Worries over a potential trade war with China subsided this weekend as Treasury Secretary Steve Mnuchin announced that the Trump administration “agreed to put the tariffs on hold” while negotiations focus on drafting a framework for addressing trade imbalances, Prudential’s Chief Market Strategist Quincy Krosby said Monday in her weekly “Connecting the Dots” outlook.
“This has been a reprieve for the market that allows market participants to focus on other things, like the very end of the earnings season, the Treasury markets, the U.S. dollar and the clutch of housing data this week,” Krosby said.
The housing data includes new home sales, the FHFA home price index, and existing home sales, all of which could offer a snapshot of whether or not higher mortgage rates are beginning to dampen sales activity.
“We’ve been seeing that Americans are buying new homes, and the higher rates are not yet inhibiting sales,” Krosby said.
While the release of minutes from the last Federal Open Market Committee (FOMC) meeting will be scrutinized by analysts, the market now fully expects a rate hike at the June meeting. Comments from a parade of Fed speakers this week will also be monitored carefully for their views on the path of monetary policy.
“The Fed funds futures market indicates over a 50 percent chance of a fourth rate hike in December,” Krosby said. “The U.S. is going through a growth spurt, and that’s good news with the Fed seemingly intent on raising rates. What we need to see is that the underpinning for the U.S. economy remains strong.”
Regional manufacturing reports—such as last week’s Empire State Manufacturing Survey and Philadelphia Fed Survey and this week’s surveys out of Richmond and Kansas City—are increasingly appearing on the radar as new orders gain strength along with the prices paid component.
“In the Philadelphia Fed survey—which has a fairly positive correlation with the rest of the United States—new orders were up to levels we haven’t seen in over 40 years,” Krosby said. “However, the prices paid component is moving higher, and this week’s reports will be watched to see if we could be headed for higher inflation overall.”
As economic reports are released this week, market participants will be focused squarely on Treasury yields and the U.S. dollar.
“If we see the 30-year move higher, we can expect the 10-year to move with it,” Krosby said. “We’ll also see how the market treats the various sectors which are beneficiaries of a stronger dollar.”
Earnings to watch:
Kohl’s, TJ Maxx, Lowe’s, Tiffany & Co., Target, Best Buy, Ross Stores, The Gap, Foot Locker, Hewlett-Packard
This week’s important economic data:
Monday: Chicago National Activity Report
Tuesday: Richmond Fed Manufacturing Index
Wednesday: Markit Flash Manufacturing PMI; Markit Flash Services PMI; New Home Sales; release of FOMC minutes
Thursday: FHFA Home Price Index; Existing Home Sales; Kansas City Fed Manufacturing Activity
Friday: Durable Goods Orders
Read Quincy Krosby’s full Q2 Market Commentary: Regime Change.
The views and opinions are those of the author at the time of publication and are subject to change at any time due to market or economic conditions. This is solely for informational purposes. This is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.