Market Perspective for May 23, 2016

St. Louis Federal Reserve Bank President Bullard confirmed the Fed’s position regarding rate increases in a Monday appearance in Beijing. Strong labor markets favor rate hikes, but slow GDP growth and low inflation expectations dictate a slower pace.  Fed Chair Yellen is scheduled to speak at Harvard on Friday.

The G-7 finance ministers’ meeting continues in Japan this week, followed by the meeting of world leaders this coming weekend. There is speculation that the Japanese government will delay a sales tax increase and engage in another round of quantitative easing, but there was friction over the weekend after U.S. Treasury Secretary Lew urged Japan to refrain from competitive devaluation.

The flash manufacturing PMIs for May in both the U.S. and EU will be released on Monday. Japanese CPI data will be released Friday and is expected to show that the country is still mired in a recession, which supports the premise that the Bank of Japan will continue to ease its monetary policy.

Domestic news on tap this week includes April new homes sales data; the consensus estimate is for a slight increase. The weekly mortgage application index out Wednesday and April pending home sales on Thursday are also expected to show an increase. Other important economic reports Thursday include the initial weekly unemployment claims, durable goods orders and the Kansas City Fed manufacturing survey. These reports are expected to show continued strength in the economy and job market. The second estimate of first quarter GDP is due out on Friday. Economists project a significant uptick, from 0.5 percent initially to 0.9 percent growth.

Earnings season is winding down, but a few retail earnings are still reporting. Costco (COST), Abercrombie & Fitch (ANF), Dollar General (DG) and Sears (SHLD) are among those delivering earnings. The earnings reports from retailers ANF and SHLD will provide additional data points for assessing the recent weakness in the apparel and department store sectors. Both companies are expected to report a loss for the most recent quarter. Discount retailers COST and DG are expected to deliver better-than-expected earnings numbers similar to Wal-Mart (WMT), which reported last week. Strong numbers will support the idea that retail weakness is confined mainly to the department store sub-sector. Hewlett Packard (HPQ) will also report this week. Analysts will be looking at the shift from PCs to mobile devices.

The major averages have remained in a relatively tight trading range since the end of March. Strong earnings and economic news could provide the catalyst that stocks need for their next leg higher.

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