- U.S. existing home sales expected to remain strong
- U.S. stock market has so far taken in stride the increased chance for a rate hike in June-July but the damage could accumulate
U.S. existing home sales expected to remain strong — The market consensus for today’s April U.S. existing home sales report is for a +1.3% increase to 5.40 million, adding to the +5.1% increase to 5.33 million seen in March. Home sales in March were strong and were only -2.7% below the 9-year high of 5.48 million units posted last summer in July 2015. That 9-year high is close enough that it could definitely be exceeded if today’s report is stronger than expected.
U.S. home sales fell sharply by -10.0% in late 2015 (Oct-Nov) but have since been mostly on the rise. The strong April retail sales report of +1.3% suggested that consumers over the winter were simply hibernating and were waiting for spring to start spending money again. The optimism behind the surge in retail sales could also show up in a spurt in home sales, although the home sales process takes up to 2-3 months to move from an offer to an actual home closing. Pending home sales showed some moderate strength in Feb (+3.4%) and March (+1.4%), which was a good leading indicator for home purchases moving toward closing.
U.S. stock market has so far taken in stride the increased chance for a rate hike in June-July but the damage could accumulate — The S&P 500 as of Thursday’s close had fallen by only -1.3% from Monday’s close despite the substantial increase in the chances for a Fed rate hike at either the June or July FOMC meeting. The stock market seems to think that either the chances for a Fed rate hike in June-July still aren’t very high or that a rate hike will not significantly hurt the U.S. economic and earnings outlook.
However, the stock market could easily slide further over the next few weeks if the Fed keeps up its drumbeat of warnings about a rate hike and/or if the dollar index continues to rally. The dollar index has so far rallied by +3.7% from the 1-1/3 year low posted on May 3. The rally in the dollar index has been mild thus far but a sustained advance in the dollar index would be bearish for stocks by reducing the dollar value of overseas earnings and hurting overseas export sales.
The markets as of this past Monday’s close were discounting only a 4% chance for a Fed rate hike at the upcoming meeting on June 14-15. However, the market then boosted the odds to 28% by Thursday’s close after several Fed officials warned this week that the June meeting was “live” for a rate hike and after the April 26-27 FOMC meeting minutes said that Fed members generally favored a rate hike in June if the economy improves, the labor market shows progress, and inflation moves higher.
The decision about a Fed rate hike on June 14-15 will now depend in large part on the May payroll report to be released on June 3. The market consensus will likely be close to about +200,000, representing a rebound from April’s weak report of +160,000. If payrolls show an increase of at least +200,000, then the chances for a June rate hike will clearly rise. However, if payrolls are weaker than April’s +160,000 increase, then there will be virtually no chance of a Fed rate hike since the implication will be that U.S. businesses are engaged in a sustained slowdown in hiring. A slowdown in hiring would certainly make sense given the current profit recession, poor labor productivity, and rising labor costs.
The other big variable for the June FOMC meeting is Brexit since the FOMC meeting comes just a week ahead of the June 23 Brexit vote. The Fed apparently isn’t too worried about Brexit since Fed members already knew about the June 23 Brexit vote when they said at their April meeting that they were willing to seriously consider a rate hike at their June meeting.
The latest polls show that the percentage of people planning to vote to remain in the EU jumped to 55% this week from 49% as recently as last Friday, according to the “WhatUKthinks.org. Meanwhile, the percentage of people planning to vote to leave the EU fell to 45% this week from 51% last week. Prior to this week’s divergence, the opinion polls were very close to 50%-50%.
However, the betting odds continue to strongly favor a UK vote to remain in the EU. The average betting odds are now 2/7 for the UK to stay in the EU (translating to a probability of 78%) versus odds of 7/2 (22%) for the UK to leave. Bettors seem to think that the public opinion polls are drastically flawed.
While the odds favor a UK vote to remain in the EU, there is still at least a 22% chance that UK voters will vote to leave the EU. If there is a surprise UK vote to leave the EU, then the question becomes the size of the market reaction. On this issue, the first thing to note is that nothing will happen immediately after such a vote. A “Leave” vote would simply kick off a long negotiation period for a UK exit. A UK exit would certainly encourage Euroskeptic politicians in countries that use the euro to consider their own referendums to consider leaving the Eurozone, but that would be a slow-moving development.
There has been so much press coverage of Brexit that a surprise UK vote to leave the EU might have only a temporary downward impact on the UK markets and might not have much effect at all on the European and global markets. The UK in our opinion would be shooting itself in the foot if it chooses to leave the EU, but the damage might not extend much beyond the UK. The Fed therefore may not be particularly worried about Brexit since the odds favor the UK voting to remain in the EU and since any fall-out from a “Leave” vote might be contained mostly within the UK.
