Warsh And US Economic Data

The stock market is likely to continue to be dominated by developments in the Iran war and corporate earnings this week.   The FOMC Meeting should be a non-event, with policy remaining unchanged.  Fed Chair Powell's news conference will probably have less to do about monetary policy and more to do with his job plans after his term as Fed Chair ends in May.  In the background, this week's slew of US economic data should support stocks, if consensus estimates print.   They would contain good news for growth and inflation, but not enough to change the overall picture.

US economic data should be market important now that the possibility of a Fed rate cut at some point was lifted by the DoJ's dropping its probe of Powell.  It clears the way for Senate approval of Kevin Warsh as the next Fed Chair, who could be more inclined to ease at some point than Powell if the data suggest so.  Besides the possibility that he may respond quickly to softer US economic data, his intention to reduce the Fed's balance sheet substantially by selling longer-dated securities could prompt a Fed rate cut.  The latter would be an offset to the higher longer-term yields stemming from these sales.

To be sure, this week's US economic data are not expected to change the macro background and thus the Fed's intent to keep policy steady.  The data are seen showing solid economic growth and higher-than-targeted inflation.  However, the most important report could be the Q126 Employment Cost Index (ECI).  This is because Warsh has testified that he puts more weight on measures of underlying inflation than headline figures.  And, Labor Costs are a major determinant of underlying inflation.  

The Q126 ECI is expected to show that labor costs are contained.  The Index is expected to rise 0.8% q/q.  While a speedup from the low 0.7% in Q426, it still would be below the 0.9-1.0% increases seen in 6 of the past 9 quarters and the y/y should fall.  A consensus or below-consensus print would likely be viewed favorably by Warsh and the markets.  It should give hope that the recent speedup in price inflation will prove temporary. 

Warsh has testified that a trimmed measure of price inflation is preferable to the standard measures since it would eliminate outliers.  This is a reasonable view, particularly since special factors could boost or lower a handful of CPI components each month.  Also, a trimmed measure could eliminate large relative price changes, either temporary or persistent, that impact the Core CPI but should be ignored by policymakers.  (To be sure, a moving average of the CPI or Core CPI tends to eliminate swings in components that quickly unwind.)  The latest trimmed inflation measures are mixed relative to the official measures (see table).  The Dallas Fed's measure shows the underlying inflation rate much closer to the Fed's 2% target than the headline figure. 

                                                     March Y/Y Percent Change                

Core CPI                                                             2.6%

Cleveland Fed Trimmed Mean CPI                    2.6% 

Core PCE Deflator                                              3.0%

Dallas Fed Trimmed-Mean PCE Deflator           2.3%  

As for other data to be released this week, consensus looks for Q126 Real GDP Growth to be 2.1% (q/q, saar), up from 0.5% in Q425.   The Atlanta Fed model's latest estimate is 1.2%.  However, the model may have missed the full boost to growth this quarter from the re-opening of the federal government after it underestimated the drag from the shutdown in Q425.   The same risk applies to the consensus estimate.  So, a higher-than-consensus print can't be ruled out.   The 2-quarter average of GDP Growth should give a better measure of the underlying pace.

Nevertheless, the bounce-back from the government shutdown could have spurred the economy's momentum.  This could be a factor behind the strength expected in March Consumer Spending and Durable Goods Orders.  Consensus expects March Consumption to jump 0.9% m/m, with about half resulting from higher prices.  The "real" increase would be a decent gain.  Consensus also expects March Durable Goods Orders to climb about 0.5% both for Total and Ex Transportation.  This pace is below the 0.8% m/m Q126 average for Ex Transportation, but is still a solid increase.

This week's inflation-related data should not be a problem for the market.  The March Core PCE Deflator is seen slowing to 0.3% m/m from 0.4% in February.  It would remain above the pace consistent with the Fed's 2% inflation target.  The market, though, would likely discount it as a potentially temporary reflection of higher oil prices and tariffs.  The trimmed  measure may be given more attention.

 

 

 

 

 

Market Focus Moving Back To Economy?

The stock market should continue to be dominated by news from the Iran war and strong corporate earnings this week.  In the background, the market focus may begin shifting back toward whether the macroeconomic data point to a Fed rate cut.  So far, the data are not conclusive.

While business-related surveys (including last week's April Phil Fed Mfg Survey) and some key US economic data, like March Payrolls and Unemployment Rate, suggest an improving economy going into the Spring, not all data are consistent with this implication.  Manufacturing Output (part of Industrial Production) ended Q126 on a soft note.  Motor Vehicle Assemblies dropped in March after two strong months, although they stayed above the Q425 pace.  High Tech Output rebounded last month but did not fully offset the February decline.  And, Manufacturing Output Excluding Motor Vehicles and High Tech slowed.  The weak prints suggest the decline in the Nonfarm Workweek and Total Hours Worked (as a result) in March should be viewed meaningfully.  Questions remain whether the decline was temporary and whether it resulted from supply constraints or weaker demand.

The Claims data also keep open the possibility that the labor market is not as strong as the March Employment Report had suggested.  To be sure, layoffs remain low, since Initial Claims are hovering around their lows for the move down.  However, Continuing Claims may have flattened out, suggesting hiring remains sluggish.  It's too soon to say what these data imply for April Nonfarm Payrolls, but last week's bounce in Continuing raises the possibility of a slowdown from the March pace.

This week's release of March Retail Sales is expected to be strong.  Consensus looks for +1.3% m/m Total and +1.0% Ex Auto.  However, much of the expected bounce could be price related, particularly in gasoline and apparel.  The drop in the University of Michigan Consumer Sentiment Index could mean weaker-than-expected retail sales, but often a soft Index coincides with a bounce in retail sales.  Perhaps, consumers try to bury their concerns by shopping more?!

Fed officials continue to indicate a preference to keep monetary policy steady in the foreseeable future.  And, while there are good reasons for them to do so,  the markets may very well change their views if it looks like economic growth is slowing significantly and markets react accordingly.

 

 

 

 

 

 

 

 

 

   

Strong Corporate Earnings To Help

The stock market should continue to be impacted by the Iranian war this week.  However, expectations of strong corporate earnings for Q126, to be reported over the next few weeks, should help support the market.  In the background, evidence is building suggesting a speedup in economic growth into the Spring.  And, Friday's March CPI offers hope that underlying inflation may stay contained in the face of the oil price shock.

Consensus expects a 13.2% y/y jump in S&P 500 corporate earnings, just below the 14% increase in Q425 but still strong.  The macroeconomic evidence supports another strong quarter (see table below).  Real GDP Growth should speed up on a y/y basis, based on the Atlanta Fed Model's latest estimate.  Base effects help, since Real GDP fell in Q125.  The jump in oil prices should help that sector.  While economic activity may have slowed outside of the US, based on the Mfg PMI for the Euro Area, the weaker dollar make earnings abroad more valuable in dollar terms.  

A slew of surveys points to a speedup in economic activity going into the Spring.  Both the Mfg and Non-Mfg ISM Indexes have ratcheted up to a new range in the past few months.  The Mfg ISM in March exceeds the Q126 average.   Although the Non-Mfg ISM slipped in March, it was the highest level since December 2024 except for the prior month.  The Logistics Index has risen in each of the past 3 months.  This has been the case for the Philadelphia Fed Mfg Index as well.

The Unemployment Claims data show little change in the pace of layoffs but a possible improvement in hiring.  Initial remain in the range seen since the end of 2024.  Continuing made a new low for the move down in the latest week.  If they stay at this level for the next couple of weeks, they would suggest a speedup in April Nonfarm Payrolls (at least strike-adjusted).  

Meanwhile, the March CPI contained some encouraging signs for the Fed's inflation fight.  Although the Total was boosted by the jump in energy prices, food prices were flat in grocery stores and slowed at restaurants.  The Core printed a modest 0.2% m/m even though the pass-through effects of tariffs and higher oil prices appeared in some components.  The Report shows that many factors impact inflation, some positive and some negative.   Unfortunately, the components boosted by tariffs and oil prices appear to be weighted more heavily in the PCE Deflator than in the CPI.  They also may get more weight in this week's March PPI Report, as consensus looks for a high 1.2% m/m Total and +0.5% Core.  Nevertheless, the Fed is right in waiting to see how all settle down.

                                                                                                                                        Euro  Area   

                  Real GDP     Oil Prices      Trade-Weighted Dollar    AHE     Core CPI    Mfg PMI  

                     [                y/y percent change                                                            ]          (level)

Q424             2.5               0.0                      +3.5                               4.1           3.4               45.4       

 

 Q125            2.1              -6.5                      +6.0                               4.1           3.1               47.6                                       

Q225            2.0             -16.0                      +3.5                               3.9           2.8               49.3     

 

Q325            2.3              -11.0                      -1.5                               3.9           3.1               50.0  

 

Q425            2.0              -14.0                      -4.0                                3.9           2.6               53.3  

 

Q126            2.5 *            40.0                       -8.0                               3.6           2.5                50.5                                                                                      

                                                                           

* Based on the Atlanta Fed Model's latest projection of 1.3% for Q126 (q/q, saar).

 

 

A High CPI After A Strong Employment Report

The stock market should continue to be dominated by developments in the Iran war this week.   In addition, it will likely contend with a high March CPI.  Much of the CPI's jump this month is tied to the war-related surge in oil prices.  So, this Report should not affect Fed policy and will likely be forgotten quickly by the market.

Consensus looks for +0.9% m/m Total and +0.3% Core CPI for March.   The risk is for an even higher print.  Pass-through of higher energy prices will likely show up in a jump in airfares, as well as in other components.  Used Car Prices also could move up sharply, as the CPI measure does not appear to have caught up to the increases seen in the Manheim Used Car Price Index so far this year.  (Used Car Prices have a negligible impact on the Fed's favorite inflation measure, the PCE Deflator.)  The y/y is expected to shoot up to 3.4% from 2.4% for Total and move up to 2.7% from 2.5% for Core CPI.

Consensus also expects a high print for the February PCE Deflator.  Consensus sees 0.4% m/m for both Total and Core.  These estimates seem too high, based on the more moderate February CPI (0.3% Total, 0.2% Core).  However, Fed Chair Powell had predicted a near-consensus print, having estimated a steady 2.8% y/y for Total and a dip to 3.0% from 3.1% for Core at the March FOMC Meeting.

The Fed is not likely to be moved by these reports, even if they come in higher than expected, as officials already have said they are waiting to see whether these war-related price hikes prove temporary.  Similarly, the Fed will not be swayed by the March Employment Report, in which some key components were on the stronger side.

Even though the Employment Report will not likely move the Fed, it should be a positive for the stock market inasmuch it mostly argues against the idea of stagflation.   Using the 22.5k m/m 2-month average of Payroll changes to adjust for strike and weather impacts,  job growth over the past two months has been more than double the anemic 10k pace of 2025.  The decline in the Unemployment Rate to 4.3% from 4.4% confirms that economic growth is solid so far in 2026, despite the m/m volatility in Payrolls.

Wage inflation, moreover, remains subdued.  The 0.2% m/m increase in Average Hourly Earnings lowered the y/y to 3.5% from 3.7%.  The 0.4% m/m prints in the prior two months now look to be part of a volatile pattern around a 0.3% trend.  The latter is the Q126 average (0.27% m/m unrounded) and is within the 0.2-0.3% range seen since Q125.

The soft part of the Report was the dip in the Nonfarm Workweek.  It pushed down Total Hours Worked enough that the March level is 0.6% (annualized) below the Q126 average -- a weak take-off point for Q226.  However, the decline in hours worked could reflect business caution or shortages related to the Iran war or bad weather.  If so, the decline could point to a bounceback this Spring as these problems dissipate.  It may join military arms replenishment as a catalyst for growth ahead.

 

 

 

 

 

Stagflation?

The stock market should remain captive to developments in the Iran war this week.  At the same time, concerns are developing that the US is entering into a period of "stagflation," with sluggish growth and high inflation -- a difficult scenario for the Fed and bad for stocks.  This week's key US economic data are not expected to end these concerns.

However, there may be positive surprises, and there are reasons to think these concerns may be overdone.  Recent data show high inflation.  And, slow population growth works toward slow growth.  It is not certain, however, that slow economic growth is below its longer-run trend nor necessarily bad for corporate earnings.  Moreover, it is too soon to say whether a combination of high inflation and near-trend growth will persist and lead to Fed tightening.  

Slow population growth appears to be behind consensus expectations for March Nonfarm Payrolls.   Consensus expects Payrolls to rebound 48k m/m, after they dropped 92k in February.  The Claims data support the idea of a March improvement (see table below).   However, February-March Payrolls should be adjusted for strikes.  Strikers impacted both months' Payroll figures, subtracting 31k from February and adding 32k to March.  Strike adjusted, Payrolls would climb 16k in March after falling 61k in February, according to the consensus estimate.  The Q126 average would be +27k m/m.  Both the March adjusted gain and the Q126 average would exceed the +10k m/m average in 2025.  So, while the expected modest increase in March is low from a longer historical perspective, it is not low relative to the more recent trend.  

Indeed, last year's slow Payrolls pace was not associated with below-trend GDP Growth.  Real GDP Growth was 2.0% (Q4/Q4) in 2025, in line with the Fed's 1.8-2.0% estimate of longer-run growth.  The latter was associated with strong corporate earnings.  So, this growth scenario is not necessarily bad for stocks.

The Atlanta Fed model's latest estimate of Q126 Real GDP is 2.0% (q/q, saar), a continuation of the 2025 growth rate.  The model's estimate may be too low, moreover, as it does not seem to build in the rebound in federal government purchases coming from the shutdown's end.  The latter subtracted at least 1% point from Q425 Real GDP Growth.  

The consensus expectation of a 0.1% point uptick in the Unemployment Rate to 4.5%, a new high for the move up, argues for below-trend economic growth.  This expectation, however, is questionable, since the Claims data do not decisively point to an increase in the Rate.  A 0.1% point m/m change is within statistical noise, so cannot be ruled out, however.

Most of the latest inflation-related data are mostly high and not favorable for the Fed.  Compensation/Hour and Unit Labor Costs were revised up for Q425.  And, Import and Export Prices posted large increases for February.  Moreover, the consensus estimate of +0.4% m/m in March Average Hourly Earnings would be the second above-trend increase in a row (trend was 0.3%).  In contrast, the longer-term 5-year inflation expectations measure from the University of Michigan Consumer Sentiment Survey slipped to 3.2%, staying within its range.  Contained longer-term inflation expectations is important to the Fed and holds out hope that the recent spate of high inflation figures will be temporary.  

Compensation/Hour -- the broadest measure of labor costs -- were revised up in both Q425 and Q325, particularly for Q325 (see table below).  It rose 6.2 or 6.3% in 3 of the 4 quarters of 2025.  The q/q pace was more moderate in 2024, ranging between 4.3% and 5.8%.  Nevertheless, the Q4/Q4 pace was 5.0% in 2025, not much different from the 4.9% in 2024 and 5.3% in 2023.  At best, labor cost inflation can be viewed as sticky.  At worst, it can be seen speeding up.  

Reflecting the downward revision in Productivity as well, Unit Labor Costs were revised up sharply.  The Q4/Q4 pace was 2.4%, about the same as the 2.6% in 2024.  Both exceeded the 1.7% in 2023.  They are slightly above the pace consistent with the Fed's 2% inflation target.  Fed Chair Powell could continue to stick with his assertion that labor costs are not a source of inflationary pressure, but these revisions could temper his view.

The other bad inflation news was the jumps in February Import and Export Prices.  Higher oil and other commodity prices played a role, but large price increases were widespread.  Nonfuel Import Prices surged 1.1% m/m, the second outsized increase in a row.  They followed a slight decline over H225.  Pass-through of higher energy costs may have been behind the widespread price hikes.  Note that tariffs are not included in this measure of Import Prices.  Nonfood Export Prices jumped 1.7%, after a large 0.7% in January.  The surge in Export Prices mirrors the high PPI in the first two months of the year.  

                                               Revisions

                                  (q/q percent change, saar)

                     Compensation/Hour            Unit Labor Costs

                    Latest     Previous                 Latest    Previous

Q425            6.3         5.7                            4.4        2.8      

Q325             6.2        3.3                           1.0       -1.8              

 

                                     Private Payrolls (m/m change, 000s)   

                        ADP Estimate        First-Print BLS        Latest-Print BLS    Continuing Claims *        

    March               155                          209                            120

    April                   62                          167                            133                               14                            

    May                    37                          140                              69                              -74           

    Jun                    -33                            74                             -27                              -57                              

    Jul                    104                            83                               77                               18   

   Aug                     54                            38                               -4                                 2                            

   Sep                    -32                           119                              104                             28 

   Oct                     42                             na                                  1                             -41 

   Nov                   -32                            69                                41                               14

    Dec                   41                            37                                 48                               30     

    Jan 26               22                          172                               146                               94   

   Feb                    63                           -86                                 na                              -14   

   Mar                   62                            na                                  na                                 3                                                                                     

 * the inverted change in Continuing Claims between Payroll Survey Weeks, 000s  

 

 

Will The Fed Tighten?

The stock market's concerns about the fall-out from the Iranian war are spreading to fears that the war's inflationary consequences will trigger a Fed tightening at some point.  Fed Chair Powell may have stoked these fears by mentioning that the possibility of a tightening at some point was discussed at the FOMC Meeting although not viewed as likely by most participants.  While the Fed will more likely remain on hold, the markets -- stocks and longer-term Treasuries -- may continue in anti-inflation modes in its place.

The main thrust of Powell's post-meeting news conference was the huge uncertainty surrounding the possible fall-out from the war.  At this point, it is unclear whether the price spikes precipitated by the war will be temporary or whether they will spur a more serious wage-price spiral.  Powell acknowledged that the jump in energy prices will not only boost the Total PCE Deflator but also Core as companies pass them through.  This boost, however, could be one-off.  Not having a clear read on the inflationary implications beyond the initial shock and potentially one-off pass-throughs,  Powell stated that steady monetary policy is appropriate.

A steady policy is likely to remain appropriate for at least several months, since uncertainty about the nature of the war's fall-out will probably not dissipate quickly.  However, the impatient markets may force the Fed's hand.  Upcoming price and wage data will be important for the markets, even though they may be too early to be conclusive about the war's consequences.  Powell said the Fed staff looks for the February Total PCE Deflator to print a steady 2.8% y/y and the Core to slip to 3.0% from 3.1%.  These estimates imply m/m increases of 0.4% for Total and 0.3% for Core.  These seem a little high, based on the February CPI (0.3% m/m Total and 0.2% Core).  However, compositional and weighting differences could be behind the Fed staff's high estimates.  The February PCE Deflator will be released April 9.

Wage data will be important, too.  This week's release of the Q425 Productivity/Labor Cost Revision should show lower productivity and higher Unit Labor Costs than in the advance report, based on the downward revision in Q425 Real GDP (to +0.7%, q/q saar, from 1.4%).  Consensus looks for Productivity to be revised down to 2.5% (q/q saar) from 2.8% and Unit Labor Costs revised up to 3.3% from 2.8%.  Compensation/Hour would be revised to 5.8% from 5.7%.  The latter, although high, could be chalked up to the typical volatility in this data series.  The y/y should be moderate .  Nevertheless, the upward revisions to labor costs could fan market concerns.

The other wage data to be released soon will be Average Hourly Earnings (AHE) in the March Employment Report, due April 3.  AHE printed a trend 0.3% m/m in February.  

The most important price news will be oil prices.   These should be dependent on developments in the war.

Besides inflation data, labor market data also will be important.  A Fed tightening may become more of a possibility if the Unemployment Rate moves down to the 4% or lower level.  Conversely, it may become less likely if the Rate rises.  At this point, the Unemployment Claims data do not suggest a big move in either direction, with an increase in the Rate perhaps more of a risk than a decline.

 

 

 

 

 

 

 

 

 

 

This Week's FOMC Meeting

The stock market will continue to be dominated by developments in the Iranian war and their impact on oil prices this week.  Fed Chair Powell's post-FOMC news conference will be a focus in the background, as the Fed is not expected to ease this week.  His comments are not likely to move the market significantly, as the Fed's view of the outlook has not likely changed much.

Powell could reiterate that economic growth is "solid," the unemployment rate "showing signs of stabilization," and inflation "somewhat elevated."   Although Q425 Real GDP Growth was revised down to 0.7% (q/q, saar), he already has blamed the government shutdown for temporarily hurting the economy in that quarter.  And, while Nonfarm Payrolls fell 92k m/m in February, this followed +126k in January.  The 17k 2-month average is in line with the anemic 10k m/m average in 2025, which Powell has blamed on the drop in immigration and associated slowdown in population.

All this would be old news with little market impact.  More interesting comments would be his views on the impacts of tariffs and the war on inflation and the economy.  The question is whether he views these impacts to be temporary.   Does he still think the impact of tariffs will recede in coming months?  Does he expect the same for the impact of the war?  He may just say that it adds another layer of uncertainty to the outlook, but it is too soon to draw any solid conclusions.   Commentary such as this  would likely have little market impact.

What may be the most interesting is if he discusses the effects of AI on the labor market.  While he could attribute some of the weakness in Payrolls to AI, he is unlikely to offer a specific estimate of the job losses associated with it.  Nevertheless, it would be of interest to the market if he discusses the implications of a possible large number of AI-related job losses for monetary policy.  In principle, an avalanche of AI-driven job losses would call for easier monetary policy.  The avalanche would have to show up in a higher unemployment rate to indicate a looser labor market.  An acknowledgement of this implication for monetary policy would be a market positive as it would dampen fears of an AI-driven recession.

Labor market weakness may be continuing, according to Unemployment Claims data.  Hiring appears to have remained dormant into early March, although layoffs have not accelerated.  Continuing Claims remain elevated while Initial Claims are stuck in the range seen so far this year.  If these data do not improve over the next few weeks, another decline in Payrolls could be in the cards for March.

Powell may comment on last week's February CPI and January PCE Deflator.  The CPI had both good and bad news regarding the inflation outlook.  On the good side, the important Owners' Equivalent Rent (OER) stayed low at 0.2% m/m -- essentially in line with the Fed's 2% inflation target.   Moreover, Primary Rent slowed to 0.1%, which could be a precursor for a similar slowdown in OER ahead.  On the bad side, many of the CPI components had increases in line with their recent trends, showing inflation is sticky.  

The January PCE Deflator was on the high side, with Total up 0.3% m/m and Core up 0.4%.  The y/y slipped to 2.8% from 2.9% but the Core edged up to 3.1% from 3.0%.  Nevertheless, with the Core CPI slowing in February, it is likely that the same will happen to the PCE Deflator.  Moreover, the slower pace would result in notable lower y/y's for both Total and Core, as the base effects are favorable.