Year: 2014

Stocks rallied in late trading on Friday, concluding a relatively flat week for the indexes. The S&P 500 gained 0.19 percent, while the Dow Jones Industrial Average was up 0.03 percent for the day. For the week, the S&P 500 and DJIA lost 0.1 and 0.6 percent, respectively. The Nasdaq continued to move higher however, gaining 0.4 percent on the day and 0.7 percent for the week. With only one trading day left in June, each of the indexes is positioned to finish higher for the month.

We now understand why Janet Yellen wasn’t disturbed by the jump in the inflation data last week. The CPI for May came in at 0.3 percent, indicating inflation could be heading above the Fed’s target range. However, the core PCE (personal consumption expenditures) for May was 0.2 percent. Since this is the gauge the Fed uses to implement policy decisions, it tells us the Fed will remain dovish for the time being. The trend in inflation remains upward, but until the core PCE starts moving higher, the Fed will not change its current policy orientation.

Additionally, the PCE report showed consumer spending was up only 0.2 percent, in line with inflation. This is quite disappointing and may cause some economists to start cutting their second quarter GDP growth forecasts. Growth rates should still be solid, but may not reach the 4 percent level many had predicted.

Combined with the first quarter GDP final estimate reported on Wednesday, it’s easy to see why the Federal Reserve isn’t worried about inflation. Government economists estimated the economy contracted at a 2.9 percent annualized rate in the first quarter. If the economy grows at 3 percent for the rest of the year, GDP growth for 2014 will be 1.5 percent, at the low end of the post-2008 range.

The weak data rattled stock market investors, but equities stayed near their highs. Technology stocks continued to recover from the spring sell-off as the Nasdaq Composite reached a new 52-week high on Wednesday. Volatile sub-sectors such as biotechnology and internet shares were also steady. If the prospect of slower growth continues, investors will likely gravitate towards more aggressive sectors in search of higher returns.

Slower growth will also favor high quality dividend paying companies. If interest rates remain low, it will keep dividend shares attractive relative to fixed income. Dividends may also make up a larger portion of stock returns as a result of weaker growth numbers.

It is not time to concede a slower growth trend just yet. This week we also saw the flash PMI for June, which climbed to a reading of 57.5. Anything above 50 indicates expansion in the manufacturing sector. Rail data also continues to show a pickup in the economy. Manufacturing leads the economy and this pickup signals stronger growth over the coming months. In contrast, consumer spending is a lagging indicator. The U.S. economy has a large consumer sector, but consumption is the last stage of the economic cycle. When manufacturing, raw material and energy production is improving, it is a very good sign. We will just have to wait to see if the growth rate will be as strong as once predicted.

There is positive news out of China to start the week as HSBC released their flash PMI number for June. The reading came in at 50.8, the highest in 7 months and indicates the manufacturing sector in China is back at expansionary levels. China still bears close watching; while the pickup in manufacturing is positive, the sector is closely tied to the global economy. The main risk in China still lies with the real estate sector and credit excesses. Still, from an American perspective, the rising PMI in China is good news.

An improving PMI out of China is also good news for energy demand. West Texas Intermediate Crude (WTIC) climbed back above $107 a barrel, a level it briefly held following the ISIS invasion of Iraq. WTIC is likely to stay in a narrow trading range this week. If it moves above $110 or below $104 per barrel, it would signal a short-term breakout to the up/downside.

Emerging markets are also near a high for 2014 but shares have traded sideways for eight days. The asset class has been weighed down by the inevitable pull back in India’s market, though shares in Russia, China and Brazil have also traded sideways. Although it doesn’t have far to go for a new high, the iShares MSCI Emerging Markets ETF (EFA) and similar funds paused right near a resistance line. A push higher would likely continue for several days as shorts are covered and bullish traders move in.

Markit released its flash U.S. Manufacturing Purchasing Managers Index for June this morning. The reading of 57.5 is the highest level since April 2010, indicating our domestic economy is continuing to improve. It was also a significant jump compared to 56.4 in May. Chris Williamson, the Chief Economist at Markit indicated “The strong reading also rounds off the best quarter for factories for four years, adding to indications that the US economy rebounded strongly in the second quarter from the weather-related weakness seen at the start of the year.”

Economic Reports: Existing and new home sales for May will be reported. On Wednesday GDP revision will be released. Currently, the consensus is in the range of negative 1.7 percent to negative 2 percent growth in Q1.

Also, this week we’ll see core PCE for May, or personal consumption expenditures. The PCE price index is similar to core inflation and is the actual number the Federal Reserve uses for deciding policy. It is similar to the core CPI number we saw last week, which showed inflation at 0.3 percent in May, above forecasts of 0.2 percent. If PCE doesn’t match the rise in the core CPI, we will know why Yellen said the CPI number was “noise.” If it does pick up, energy and commodities should benefit along with stocks in general.

Look for the Dow Jones Industrial Average, Dow Transports and the Nasdaq to make new all-time highs this week. The Russell 2000 still has a ways to go, but it led the indexes last week and is likely to do so again if we get another up week.

Earnings: A light week for earnings that will see Nike (NKE), Carnival (CCL), Monsanto (MON), Walgreen’s (WAG), KB Home (KBH), Lennar (LEN) and General Mills (GIS) report.