- The New York Fed Manufacturing Index is expected to tick higher in May
- The rise will reflect another month of moderate growth in the US
- US home building sentiment will dip again, but stay near its post-recession high
- Any slide in the two-year Treasury yield will raise doubts about a June rate hike
Two US reports will set the tone for expectations for the May economic profile, starting with the New York Fed’s manufacturing index. We’ll also see this month’s sentiment update for US home builders via the Housing Market Index. Meantime, keep an eye on the policy sensitive two-year Treasury yield, which ticked lower on Friday.
US: New York Fed Manufacturing Index (1230 GMT): April is shaping up to be a solid month of growth for the US, in no small part due to encouraging increases last month for payrolls and retail sales. Will today’s preliminary look at economic activity in May via the New York Fed’s manufacturing survey show that the good times will continue?
The outlook is moderately bullish, according to Econoday.com’s consensus forecast. The Fed bank’s regional index is expected to edge up to 7.0 in May from 5.2 in the previous month. That’s below the readings in the first quarter, but a slightly firmer reading is enough to reaffirm the view that the rebound in manufacturing that began in last year’s fourth quarter remains intact.
Although today’s report focuses on regional activity, positive news will set the tone for the week ahead and strengthen the market’s conviction that the Federal Reserve remains on track to raise interest rates at next month’s monetary policy meeting.
The probability of another round of tightening at the June 14 Federal Open Market Committee meeting has eased moderately in recent days, based on Fed funds futures. Nonetheless, the crowd is still anticipating that the central bank will lift the target range from its current 0.75%-to-1.0% next month. The current estimate at last week’s close: a roughly 79% chance of a hike, according to CME data.
There's a month of data to digest between now and the next Fed announcement, but it starts with today's release. And for the moment, the case for expecting a rate hike is on track to strengthen a bit, courtesy of the outlook for a modest gain in manufacturing output in the New York Fed’s region.
US: Housing Market Index (1400 GMT): Residential construction activity has been holding in a narrow range lately, but there’s no sign that a major slowdown is imminent. One reason for expecting that a moderately bullish climate will prevail: today’s profile of sentiment in the home building industry is expected to hold near a post-recession high.
The Housing Market Index is projected to remain unchanged in May, printing at 68 for a second month, based on Econoday.com's consensus outlook. The estimate is just slightly below the 71 reading in January, which marked the highest value in a decade.
Sentiment in the home-building industry has softened recently, but “builder confidence is on very firm ground, and builders are reporting strong interest among potential home buyers,” noted the chairman of the National Association of Home Builders last month.
That’s a clue for expecting that the hard data on housing starts will stabilize in the months ahead and perhaps ramp up. Tomorrow’s update on residential construction activity for April delivers the next round of numbers.
Short of a major setback in today’s HMI report, cautious optimism for the real estate sector remains a reasonable forecast.
Two-Year Treasury Yield: The policy sensitive two-year yield on Friday pulled back from its recent high, closing last week at the lowest level since May 2, based on daily data from Treasury.gov. Is that just noise or a sign that the crowd is beginning to have second thoughts about the prospects for a rate hike at next month’s Fed meeting?
It’s too soon to say for sure, but last week’s update on consumer inflation for April suggests that pricing pressure is sufficiently tame to offer the central bank cover to leave rates unchanged.
The headline Consumer Price Index rose 2.2% in the year through last month, the lowest rate so far in 2017. Core CPI, which strips out food and energy and is considered a more reliable measure of the trend, nudged lower too, dipping to a 1.9% increase vs. the year-earlier level – the softest pace since last August.
Inflation, in other words, shows no sign of accelerating via consumer prices. Instead, it appears that the pricing trend is stabilizing right around the Fed’s 2.0% inflation target. In turn, the latest CPI numbers offer the Fed an excuse to delay the next rate hike beyond the June 14 FOMC announcement.
Some analysts, however, argue that the clock is ticking, based on the labour market.
“The best labour market in nearly 30 years should tell Fed officials that additional monetary stimulus is not required,” said the chief economist at MUFG Union Bank on Friday. “We expect them to put another rate hike notch on their belts at the upcoming June meeting.”
The two-Year Treasury yield, which is widely followed as a proxy for near-term rate expectations, isn’t fully on board with that view, or so Friday's mild slide for this maturity implies. Upbeat economic news in the days ahead could alter the outlook, of course. Meantime, traders will be watching the two-year yield closely this week for any hints that confidence is waning for anticipating a rate hike. A dip below the 1.20% would certainly mark a compelling sign that dovish sentiment is again taking flight.
Disclosure: Originally published at Saxo Bank TradingFloor.com