Over the last few days, we've seen a bounce in the U.S. stock market fueled by a pullback in the dollar. We chalk that up to the realization that the Fed will not be hiking interest rates in the next few months. If anyone was still thinking a June hike was on the table, last week's disappointing April retail sales and industrial production reports should serve as a final wake-up call.
It's hard to argue that consumers are not spending as expected over the last five months, opting instead to stockpile any lower gas price-related savings. At the same time, manufacturing activity, as reflected in the industrial production figures, have contracted for five consecutive months.
For those who were still thinking some Fed action may happen in June or July, we suggest a perusal of the Philly Fed's quarterly economist survey. Released on Friday, the survey's findings showed 44 economists now expect the current quarter to grow 2.5%, down from the prior 3.0% in February. For all of 2015, the updated survey findings now point to economic growth of 2.4%, down from the prior 3.2%. We'll still dive deep into the Fed FOMC meeting minutes when they are published on Wednesday, but we would be surprised if the Fed's language wasn't more cautious than just a few months ago.
In our view, the data we'll get in the coming weeks will paint a far more accurate picture of the economy's vector (direction) and velocity (speed). Based on the April data we've seen thus far, it appears those surveyed economists could be a little overly optimistic. Regardless, when we tie in the April PPI report with all the above, we see little reason for Fed interest rate action in the coming quarters. That's why we'll be looking closely at the monthly Flash PMI readings for the four economic horsemen of the global economy -- the U.S., eurozone, China and Japan -- with a heavy eye on new order activity.
Hawkins would like to point out for the record that it is rather astounding that we find ourselves in the position where one of the single most important factors for investing is Fed action!
With all the QE-esque stimulus happening around the globe thus far in 2015, which is weakening other countries' currencies, we don't see the U.S. dollar falling back to year-ago levels. That means it will continue to be a headwind for companies with meaningful international exposure for the next few quarters. European Central Bank President Mario Draghi made clear the ECB's commitment to rather open-ended QE late last week when he stated that "quite some time is needed before we can declare success, and our monetary policy stimulus will stay in place as long as needed for its objective to be fully achieved on a truly sustained basis."
There is plenty more room for the euro to fall relative to the dollar. Expect to hear more about this from Johnson & Johnson (JNJ), Intel (INTC), Walgreens Boots Alliance (WAG), Monsanto (MON), Carnival (CCL), Red Hat (RHT), General Mills (GIS), McCormick & Co. (MKC), FedEx (FDX) and many others.
Of course, the weak economic data simply mean the low interest rate environment will continue to linger, and with little alternative, it means dollars will continue to flow into the market. One upside wild card for the stock market would be if, given recent gyrations, bondholders hit the bid and redirect that capital into the stock market. This bears watching, for should it come to pass, it could put the market multiple into more frothy territory at a time when earnings and revenues have been contracting and are likely to do so in the current quarter as well. As it is, the current market multiple stands at 17.7 for the S&P 500 with earnings that are set to grow at 2% year over year.
For those looking to put capital to work, we continue to like those tailwind beneficiaries that have, like much of the recent economic data, fallen shy of expectations only to see their shares clobbered in the double digits. Examples include United Natural Foods (UNFI), Cavium (CAVM) and Spirit Airlines (SAVE).
In addition to the flash PMI data, the coming week will also be housing-heavy, with April housing starts and existing home sales. Given the correlation between job growth and the housing market, the big negative revision to March job growth and the disappointing April jobs report, we choose to remain on the sidelines even though shares of Toll Brothers (TOL), DR Horton (DHI) and other homebuilders, as we expected, have pulled back over the last month.
As it pertains to earnings, the coming five days could be feast or famine for retailers. Based on the last several months of retail sales and personal income and spending data, we expect the general tone of retailer earnings to be rough with a cautious outlook. There could be some diamonds in the rough, but in aggregate we expect the plethora of retailers -- Urban Outfitters (URBN), Dick's Sporting Goods (DKS), Home Depot (HD), TJX Companies (TJX), Wal-Mart (WMT), Aeropostale (AEO), Shoe Carnival (SCVL), Williams Sonoma (WSM), Best Buy (BBY), Gap (GPS) and several others -- coming at us this week to offer a sobering view on the Ame rican consumer, despite Nordstrom (JWN) beating topline estimates.
Other companies to watch this week include Hewlett-Packard (HPQ) to see if management is making any progress on turning that tanker of a company around, and Fresh Market (TFM) for any signs of share gains at the expense of Whole Foods (WFM) or Sprouts Farmers Market (SFM).
Below is a more detailed look at the economic data in the week ahead. For a fuller list of corporate earnings to be had over the next five days, click here to view The Street's weekly earnings calendar. Be sure to check back for our midweek column, in which we will dish on the first half of the trading week and other key matters and thoughts, as well as how to play it all.
Economic Calendar: Monday, May 18 - Friday, May 22
18-May NAHB Housing Market Index
19-May Housing Starts
19-May Building Permits
20-May MBA Mortgage Index
20-May Crude Inventories
20-May FOMC Minutes
21-May Markit Flash Japan Manufacturing PMI
21-May HSBC Flash China Manufacturing PMI
21-May Markit Flash Eurozone Composite PMI
21-May Markit Flash US Manufacturing PMI
21-May Chicago Fed National Activity Index
21-May Initial Claims
21-May Continuing Claims
21-May Existing Home Sales
21-May Philadelphia Fed
21-May Leading Indicators
21-May Natural Gas Inventories
22-May Core CPI