1Finance

Existing home sales likely rose a solid 4.4% to 5.26 million units in May. May existing (previously-owned) home sales are expected to post a solid 4.4% gain to 5.26 million units, more than reversing the April dip. Pending sales of existing homes, a leading indicator, have seen a steep upward trajectory since January and touched a post-recession high in April. In addition to steady growth in mortgage purchase applications in March and April, the momentum in pending sales points to a strong comeback in May closings, which remain below their 2013 peak of 5.31 million units.

Durable goods orders likely slipped 0.2% in May while ex-transportation orders likely rose 0.6%. We expect durable goods orders to fall 0.2% while ex-transportation orders likely bounced back with a 0.6% increase. Non-defense aircraft orders likely weighed in May as Boeing reported only 11 new aircraft orders, down from 37 in April. For motor vehicles and parts orders, we look for another increase given the solid 1.7% increase in auto production. Outside of transportation, orders are expected to rebound with a 0.6% rise led by rebounds in computers, electronics and electrical equipment. Core capital goods (nondefense excluding aircraft) orders and shipments will be closely watched as the series factor in to our business capex outlook. We look for a rebound in core capital goods orders to support a bounce back in Q2 business equipment spending.

May new home sales are expected to rise 1.1% to a 523K unit annual rate. New home sales likely saw continued growth in May, rising 1.1% to 523K units. Sales in April jumped 6.8% led by a surge in the Midwest. We look for sales to increase on balance in May, albeit at a softer pace as the Midwest region likely retracted a touch. Mortgages rates for 30-year fixed rate contracts edged modestly higher in May but remained below 4%. Low mortgage rates on top of solid job growth continue to be supportive of solid sales growth this year. However, sluggish inventory growth and strict lending standards remain impediments. In this respect, a strong May increase in the supply of homes for sale would be encouraging for the outlook.

In its third and final release, Q1 GDP growth likely saw an upward revision to -0.1% from -0.7%. We look for an upward revision to Q1 real GDP growth (-0.1% vs. -0.7%), reflecting revisions to March trade data that imply less of a decline in net exports. The quarterly services survey came in higher than BEA assumptions, notably for spending on physician services, and March core retail sales were revised higher. Inventories also saw upwards revisions.

The May headline PCE price index likely rose 0.4% on the month with the core index rising 0.1%. As a result, annual PCE inflation likely firmed to 0.2% YoY while core inflation was stable at 1.2% YoY. The May headline PCE price index likely rose 0.4% on the month while the core index is expected to rise 0.1%. Both match the monthly increases in the May CPI. In the May CPI report, energy prices boosted consumer prices with the gasoline index rising 10%, while food prices remained weak with a flat print. Excluding food and energy, we look for core PCE to firm to a 0.1% increase following a flat reading in April. Largely contributing to the April weakness was a dip in nondurable goods prices and soft healthcare prices. We expect firmer readings in both components given a stabilization in nonpetroleum imported goods prices as well as price growth on the producer level. Our projections point to a 0.2% YoY rise in annual headline PCE inflation, up from +0.1% YoY in May, while core PCE inflation was likely stable at +1.2% YoY. Looking ahead, we expect core PCE inflation to bottom out at +1.2% YoY in Q2 and slowly accelerate towards the FOMC 2% target this year through 2017. Given the unchanged Q4/Q4 2015 FOMC projection range of 1.3%-1.4% in the June Summary of Economic Projections, this is likely the Fed’s scenario as well.

Personal nominal income likely rose 0.5% in May while spending likely picked up with a 0.6% increase. May nominal income likely rose 0.5%, slightly firmer than the 0.4% increase in April. Earnings and hours posted strong gains in May, with average hourly earnings and the aggregate workweek both rising 0.3%. Nominal personal consumption expenditures likely picked up with a 0.6% increase in line with the strong May retail sales report. Vehicle sales surged over 7% to a 17.8 million unit rate, suggesting a big boost to durable goods spending, while the 1% increase in exauto retail sales points to a meaningful rebound for nondurable goods. Spending on services likely matched its April increase, rising 0.2%, as we expect energy services to weigh given the 1% drop in May electricity and natural gas prices. Altogether, our 0.6% projected rise in May nominal PCE supports a firm acceleration in Q2 consumer spending to a 2.8% pace.

The final University of Michigan (UofM) consumer sentiment index likely confirmed a rebound in June to 94.6 from 90.7 in May. June UofM consumer sentiment likely confirmed its preliminary print of 94.6, up from 90.7 in May. A June rebound in sentiment will be most welcome as the weak May reading marked the lowest level since November 2014. Gas prices hardly moved since the preliminary survey release, standing at $2.80/gal on average at the time of writing. After a volatile few weeks, stock prices also have rebounded from their June lows. Both developments are reassuring for the consumer. As economic activity and labor markets continue to recover from the soft patch in the first quarter, we expect consumer spirits to move higher, supporting stronger household spending. Finally, short- and long-term inflation expectations will be noted, as both measures slipped to 2.7% in the preliminary report.


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