark revisions finally fix it). People react to this news because it is important, not because it is really accurate. The sampling error is better after a time, but by then no one cares.

The Bad

Hotel occupancy has turned lower. (Calculated Risk).

Factory Orders declined 0.8%, slightly worse than expectations of -0.7%. (MarketWatch).

Employment – Household Survey. Many observers jumped on the sluggish nominal growth in the hourly wage. Bob Dieli, who writes an excellent and comprehensive employment analysis each month (subscription only), gave the Household Survey a “high D.” The main reason was that more people are unemployed. It is not terrible, and only one month, but something to watch.