INDICATOR: February Existing Home Sales, Leading Indicators and Jobless Claims
KEY DATA: Home Sales: -0.4%; Prices: +9.1%; Leading Indicators: +0.5%; Claims: 320,000 (up 5,000)
IN A NUTSHELL: "While the winter may have frozen out home sales, it looks like the economy and the labor market continues to firm."
WHAT IT MEANS: Yesterday, Fed Chair Yellen surprised the markets by indicating that rates could be increased starting a year from now. What that has done is focus attention even more on the variety of economic indicators that tell us about the labor market and the future pace of economic activity. One of those is jobless claims, which rose a bit last week. However, the recent level of claims seems to be pointing to a reduction in layoffs and possibly a very strong March employment report. For the last three weeks, claims have averaged 320,000, which for me imply payroll gains of 225,000 or even higher. It also points to a decline in the unemployment rate. A surprisingly sharp rise in the Conference Board's Index of Leading Indicators also holds out great hope that the economy is coming back around from the winter weather weakness. A major rebound in the Philadelphia Fed's Business Outlook Index also points to improving growth and portends a solid rise in the Institute for Supply Management's Manufacturing Index. The only release that was not positive was the existing home sales report. Home demand continues to ease but most of the drop was in the Northeast and Midwest where the weather was pretty bad. Sales increased in the South and West and prices were up sharply over the year, though that may have been due to an improvement in high-priced home sales, not a general rise in prices.
MARKETS AND FED POLICY IMPLICATIONS: Whether or not Janet Yellen "misspoke" at her first press conference by defining "a considerable time" as being about six months, the Fed Chair reminded the markets that the time for raising rates may not be that far away. It is all about the labor market and in particular, a tightening situation where wage gains would finally accelerate. We are not there yet don't be surprised if during the summer, the combination of a falling unemployment rate, rising job openings and quit rates as well as falling jobless claims creates the conditions for much better wage and salary increases. Today's data seems to point to that possibility, though we need to see whether it was weather or higher prices and mortgage rates that have been restraining housing demand. That too should be known by mid-summer. If investors are worried about higher rates, they should not be. Yellen was talking about getting back to "normal" levels and for fed funds, the members seem to be coalescing around 4%. Even if the Fed starts raising rates in spring 2015, 4% is not likely to be reached until mid-2016 at the earliest. Thus, we have a long time before we get to "normal" let alone high interest rates. The economy will be able to withstand the rise in rates, especially if wages start rising strongly.