Is This the Calm Before the Storm? Preparing for a Busy Data Week

Markets seem to have been basking in the spring sun as they wait for the approaching summer heat, so to speak. During a week that provided very little extra information on the state of the U.S. economy, the markets seem to be hanging on to what little data was released this week, which seems to have been in line with the weaker-than-expected employment report released on Friday as well as the weaker than expected ISM Services Index.

However, as we argued last week, although the nonfarm employment number last week was lower than expected at 175,000, it was a still strong number compared to the historic monthly average (~125,000). The most disappointing number last week was the ISM Services Index, which fell slightly into contraction. And since it has been the strength of the service economy that has continued to drive the U.S. economy, that was, for us, the most important data point we got last week.

This week we got consumer credit, initial jobless claims, and the preliminary University of Michigan Consumer Sentiment Index for May, which also included inflation expectations, both one-year and 5-years head. We will talk about consumer credit in the next section, but initial jobless claims came in higher than expected for the week ending on May 4 and we will continue to follow it along with other signs (e.g., ‘Hiring Plans’ in next Tuesday’s NFIB Small Business Survey) for further labor weakness—the ‘last shoe to drop’ before the Fed kickstarts a rate easing cycle.

The preliminary Index of Consumer Sentiment for May from the University of Michigan’s Survey of Consumers came in much lower than expected, at 67.4 compared to expectations for a 76.9 print. April’s Index of Consumer Sentiment was 77.2. Both components of the Index were down in April, with the Index of Current Economic Conditions declining from 79.0 to 68.8 while the Index of Consumer Expectations came down from 76.0 in April to 66.5 in May, according to the release. The deterioration in consumer sentiment in May brings it to its lowest level since November and adds to the deterioration in the Consumer Confidence Index over the last several months. Moreover, despite the decline in energy prices, gasoline prices have remained elevated, pushing one-year ahead inflation expectations higher from 3.2% in April to a preliminary reading of 3.5% in May. While this is not good news for the Federal Reserve (Fed), five-year ahead expectations only increased slightly, and we expect June’s one-year ahead inflation expectations to be lower and the disinflation trend to continue.