A Primer for the Week Ahead
The key themes in focus this week are inflation and housing, as markets and the Federal Reserve digest an onslaught of data.
- The CPI carries the most weight; we are looking for inflation to gain traction as a pickup in gas prices adds to a slight acceleration in inflation in the service sector. Medical costs are moving back up after a slowdown earlier in the cycle, while shelter costs remain elevated. The results will push up the month-to-month increases on overall and core inflation. Year-over-year increases will remain more constrained, but the tides appear to be shifting and the Fed is getting what it wants with some firming in inflation.
- Housing starts are expected to rebound from the lows of March and nudge above the 1.1 million-unit mark (annualized) for April. The single-family market, which is now grossly underbuilt, is expected to edge higher, up to 800,000 after softening in March. Multifamily starts are expected to reach 330,000 units, but remain well below the highs of 2015. The luxury apartment market, in particular, is becoming overbuilt in some of the major cities, while there is still a shortfall of affordable rentals.
- Existing homes sales are expected to rise a little less than 2% to a 5.37 million-unit annualized rate in April, continuing a solid if not spectacular upward trend. The tight supply of move-in ready, entry-level homes is the primary constraint. Bidding wars for the most affordable move-in ready homes and trade-up homes remain common. Prices will continue to rise faster than incomes.
Separately, industrial production data are expected to confirm the bottoming in the manufacturing sector. We are still a few months away before the recent firming in oil prices helps production or investment.
The minutes to the April FOMC meeting are also due for release. They are now backward looking and should be discounted. The markets do not have a June rate hike priced in but given recent improvements in the economy, it can’t be ruled out.