Fed and markets seek fresh insights into consumers’ intentions

Important May reports are on the nation’s business calendar this week — retail sales today, the Consumer Price Index on Thursday and housing starts on Friday.
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Important May reports are on the nation’s business calendar this week — retail sales today, the Consumer Price Index on Thursday and housing starts on Friday.

Looming among them, though, is the Federal Open Market Committee meeting that will end Wednesday afternoon with a Janet Yellen press conference. What the Fed chairman says is likely to color what investors in lately rising S&P 500 stocks and other economy watchers think of the rest of the data they see this week.

The Fed is not expected to raise interest rates at this time, especially after the Labor Department said earlier this month that the economy created just 38,000 jobs in May, the fewest in any month in more than five years.

MarketWatch reported that the top question on the minds of Fed committee members is likely to be whether the job market has actually deteriorated. Yellen said last week that she doesn’t believe it has.

“The overall labor market situation has been quite positive,” she said.

MarketWatch said this week’s retail sales and housing reports could ease concerns that the economy is slowing. It is on track to grow 2.5 percent during the current quarter, three times as fast as in the first three months of the year, according to economists MarketWatch polled. Consumers are leading the way.

The percentage of eligible Americans collecting jobless benefits fell to a record low in early June, job openings are at a record high and wages are rising.

“Sooner or later a tightening labor market is going to come home to roost,” Peter Hooper, chief economist at Deutsche Bank Securities, told MarketWatch. “The law of supply and demand has not been repealed.”

On Wall Street, stock traders will closely watch the retail sales report. Those data "will give us a little bit more insight into just how much consumers are pulling back, if they are, or whether that employment number was more an aberration in the trend and we still have pretty solid results to keep us moving forward," Bruce McCain, chief investment strategist at Key Private Bank in Cleveland, told Reuters.

The S&P 500 made a run at a record high last week, but fell short of the May 21, 2015, record close of 2,130.82.

"We need to see something consistently good or bad to move the markets in a direction," Peter Costa, president of Empire Executions, told Reuters. "Right now we haven’t got that."

In a Wall Street Journal survey, economists predict a 0.3 percent rise in retail sales, which would fall far short of April’s 1.3 percent gain. The Journal also said economists are forecasting a 0.3 percent increase in the Labor Department’s Consumer Price Index. Inflation was at 0.4 percent in April, the largest single-month increase in the index in three years.

Last week we learned that growth in consumer credit slowed in April after it reached a 15-year high in March. The Fed said total consumer credit increased $13.4 billion, below the $18 billion median estimate of economists Bloomberg surveyed.

“We see some moderation in the consumer credit data,” Daniel Silver, of J.P. Morgan Chase, told the Wall Street Journal. He said it could be related to some “cooling in auto sales.”

Lastly, the University of Michigan’s preliminary Consumer Sentiment Index for June came in at 94.3, slightly below the 94.7 level that it reached in late May.

“Consumers were a bit less optimistic in early June due to increased concerns about future economic prospects,” said Richard Curtin, chief economist for the university’s Surveys of Consumers.

“The strength recorded in early June was in personal finances, and the weaknesses were in expectations for continued growth in the national economy,” Curtin added. “Consumers rated their current financial situation at the best levels since the 2007 cyclical peak, largely due to wage gains. Prospects for gains in inflation-adjusted incomes in the year ahead were also the most favorable since the 2007 peak, enabled by record-low inflation expectations. On the negative side of the ledger, consumers do not think the economy is as strong as it was last year, nor do they anticipate the economy will enjoy the same financial health in the year ahead as they anticipated a year ago.”

Jim O'Sullivan, chief U.S. economist at High Frequency Economics, said the decline in long-term inflation expectations was notable.

"It provides another reason for the Fed not to tighten [this] week, even as the headline on sentiment was quite encouraging," CNBC said O'Sullivan wrote in a research note.

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