New Data Has Big Implications for Fed, Pushes Market to Positive Note
We're continuing to closely watch the S&P 500 and Nasdaq Composite RSI levels.
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Following Thursday's April data, which comprised Retail Sales, Industrial Production, and Producer Price Index reports, the Atlanta Fed bumped up its rolling GDP forecast for the current quarter to 2.5%. The central bank will update that model again later today following the April Housing Starts report, which, from a headline basis, showed total starts up 1.6% month over month.
In last Friday’s Roundup, we discussed the rebound in mortgage rates and why we were likely to see sequential weakness in April housing starts. We were half right.
Single-Family Housing Starts Slide
Breaking that April data down, we see April strength in multifamily housing, up just over 11% sequentially, with single-family housing starts hitting their lowest level in the last year.
On a year-over-year basis, single-family housing starts tumbled 12% on a seasonally adjusted annual basis. Looking at the number of homes under construction, we also see sequential and year-over-year declines for single-family homes.
Rolling Q2 GDP Estimates Keep Fed in Holding Pattern
While the overall April Housing Starts report could lead the Atlanta Fed to nudge its GDP figure for the current quarter higher, we would argue that even if it doesn’t, a mid-2% GDP figure is enough to keep the Fed on the sidelines following Fed Chair Powell’s comments earlier this week.
If you missed them, on Thursday, Powell said, "We may be entering a period of more frequent, and potentially more persistent, supply shocks — a difficult challenge for the economy and for central banks."
Add in comments from Walmart WMT and others that price increases are on the table as they contend with the impact of Trump tariffs, and our thinking is the Fed will remain in a holding pattern for some time.
Atlanta Fed’s Bostic Sees Only One Rate Cut This Year
Adding to that thinking, Federal Reserve Bank of Atlanta President Raphael Bostic said he expects the U.S. economy to slow this year but not fall into recession and reiterated that he sees one interest-rate cut in 2025.
When asked about tariffs putting upward pressure on inflation, Bostic replied, “That means that our policy is going to have to anticipate — and to some extent — potentially push against those inflationary forces to the extent that we see them, so that will put a limit on where our current policy stance is.”
More reason to think the Fed will be in a holding pattern, or as TheStreet’s Todd Campbell said during a recent TheStreet’s Stocks & Markets Podcast, “the Fed is in a rock and hard place.”
The above also suggests there is room for the market to be disappointed by the Fed, given the three rate cuts the market sees before the end of 2025.
Amid Market Melt Up, Watching Key RSI Levels
As we head toward the end of this week, however, with the April housing starts behind us, less than a handful of earnings reports out on Friday morning, none of which are market-moving, we’re likely to see the market end on a positive note.
If we’re right, that will likely mean the S&P 500’s relative strength index (RSI) will inch higher after closing last night at 68.17. The same goes for the Nasdaq Composite, which saw its RSI level finish at 70.01.
We’ll continue to tread carefully and be on guard for events that could upset the market anew or at least take some of what appears to be building froth out of it. With that in mind, while we have little in the way of fresh April economic data next week, we do have nine Fed speakers making the rounds. We suspect they will be sticking to the playbook laid out by Powell and Bostic above.
Next Thursday brings the May Flash PMI data from S&P Global, and while we like to dig into this monthly data, we’ll be especially interested in what it tells us about May inflation.
With those learnings in hand, we will be looking forward to what, if anything, Fed Chair Powell says about it on Sunday, May 25, and what that could mean for the CME FedWatch Tool. Between now and then, retailer earnings and trade deals will be a key focal point for the market, and for us.
