Sunday, May 17, 2015

The Week Ahead: Inflation, housing, Fed minutes and grandees

What a fascinating time it is when the word "inflation" can carry a glowing patina of hope. Most of us who are of a certain age remember well the time when inflation was a rampaging demon eroding fortunes and lives.

But with parts of Europe paying negative interest rates as the chance of deflation looks more likely and Japan trying to claw its way out of a decade's worth of deflation, that inflationary demon looks increasingly like the cowboy in a white hat riding into town to save the day.

The consumer price index tops the week in economic reporting. It will be published Friday at 8:30 a.m. New York time. The conventional wisdom is that a higher index helps encourage the Federal Reserve to tighten down on credit, and a lower one, to continue the long-running loose credit regime. Given what is happening in Europe, I'm not so sure that the conventional wisdom is being truly wise.

Two housing reports will also guide the narrative: Housing starts on Tuesday at 8:30 a.m. and existing home sales on Thursday at 10 a.m.

The housing reports plus the price report will find context when the Federal Open Market Committee minutes of its April 29 meeting are released on Wednesday at 2 p.m.. We know the Fed is looking closely at when to tighten. The minutes give the greatest contemporaneous detail about their thinking.

And another potential market-mover, although of lesser report, will be released: The Philadelphia Federal Reserve business outlook survey on Thursday at 10 a.m.

It is a very rich stew nourishing the markets in the week to come. Adding seasoning to the pot, two Federal Reserve grandees will make major speeches during the week.

Fed Chair Janet Yellen addresses the Greater Providence Chamber of Commerce economic outlook luncheon in Providence, Rhode Island on Friday at 1 p.m. Her subject: "U.S. Economic Outlook".

Fed Vice Chairman Stanley Fischer addresses the European Central Bank forum on central banking in Linho Sintra, Portugal on Thursday at 2 p.m. His subject: "Past, Present and Future Challenges for the Euro Area".

And it is a shortened week, by two hours. The markets close at 2 p.m. on Friday for the Memorial Day weekend, and will be closed all day the following Monday. Normal trading will resume Tuesday, May 26.

Leading indicators (in descending order of importance):

The interest rate spread between 10-year Treasuries and the federal funds rate, reported continually during market hours.

The M2 money supply, at 4:30 p.m. Thursday.

The S&P 500 index, reported continually during market hours.

Average weekly initial jobless claims, at 8:30 a.m. Thursday. 

Building permits for new private homes from housing starts, at 8:30 a.m. on Tuesday.

Other items of interest:

Monday: The National Association of Homebuilders housing market index at 10 .m.

Wednesday:  Petroleum inventories at 10:30 a.m.

Thursday: The PMI manufacturing index flash report at 9:45 a.m.

The index of leading indicators, although not itself a leading indicator, will be published Thursday at 10 a.m. I find it to be a useful "You Are Here" marker in tracking the economic cycle.

I also keep an eye on the Baltic Dry Index, updated daily, and the 5-year implied inflation rate based on U.S. Treasury yields, which presently stands at 1.67%.

Treasury Debt

  • 4-week: Announcement Monday 11 a.m., auction Tuesday 11:30 a.m., settlement Thursday
  • 3-month: Auction Monday 11:30 a.m., announcement Thursday 11 a.m.
  • 6-month: Auction Monday 11:30 a.m., announcement Thursday 11 a.m.
  • 52-week: Announcement Thursday 11 a.m.
  • 2-year: Announcement Thursday 11 a.m.
  • 5-year: Announcement Thursday 11 a.m.
  • 7-year: Announcement Thursday 11 a.m.
  • None.
  • 10-year: Announcement Thursday 1 p.m.

In addition to Yellen and Fischer (see above), a pair of other Fed glitterati will also take to the podium.

San Francisco Fed Pres. John Williams, a member of the Federal Open Market Committee, speaks on Thursday, and Chicago Fed Pres. Charles Evans, who is unaffiliated with monetary policy body this year, speaks twice, on Monday ad Wednesday.

Analytical universe

This week I shall be analyzing new bull and bear signals among 532 large-cap stocks and exchange-traded funds.

Trading calendar

By my rules for shorter-term trades of Monthly options, I'm trading June options and later for the short legs of vertical, diagonal and calendar spreads and covered calls, and for all legs of butterfly spreads and iron condors. I'm trading August options and later for single calls and puts as well as straddles. Shares and Weekly options, of course, are good at any time.

Good trading.

-- Tim Bovee, Portland, Oregon, May 17, 2015


My trading rules can be read here.


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