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Look forward to May 20, 2019 week: The focus will be on the Fed and seeking evidence for a rate cut

The May 20 week slows down again for economic data releases. The highlights of the week are likely to be the numbers of sales of homes, while the data on new orders for durable goods could well post a downside surprise. However, it is public comments from Federal Reserve policymakers that will get the most attention with markets trying to find evidence to substantiate their anticipation of a cut in short-term rates. The FOMC meeting minutes will be carefully parsed for anything that would do the same. However, data on inflation and employment are in fact less supportive of a rate hike than they were. The FOMC is not anxious to either add to or remove accommodation at the moment and are going to remain in wait-and-see mode. A willingness to move in either direction is not the same as an intention to do so. Moreover, there is no consensus emerging about the appropriate next step in monetary policy beyond reminding that the FOMC is data-dependent. Policy will be set on data over the medium term, not a single month or two’s numbers.

The NAR will report sales of existing homes for April at 10:00 ET on Tuesday and the Commerce Department will release the numbers for sales of new single-family homes at 10:00 ET on Thursday. The April data should be past any noise generated by wintry weather in February and March. The picture that could emerge is one where lower mortgage interest rates have helped shake off the lethargy in the housing market that took hold in the second half of 2018 when rates reached a near-term peak. At present, the story may be one of limited supplies rather than lack of buyers. Some renewed pricing power may help bring existing units on to the market. At the same time, homebuilders could see an opportunity to capture some of that demand, if they can find the land to build on and workers to break ground and start construction.

At present, Freddie Mac has reported that fixed mortgage interest rates are at the lowest levels since January 2018. Consumer may be less worried about rates moving noticeably higher with the Federal Reserve expected to impose no more short-term rate hikes for a while. However, recent history may motivate potential homebuyers to capture an affordable rate while it is certain they can. Freddie Mac releases its mortgage rate data at around 10:00 on Thursday.

The advance report on durable goods orders for April at 8:30 ET on Friday holds the potential to be a downside surprise due to weakness in transportation orders. In the main part, it is orders for aircraft that is likely to be the culprit. Boeing reported a scant 4 new orders for April and demand for new motor vehicles has been slow in recent months.

The Kansas City Fed’s Manufacturing Index for May is set for release at 11:00 ET on Thursday. So far, the April data out of the New York and Philadelphia Districts points to moderate expansion for May.

The Philadelphia Fed’s Non-Manufacturing Index for April at 8:30 ET on Tuesday is the second of the early regional reports on conditions in the service sector. It is difficult to draw solid conclusions from any one of the reports given the differences across regions. However, the New York data pointed to robust activity for the month. If this is the same for Philadelphia, it will suggest that the service sector is doing just fine at present whatever events are affecting manufacturing.

Initial jobless claims for the week ended May 18 at 8:30 ET on Thursday will probably remain in the low 200,000’s which seems to be the current underlying trend.

The minutes of the April 31-May 1 FOMC meeting at 14:00 ET on Wednesday probably will only reiterate that the Committee is mostly in wait-and-see mode for the monetary policy outlook. Three weeks earlier the FOMC was just getting the final reports delayed by the federal government shutdown, notably the PCE deflator through March and its surprisingly soft reading at the core level of up 1.6% year-over-year. The consensus seems to be that it is due to some idiosyncratic factors that will pass through in a few month’s time. However, the doves on the FOMC will be alert to the possibility that this is not the case, or at least that it is keeping inflation low enough that a rate cut is not out of the question. However, I would caution against making too much of it when not all the inflation data is telling the same story and that subsequent numbers for the CPI suggest inflation is still not far off the Fed’s 2% objective. Even were it the case, the strength in the labor market could argue against increasing accommodation.

It is around this time of year that appearances by Fed officials tend to taper off. As the Memorial Day weekend approaches and into early June, the speeches given are often at college commencement events and not generally useful in assessing monetary policy. However, with the June 4-5 Conference on Monetary Policy Strategy, Tools, and Communications Practices only weeks away, Fed officials will be active in communicating the purpose of the conference and making clear that while some decisions may come out of the conference and subsequent discussions, nothing has as yet been determined as a fundamental change in the way the FOMC conducts monetary policy.



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