The stock market will likely continue to contend with higher oil prices and longer-term Treasury yields this week. But, the rally could rekindle with the earnings season.
To some extent, the higher oil prices and yields are not entirely bad for stocks if, as is likely, a post-winter speedup in economic activity is a factor behind them. They act like "built-in stabilizers" to restrain the latter, allowing the Fed to maintain steady policy through a possibly temporary bounce in the economy. This week's US macro-economic data should keep policymakers in a wait-and-see position as well as keeping alive expectations of rate cuts ahead. Meanwhile, the macro evidence suggest a strong Q124 corporate earnings season this month.
March CPI
The consensus estimate of +0.3% m/m for both Total and Core CPI for March seems reasonable. Both would slow from February's 0.4% pace. The y/y would increase to 3.4% from 3.2% for Total and be steady at 3.8% for Core. Oil-related energy prices (gasoline and heating oil) should slow, helping to hold down the Total. (Seasonal factors offset most of the increase seen in gasoline prices at the pump. So far, this offset is the case for April, as well.) The Core CPI should not be boosted as much by airfares as in February, since seasonal factors provide less of a lift in March than they did then. Most other components should be similar to their recent trends. A slowdown in Owners' Equivalent Rent from 0.4% may be needed to push down the Core further.
March Employment Report
The March Employment Report had more benign than worrisome components from the Fed's perspective. Although Payrolls were strong, about half the increase was in non-economic sectors -- government and health care. The sectors susceptible to monetary policy show the jobs slowdown desired by the Fed. Nevertheless, the Nonfarm Workweek recovered back to trend, thereby pointing to a post-winter speedup in economic growth going into the Spring. A steady Workweek in coming months would suggest the speedup is temporary.
Other parts of the Report were benign. The dip in the Unemployment Rate to 3.8% from 3.9% kept it above the 3.7% November-January level. So, it still shows that labor market slack has increased. This is also seen in the steady 7.3% U-6 Rate -- a broader measure of the labor market than the Unemployment Rate. Perhaps thanks to the easier labor market conditions, wage inflation remains contained. The 0.3% m/m increase in Average Hourly Earnings equals the 2023 average and Q124 average. It is consistent with the Fed's 2% price inflation target, taking account of productivity growth.Q124 Corporate Earnings
Market participants look for about +3.0% y/y in S&P 500 corporate earnings for Q124, after about +8.0% in Q423. The macroeconomic evidence suggest the risk is for a larger-than-expected gain. Real GDP sped up on a y/y basis in Q124, oil prices reversed their decline, and economic activity abroad appears to have picked up while the trade-weighted dollar was flat. Profit margins may have narrowed, however, as the Core CPI rose by less than Average Hourly Earnings.
Markit
Eurozone Real GDP Oil Prices Trade-Weighted
Dollar AHE Core CPI PMI
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