Friday closed the books on the month of May, and that means we are two-thirds of the way through the current quarter, nearly halfway through 2015. So far, the S&P 500 is up 2.5% for the year, with May adding 0.2% to the index. As we learned on Friday in a report that, on its face, was surprisingly unsurprising, the domestic economy contracted 0.7% during the first three month of 2015. Underneath, however, we learned that corporate profits deteriorated, inventories grew and "contributed" to the economy, and exports dropped like a stone -- thank you very much, strong dollar.
Now, we've been ranting for some time about buybacks and dividend hikes funded by debt issuance, but even we are getting a little concerned by the drop in corporate profits vs. the rising stock market. The combination could help explain the rash of M&A deals we've seen as companies exploit low rates to deliver growth by acquisition when organic growth is waning. Makes you go hmmmm and wonder what happens when the Fed actually raises rates.
We said "actually raises" because we have to wonder why the Fed is jawboning on this as "happening" in 2015 given the data we've been getting. Could it be the Fed may find it easier to go, "Oops, the economy did not strengthen as much as we had expected ... once again we were overly optimistic in our thinking," rather than get caught flat-footed?
To us, all of this remains data-dependent and that brings us to...
The week ahead, which will be heavily focused on the economy. We can safely say that given the lack of corporate earnings on the docket. Much like you, we're glad to have a breather if only so we can backtrack through conference-call transcripts and 10Q filings to make sure we've got things not only in context, but perspective. Of those earnings stragglers, if you had to pay attention to some, we'd recommend Dollar General (DG), Guess (GES), PVH (PVH), Joy Global (JOY), Smuckers (SJM) and Ciena (CIEN).
Getting back to the onslaught of economic data, given Friday's revised first-quarter 2015 GDP report as well as the mixed manufacturing and housing data received thus far for April, we continue to see May and June data as far better indicators of the true speed of the domestic economy. Just like last year, we expected a snap-back of sorts in April, but just as 1Q 2015 understated the economy, April data are likely to overstate it. The upcoming May and June data will likely deliver a faster and more furious ride along with the mandatory parsing of all the Fed-speak about interest hike timing. We know, we know ... we, too, are tired of all the Fed talk, but as long as the market focuses on it, we have to consider it.
Kicking off the data deluge, we get the full-blown PMI reports across the globe from Markit Economics on Monday. The flash reports overall pointed to a softer May, but it's the greater details these full reports offer -- order, pricing and so on -- that offer a better guesstimate on June. The full reports also offer a more granular look into the eurozone, and Versace remains upbeat on Spain and Italy, which translates into iShares MSCI Spain Capped ETF (EWP) and iShares MSCI Italy Index (EWI) shares. In step with the PMI data, the Institute for Supply Management also gives its take on the domestic manufacturing economy on Monday. Much like the Markit reports, ISM's offers far more below-the-headline insight, and we'll be examining that to see how well it confirms or contradicts the Markit findings.
The other big economic report coming during the first part of the week is personal income and savings. Recent data from Gallup and others point to consumers spending more on necessities like food over what we'd rather have or be doing (eating out, travel and other leisure activities). While we could see some improvement in income levels, which we attribute to the upward move in minimum wages, it's the spending and savings figure that really matters. Keep in mind, gas prices have continued to creep higher and when coupled with the rise in health care and food costs ... Hawkins would like to jump in here and simply cut Versace off at the rising-egg-price pass he's talked quite a bit about it the last few days, and the bottom line is the avian flu is destroying the egg-laying hen population. The ripple effect will hit companies and consumers in the coming months. Not good for ConAgra (CAG), Post Holdings (POST), Nestle SA (NSRGY), General Mills (GIS), Mondelez International (MDLZ) and other companies that rely indirectly or directly on eggs.
Midweek brings the next iteration of the Fed Beige Book as well as the ADP employment report and Challenger job cut report for May, ahead of Friday's May employment report. Between the four reports, it's the anecdotal reports from the various Fed banks that will shed more light on the health of the regional economies. Candidly, given recent regional Fed manufacturing indices, the bulk of which contracted or missed expectations, we're not expecting a blowout Beige Book.
Again, we hate to be repetitive, but we put little faith in the Bureau of Labor Statistics' employment rate figures, and we see a more accurate picture when we triangulate the ADP, Gallup and other employment reports. Wages, however, will still be the thing to watch Friday. If wages are stagnant, the impact of higher prices means less discretionary spending ahead ... not good for a consumer-driven economy.
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. Enjoy the long weekend and 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 for June 1-5
|1-Jun||HSBC China Manufacturing PMI|
|1-Jun||Markit Spain Manufacturing PMI|
|1-Jun||Markit / ADACI Italy Manufacturing PMI|
|1-Jun||Markit France Manufacturing PMI|
|1-Jun||Markit / BME Germany Manufacturing PMI|
|1-Jun||Markit Eurozone Manufacturing PMI|
|1-Jun||Markit US Manufacturing PMI|
|1-Jun||JPMorgan Global Manufacturing PMI|
|1-Jun||PCE Prices - Core|
|3-Jun||MBA Mortgage Index|
|3-Jun||ADP Employment Change|
|3-Jun||Fed's Beige Book|
|4-Jun||Challenger Job Cuts|
|4-Jun||Unit Labor Costs - Rev|
|4-Jun||Natural Gas Inventories|
|5-Jun||Nonfarm Private Payrolls|