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This Week’s Data Could Rock The Financial Markets

The financial markets will be held hostage by a series of important economic data releases this week. If the data is disappointing, the repercussions could be significant. The US Dollar is particularly vulnerable. Between July 2014 and mid-March this year, the US Dollar Index rose 23%, in large part due to expectations that the US central bank would soon begin to increase interest rates in the United States. However, a first quarter economic “soft patch” (with US GDP contracting by 0.7% in Q1) has raised doubts over whether the Fed will be able to hike interest rates this year. That has caused the Dollar rally to stall. The data to be released this week will reveal whether the weakness persisted on into the second quarter. If it did, market expectations for a rate hike will be undermined and the Dollar will go into reverse – at least temporarily. Dollar weakness would give commodity prices a boost, but would be a blow to the European and Japanese stock markets.

So let’s take a look at this week’s Economic Calendar. On Monday, the government will announce the level of Personal Income, Personal Spending and the Personal Consumption Expenditure (PCE) Price Index for April. These are enormously important for understanding what is happening in the economy. Personal spending makes up roughly 70% of US GDP, but spending is dependent over the longer run on income. That makes these releases two of the most closely watched every month. The PCE Price Index is an important measure of inflation. If it is rising, the chances of interest rate hikes will increase. On the other hand, if it comes in below expectations, that will point to an increasing threat of deflation, in which case rate hikes would be less likely. Also on Monday, we will have updates on the ISM Manufacturing Index, the Purchasing Managers’ Manufacturing Index (PMI) and Construction Spending. The ISM Index and the PMI Index are measures of strength of the manufacturing sector. Both have weakened significantly in recent months as the strength of the Dollar has undermined the competitiveness of US goods in the global market. Construction spending also weakened in the first quarter, but is expected to rebound with the Spring.

On Tuesday we get Factor Orders and Auto Sales; and on Wednesday the Trade Balance and the ISM Services Index. In recent months factor orders have weakened due to the strong dollar, while the trade balance for March blew out to an exceptionally large level, also in large part due to the strong dollar, which undermined exports while encouraging imports. A trade deficit deducts from GDP. The ISM Services index provides a glimpse of the strength of the services industry. It has held up better than most other indicators recently. On Thursday, Productivity and Unit Labor Costs will be released. These will be watched for signs that wage pressure could arise and lead to inflation.

Finally, on Friday, the May jobs numbers will be released, along with the Unemployment Rate, Hourly Earnings and the length of the Average Workweek. These Nonfarm Payrolls numbers are perhaps the most important economic data point released each month, both in terms of what they tell us about the health of the economy and in terms of their impact on the financial markets. The consensus expects that 220,000 jobs were created in May and that Average Hourly Earnings increased by 0.2% compared with April. Job creation was strong all during 2014. Consequently, the unemployment rate came down more quickly than had been expected to just 5.4% currently. However, the Underemployment Rate remains high and the increase in Hourly Earnings has been disappointing. The number of jobs created came in at less than half the level anticipated in March, but then rebound back above 220,000 in April. There is growing unease that the best may be over for job creation in this business cycle. Another weak number in May or downward revisions to prior months would be a severe blow to market optimism that the US economic recovery remains on track - despite all of the evidence to the contrary so far this year.

By the end of this week we will have a much clearer picture about the state of health of the US economy than we do now. What we learn could significantly impact market expectations about the outlook for Fed policy, interest rates and the Dollar. I’m looking forward to some potentially exciting market moves.

By the way, if you would like to monitor these releases in real time, visit Bloomberg’s Economic Calendar at:

http://www.bloomberg.com/markets/economic-calendar/

There you will find the date and time of the releases, as well as consensus expectations, background information about the indicators and their recent trends. Bloomberg updates all the data immediately after each announcement.

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