The stock market recovery should continue this week, as the macroeconomic background may have begun to improve. Lower oil prices have eased the inflation threat somewhat. And, the March Employment Report contained hints of a moderation in labor demand and wage inflation. If these hints are realized, they could persuade the Fed to pursue a less aggressive tightening path than currently feared (as seen in the jump in the 2-year Treasury yield on Friday). Moreover, strong corporate earnings are expected to be reported over the next few weeks.
The drop in oil prices should take some sting out of a high print for the March CPI (due April 12). Not only does it point to a decline in gasoline prices in the April CPI, but it suggests that a moderation in transportation costs will filter through to other goods and services prices over time. While a 50 BP rate hike at the May 3-4 FOMC Meeting is still the risk (which could be discussed in this week's release of the March FOMC Minutes), an easing in inflation could dampen the subsequent pace of tightening -- particularly if labor demand begins to ease noticeably, as well.
The March Report hinted at a moderation in demand for labor. Besides the slowdown to an albeit still strong 431k m/m increase in Nonfarm Payrolls, there appears to have been a shift toward part-time work. The Household Survey showed that the number of people with part-time jobs for economic reasons rose for the second month in a row. Such a shift may have been at least partly responsible for the decline in the Nonfarm Workweek and flat m/m Total Hours Worked. The latter could be setting the stage for slower job and economic growth at some point in Q222. Note, however, early evidence does not rule out a speedup in Payrolls in April (due May 6).
The possibility of an economic slowdown this Spring also was hinted by the declines in the March Mfg ISM and some Asian Mfg PMIs. Disruptions caused by the Chinese anti-Covid lockdowns and Russia/Ukraine war are restraining economic activity, according to these surveys. These developments could have even bigger effects as they drag on into the Spring. Slow growth in Q222 could make it difficult for the Fed to tighten aggressively, although in truth supply-constrained growth should require a greater degree of demand restraint than otherwise to prevent a pickup in inflation.
The March Employment Report had some good news regarding inflation. The Report contained hints of a stabilization in wage gains. Despite the Unemployment Rate essentially back to its pre-pandemic low, wage inflation does not appear to be accelerating on a sequential basis -- in contrast to the concern raised by the speedup in Average Hourly Earnings (AHE) in December and January. The 0.4% m/m increase in March AHE matched the m/m pace seen in 5 of 6 months between June and November 2021. It follows a slight 0.1% increase in February.
Consensus looks for about +5.0% (y/y) for Q222 S&p 500 Corporate Earnings, despite tough year-ago comparisons. This would be an impressive gain, as it is the first quarter when the year-ago pandemic drag falls out significantly. The macro evidence supports the expectation of a positive y/y but lower than in Q421 (+27%). Real GDP Growth and Oil Prices slowed in Q122. And, softer non-US economic growth and a stronger dollar should hurt earnings from abroad. Perhaps the biggest boost could come from an improvement in profit margins, as the Core CPI rose faster than Average Hourly Earnings.
Markit
Eurozone Real GDP Oil Prices Trade-Weighted
Dollar AHE Core CPI PMI
[ y/y percent
change ] (level)
Q119 3.2 -12.8 +7.9
3.2 2.1 51.9
Q219 2.7
-12.2 +5.9 3.1 2.1 47.8
Q319 2.1 -19.2 +3.6 3.2 2.3 46.4
Q419 2.4 -3.6 +1.7 3.2 2.3 46.2
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