Corporate Earnings and Fed

The stock market should trade with an upward bias in the second half of April, as Q123 corporate earnings are likely to surprise to the upside -- the macro background may have been better than thought (see my April 2 blog).  There could be some market caution as the May 2-3 FOMC Meeting approaches, nonetheless, since the Fed could choose to do another 25 BP rate hike.  

The stronger-than-expected bank earnings, reported last week, may impact the Fed's decision.  They could assuage the Fed's concerns about the fall-out from the SVB failure in March.  Some comments attached to the earnings reports also appear to be more upbeat about the economy than what their leaders had been saying.

Recent US economic data can be read two different ways from the Fed's perspective.  Both economic growth and inflation are moving in the right direction -- both slowing.  But, their slowdowns are gradual and their paces remain too high.  Fed officials could conclude that another 25 BP hike is warranted and won't push the economy into recession.  Some recent speeches by Fed officials have made this point.

Airfares reflect the problem.  They jumped another 4.0% m/m in April -- without it the Core CPI would have printed 0.3% instead of 0.4%.  Along, with the 6.0% March jump, they more than made up for the 6.9% decline over the prior 4 months.  While movements in the cost of fuel were important contributors to these swings, the more recent rebound also  may be a response to an expected surge in air travel over the summer -- particularly since labor shortages forced airlines to reduce the number of scheduled flights.  In other words, the jump in airfares reflects strong consumer demand relative to supply.  So, the Fed will probably not dismiss the jump as a development beyond their control (i.e., just blaming it on OPEC's output decisions).

Recent data may not be as weak as appears at first glance.  The drop in March Retail Sales probably was largely the typical payback seen for several months after a surge (January).  The pullbacks in February and March most likely shouldn't be extrapolated to Q223.  A q/q consumer slowdown is a good bet, however, after Real Consumption looks to have risen a strong 4+% (q/q, saar) in Q123 -- and the Atlanta Fed model's latest estimate of Q123 Real GDP is back up to 2.5%.  Although Initial Claims rebounded in the latest week, the uptrend in layoffs may have eased.  They remain within a range seen since mid-March.   There is mixed evidence so far whether Nonfarm Payrolls will slow or speed up in April.