The stock market should resume rallying, as Friday's March Employment Report argues for an economic slowdown but not recession and this week's March CPI Report may very well be benign. The combination of slowing growth and moderating inflation raises the possibility the Fed will refrain from tightening at the May 2-3 FOMC Meeting.
The March Employment Report contained a number of components that were more indicative of slower economic growth than recession. Besides slowing overall, March Payrolls showed only a slight decline in cyclical sectors -- Manufacturing (-1k m/m), Construction (-9k) and Retail (-15k). The next Industrial Report (due Friday) should show flattish manufacturing output, similar to February's +0.1% m/m print. Indeed, the essentially steady jobs and workweek in this sector suggests the Mfg ISM Report overstates weakness. The Household Survey showed jumps in Civilian Employment and Labor Force. Although they could reflect the small sample size of this survey, this "bias" is essentially eliminated in the calculation of the Unemployment Rate. So, the 0.1% pt decline in the Rate to 3.5% is solid evidence against recession. To be sure, the dip in the Nonfarm Workweek pushed down Total Hours Worked to below the Q123 average -- a soft take-off point for Q223. Slower growth in Q323 is likely, in part payback for the warm winter.
The Employment Report also showed that wage inflation may be shifting down to a pace consistent with the Fed's 2% price inflation target. The 0.3% m/m increase in Average Hourly Earnings annualizes to 3.3%, which would be close to the target once trend productivity is taken into account. A majority of the major sectors had wage increases at 0.3% or lower. Wage inflation may stay modest, as news reports and anecdotal evidence indicate some companies are cutting or freezing wage rates in response to weaker demand -- a very quick response suggesting the post-pandemic surge in wage rates may not be as permanent as thought. If the latter turns out to be prevalent, then the Unemployment Rate may not have to rise as much as thought to tame inflation.
The moderation in wage inflation may help to hold down the March CPI. Consensus looks for +0.3% m/m Total and +0.4% Core CPI, both 0.1% pt lower than February's prints. Even lower-than-consensus prints can't be ruled out. Some of the 0.4-0.5% increases seen in the January and February Core CPI likely stemmed from start-of-year hikes and the pass-through of higher oil prices, both of which should dissipate in March -- and possibly by more than consensus builds in. In contrast, arguing for the consensus Core estimate is the risk that Used Car Prices will begin to move up, as has been the case at the wholesale level for the past several months according to the Manheim Survey. Also, airfares may still climb to reflect the past increase in oil prices.
The other important US data this week will be March Retail Sales. Consensus looks for -0.4% m/m Total and -0.3% Ex Auto. Although near-consensus prints could prompt recession talk, the latter may be an overstatement. A soft Report could be just further payback for the sales strength seen in January -- in other words, the typical pause after a strong month. The overall pace so far appears to be strong -- Real Consumption for Q123 is on course for 4+% (q/q, saar) through February -- assuming flat March and no significant downward revisions to January and February. Note that the latest Atlanta Fed model's estimate is 1.5%, but risks being too low as it embodies an estimate of only 3.4% for Q123 Real Consumption.
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