We'll Get A Very Nice Cross-Section Of The Economy This Week - Here's Your Complete Preview

We'll get a nice cross section of the U.S. economy this week thanks to new monthly reports on retail sales, inflation, industrial production, and housing starts.

But with the stock market and economy stalling a bit lately, most experts are focusing on one force to ignite the next phase of the rally: capital expenditures.

Here's your Monday Scouting Report:

Top Story

• Four Takes On The CapEx Conundrum: Lately, everyone seems to be talking about a coming boom in capital expenditures (that is, business investment). This is supposed to be the catalyst for growth in hiring and corporate earnings. For the most part people are optimistic. This past week, a bunch of Wall Street analysts went out of their way to write about it. Here are some highlights:
  
  -It's Happening This Year: Here's UBS's Drew Matus: "Although the weak first quarter (capex fell by 2.1% annualized) made reaching our initial forecast for capex growth difficult, a rebound in capex remains a core driver of our 2014 outlook. This semi-annual report from the ISM provides support for our view that capex will accelerate this year, to 6.5% y/y versus 2.6% y/y in 2013."
  
  -Timing Remains A Question: Here's Bank of America Merrill Lynch's Michael Hanson: "One possible reason is that elevated policy uncertainty over the past few years had led firms to delay investment. Thus the lack of fiscal brinkmanship this year should bring about stronger capex. Alternatively, firms may be waiting to see signs of a more sustained pickup in aggregate demand before adding to their stock of capital. If so, the risk is that the capex recovery may be postponed until late this year or early next. The question isn't so much about whether capex will pick up - we remain confident that it will - but when."
  
  -But Cheap Labor Is A Hurdle: Here's Pantheon Macroeconomics' Ian Shepherdson: "Business decisions are also influenced by the relative costs of the factors of production. At times when labor is cheap relative to capital, the business sector will, at the margin, prefer to hire incremental staff than to spend on labor-saving technology. Uncertainty over the future state of the economy also pushes companies towards people rather than capital spending. If demand turns out to be weaker than you expected, it's easier to lay off staff than to stop making the payments on a new IT system."
  
  -It's The Whole Debate About The S&P 500: Here's Deutsche Bank's David Bianco: "Company capex guidance and surveys suggest capex slump should end soon... Industrial and Transport equipment spending improved in the 1Q, but IT spending remained stuck in low gear. We expect capex growth to improve to 5%+ in 2014/15 and are encouraged by high energy prices (2014E S&P Energy capex is up 8% y/y vs. flat 2013) and improving global growth (Euro, UK, China and India April PMIs up) which should lead to healthy exports. Capital goods exports y/y was stronger than 1Q GDP report suggests. Fed, Business Roundtable and NABE surveys on future capex show consistent improvement YTD."

Economic Calendar

• Monthly Budget Statement (Mon): Economists estimate the Treasury will report a budget surplus of $114.0 billion for April. Here's Morgan Stanley's Ted Wieseman: "We estimate that the federal government ran a $111 billion budget surplus in April, down slightly from $113 billion a year earlier on a 1.6% year/year rise in receipts and 3.0% increase in outlays. We figured there would be significant underwithholding for the tax hikes in 2013 under Obamacare, with Medicare taxes applying to investment income for the first time, but nonwithheld tax receipts in April instead surprisingly fell 1.6% from last year. The miss on nonwithheld was partly offset, however, by slow spending growth. In particular, the ramp up in Medicaid (+8% year/year in April) under the Obamacare expansion hasn't been as rapid as we were expecting so far, while defense and other discretionary spending areas continue to decline."
• Retail Sales (Tues): Economists estimate retail sales climbed by 0.4% in April, 0.5% excluding autos and gas. "We expect decent retail sales but more moderate than March's sharp rebound from winter weakness," said Credit Suisse economists. "Unit vehicle sales fell slightly on the month. Last month's 1.9% spike in general merchandise sales looks ripe for a reversal. Income growth has been decent, however, so other components are expected to pick up the slack."
• Producer Price Index (Wed): Economists estimate PPI climbed 0.2% month-over-month in April and 1.7% year-over-year. Excluding food and energy, core PPI is estimated to have increased by 0.2% and 1.4% respectively. "Another sizable increase in prices received by farmers (most likely due to drought conditions in some regions) should put upward pressure on producer prices in April," said Nomura economists who forecast a 0.5% jump in PPI.
• Consumer Price Index (Thurs): Economists estimate CPI climbed 0.3% month-over-month in April and 2.0% year-over-year. Excluding food and energy, core CPI is estimated to have increased by 0.1% and 1.7% respectively. "We expect higher farm prices and seasonally adjusted gas prices to prop up headline CPI in April," said Nomura economists.
• Empire State Manufacturing (Thurs): Economists estimate this regional activity index jumped to 6.0 in May from 1.29 in April. "While the new orders index has printed in contractionary territory in four of the past six months, the headline index has averaged 4.5 over that time, and we expect a pickup in activity in the coming months, in line with overall GDP growth," said Barclays economists who forecast a 4.0 level.
• Initial Jobless Claims (Thurs): Economists estimate jobless claims climbed to 320,000 from 319,000 a week ago. "Initial claims probably rose by 11,000, marking another week of wild swings," predicted Citi's Peter D'Antonio. "If correct, the four-week moving average rose to the highest level in two months amid the recent volatility. Separately, continuing claims fell again, and the insured rate held at a cycle low of 2% for three of the past four weeks."
• Industrial Production (Thurs): Economists estimate production saw 0.0% growth in April as capacity utilization slipped to 79.1% from 79.2% in March. "Other manufacturing indicators including the ISM manufacturing survey and regional purchasing managers' surveys support further gains in manufacturing output," said Wells Fargo's John Silvia who expects a 0.3% increases. "However, factory production hours worked, also a leading indicator for manufacturing output, slowed in April. Taking cues from gains in oil, natural gas and coal, mining production rose on the month and should continue to show improvement. On the other hand, although utilities output rose in March, strength was due to the unseasonably cold winter weather. With weather conditions normalizing, utilities will likely show weakness in April."
• Philadelphia Fed Business Outlook (Thurs): Economists estimate the Philly Fed index slipped to 14.1 in May from 16.6 in April, but up from 9.0 in March. "It appears the April reading for the Philadelphia Fed headline index may have been a bit overdone-new orders and employment indices in the April survey were not as strong as the headline index-and we forecast a slight pullback in early May," said UBS's Sam Coffin who forecasts a 15.0 print.
• NAHB Housing Market Index (Thurs): Economists estimated this homebuilder sentiment index climbed to 49 in May from 47 in April. "The NAHB index tumbled in February by 10 points to 46 and has remained stuck below the 50 breakeven since," noted Bank of America Merrill Lynch economists. "Buyer traffic, in particular, has remained sluggish, which is not a good sign for housing demand at the start of the spring selling season. We expect a modest improvement in this measure, but not a sharp move higher."
• Housing Starts (Fri): Economists estimate the pace of starts climbed 3.8% to 982,000 in April as while permits climbed 1.8% to 1.015 million. "Building permits for single family homes, although higher in March, are still running below the pace of single family starts," said BAML. "We therefore think the risk is that single family starts slip to better match the rate of permits. This would also be consistent with the weak signal from the NAHB housing index and sharp drop in single family new home sales. It appears that the spring selling season has kicked off to a slow start. Multifamily starts are likely to improve, although the data are extremely choppy on a monthly basis."
• Univ. Of Michigan Confidence (Fri): Economists estimate the preliminary estimate of this sentiment index climbed to 84.5 in May from 84.1 in April. "Our forecast would be close to the cycle high (July 2013 at 85.1)," said Credit Suisse economists who forecast an 85.0 print. "The revision to the final April reading suggests sentiment improved steadily through the month of April, so May has the wind at its back. Positive headlines from the May employment report should also be supportive."

Market Commentary

Five months into the year, the S&P 500 is up a measly 1.6%. And that gain belies the fact that many stocks are in bear markets (that is, down by over 20% from their highs).

Deutsche Bank's David Bianco believes the next 5%+ will be down. But he also see the S&P rallying to 2,000 by the end of 2015.

Behavioral Macro's Mark Dow recommends investors keep calm for now: "Bottom line: It will take a growth breakout into escape velocity or something like it to get a resumption of the rally, or, more serious disappointment to get the washout that so many are already expecting. Unsatisfactory though this is, the right move is to be patient. The bull market is not over, but it's not a smart time to press your bets. The longer we twist in this limbo, the more attractive the upside will become. Time heals. Keep your strategic positions and hedge out market beta as best you can. Sometimes you have to keep your bat on your shoulder-something guys collecting two percent management fees have a hard time doing."

For more insight about the middle market, visit mid-marketpulse.com.