Next week's key US economic data -- March Mfg ISM and Payrolls -- will probably not significantly lower the odds of a June hike, even though they are expected to soften. Near-consensus prints still would be strong. Substantially softer-than-consensus prints would likely prompt Treasury yields to fall, dollar to weaken and perhaps stocks to climb. But, these easier financial market conditions would be a positive for the economic outlook and could encourage Fed officials to dismiss the weakness as temporary (possibly in subsequent speeches). As NY Fed President Dudley said in a speech on March 30, the easing of financial conditions after the December 2016 rate hike added to reasons to hike again at the March 2017 FOMC Meeting.
Next Week's US Economic Data
Prints near the consensus estimates for the March Mfg ISM and Payrolls should keep the odds high for a June Fed rate hike, regardless of how financial market conditions react to the reports. Consensus looks for a dip in the Mfg ISM to a still-strong 57.0 in March from 57.7 in February, keeping it well above the 53.3 Q416 average. Consensus also looks for March Nonfarm Payrolls to slow modestly to +180k m/m from +235k in February. The underlying job pace would remain well above the 75-125k pace deemed consistent with underlying labor force growth. And, it would suggest the temporary factors that may have boosted job growth in January-February -- the warm winter and catch-up after post-election cautious hiring in Q416 -- were not significant: job growth just has been strong. So, even if financial markets tighten on the jobs report, the economy's strength would seem to be enough to keep a June rate hike in play.
But, if the jobs data are substantially below consensus -- which is my guess -- and Treasury yields fall notably, stocks rally and the dollar falls in the belief that odds of a June rate hike have diminished, the resulting easing in financial market conditions could be a Catch-22. The Fed could view the easier conditions as ensuring that the March payback in the data is temporary, and thus not change its view of a gradual tightening in monetary policy that could include June. Note that a March Payroll increase in the 100-125k range is not out of the question, as
that would bring the Q117 m/m average in line with the +192k m/m H216
average.
What Could Stop the Fed
Recent Fed speeches have underscored officials' desire to bring the funds rate closer to its longer-run level. So, it will likely take a lot to stop the Fed from hiking at least two more times this year. Two possible reasons for the Fed to delay tightening would be a sharp drop in financial conditions and/or a sharp slowdown in economic growth and labor market improvement.
Dudley discussed the usefulness of financial conditions as both a reflection of expectations of future growth and a propellant of growth. So, tighter conditions -- weaker stocks, higher Treasury yields and stronger dollar -- would be viewed as a negative development for the economy. To be sure, tighter financial conditions would not necessarily result in slower growth, as Dudley pointed out from the 1987 stock market crash experience. But, it still could hold back the Fed from tightening.
The most important US economic data to monitor the strength of the economy/labor market are Initial Unemployment Claims. These are the broadest high-frequency evidence on the economy that is available, and they are a universal count -- not subject to sampling issues. Initial Claims have begun to move up, as predicted on the basis of a payback for the temporary factors that supported the labor market in January-February. But, the question is whether they will continue to climb into the Spring. A sustained uptrend in Initial Claims could give the Fed pause in considering another rate hike at the June FOMC meeting -- although not necessarily if financial market conditions are easing. A reversal to the downside in Initial Claims -- or even a leveling off -- would encourage officials to move again. Note that they moved down in January and February ahead of the March rate hike.
Initial Claims (level, 000s)
March 25 Week 258
March 18 Week 261
March 11 Week 246
March 4 Week 243
Feb Avg 234
Jan Avg 243
Q416 Avg 256
Friday, March 31, 2017
Sunday, March 26, 2017
The Stock Market Post the Ryan Rejection
The markets' attention this week will be on the fall-out from Friday's rejection of Ryan's ObamaCare Repeal/Replacement bill, particularly with regard to the implications for the composition and trajectory of Trump's agenda. The Administration will probably assert that it will now focus on corporate tax reform, with a target date of August. Although tax reform will likely be as difficult and contentious as health care reform, an affirmation that work will begin on it could be enough to sustain the stock market's hope at this point.
While a renewed hope of tax reform -- and possibly end-of month/quarter buying -- could result in a reversal of at least part of last week's stock market decline, stocks still may trade cautiously after a bounce. The market will have to contend with key data in the first week of April that risk softening -- March Mfg ISM and Payrolls. Also, even though expectations of Q117 corporate earnings are for a strong 9% (y/y) gain, much of this increase is likely in the oil industry -- and some of it could be viewed as temporary, given the recent drop in oil prices. The two Fed models continue to diverge substantially with regard to Q117 Real GDP Growth -- Atlanta Fed (1.0%, q/q saar) and NY Fed(3.0%) -- suggesting some uncertainty about profits overall.
The most important macroeconomic issue behind the stock and Treasury markets' outlooks is whether some of the strength seen in Q117 -- particularly in the labor market -- will unwind as we move into Q217. Last week's Initial Claims release hinted that this may be the case, as Initial jumped well above their January-February range despite the Northeast snowstorm that week possibly having interfered with their processing. Confirmation is needed in this coming Thursday's release.
Initial Claims (level, 000s)
March 18 Week 261
March 11 Week 246
March 4 Week 243
Feb Avg 234
Jan Avg 243
Q416 Avg 256
The February PCE Deflator, due Friday, also is of some importance, as a continuation of sub-2.0% (y/y) core inflation could combine with a Q217 softening in the labor market to give the Fed pause in its tightening path (making September a greater likelihood than June for the next hike). The 0.2% m/m consensus estimate of Friday's February Core PCE Deflator should keep the y/y steady at 1.7%. And, the near-term outlook is not overly worrisome. With crude oil prices falling over the past few weeks, not only should the Total PCE Deflator inflation rate come down in March and April, but some components in the Core Deflator -- like airfares -- could fall as well.
While a renewed hope of tax reform -- and possibly end-of month/quarter buying -- could result in a reversal of at least part of last week's stock market decline, stocks still may trade cautiously after a bounce. The market will have to contend with key data in the first week of April that risk softening -- March Mfg ISM and Payrolls. Also, even though expectations of Q117 corporate earnings are for a strong 9% (y/y) gain, much of this increase is likely in the oil industry -- and some of it could be viewed as temporary, given the recent drop in oil prices. The two Fed models continue to diverge substantially with regard to Q117 Real GDP Growth -- Atlanta Fed (1.0%, q/q saar) and NY Fed(3.0%) -- suggesting some uncertainty about profits overall.
The most important macroeconomic issue behind the stock and Treasury markets' outlooks is whether some of the strength seen in Q117 -- particularly in the labor market -- will unwind as we move into Q217. Last week's Initial Claims release hinted that this may be the case, as Initial jumped well above their January-February range despite the Northeast snowstorm that week possibly having interfered with their processing. Confirmation is needed in this coming Thursday's release.
Initial Claims (level, 000s)
March 18 Week 261
March 11 Week 246
March 4 Week 243
Feb Avg 234
Jan Avg 243
Q416 Avg 256
The February PCE Deflator, due Friday, also is of some importance, as a continuation of sub-2.0% (y/y) core inflation could combine with a Q217 softening in the labor market to give the Fed pause in its tightening path (making September a greater likelihood than June for the next hike). The 0.2% m/m consensus estimate of Friday's February Core PCE Deflator should keep the y/y steady at 1.7%. And, the near-term outlook is not overly worrisome. With crude oil prices falling over the past few weeks, not only should the Total PCE Deflator inflation rate come down in March and April, but some components in the Core Deflator -- like airfares -- could fall as well.
Monday, March 20, 2017
Markets Likely To Tread Water Until April
The markets are likely to tread water until April when some of the more important US economic data should begin to soften but corporate earnings come in strong. US economic data due over the remainder of March are not likely to significantly change expectations of gradual monetary policy tightening in the remainder of the year -- which should be reaffirmed by a number of Fed speakers this week. But, the March Mfg ISM and Employment Reports in the first week of April could raise some doubts whether the Fed will move in June -- helping Treasuries. Nonetheless, some macro evidence points to strong Q117 Corporate Earnings, reported later in April, which should help lift stocks.
Although most of the data to be released over the rest of March are minor, they could serve to narrow the large difference between the two Fed models regarding Q117 Real GDP Growth. The Atlanta Fed model projects +0.9% (q/q, saar), while the NY Fed model projects +2.8%. Having a more precise estimate of Q117 Real GDP could help get a better handle on that quarter's corporate earnings. But, the Fed's view that economic growth is proceeding in line with expectations would not likely be dented if the low Atlanta Fed model projection turns out to be right. Some of the weakness results from consumers spending less on energy in the relatively warm winter. Spending on electricity and natural gas should rebound into the Spring.
The data to be released through the end of March, themselves, are not likely to change the Fed's positive view of the economy. Consensus looks for little change in New and Existing Home Sales and moderate gains in Durable Goods Orders -- all for February. In this coming week, note that Initial Claims could drop as a result of the Northeast snowstorms having interfered with the processing of Claims. If so, they should rebound the following week.
More significant US economic data are due in the first week of April, with the March Mfg ISM and Employment Reports, could present a window for Treasuries to rally somewhat. A pullback in the Mfg ISM is suggested by the Phil Fed Mfg Index, and job growth risks slowing as the boosts from a warm winter and post-election catch-up unwind.
Aside from the data, Q117 corporate earnings releases should on balance support a further rally in stocks in April. The consensus estimate of a strong 9.0% y/y increase in Q117 S&P 500 Earnings, versus 4.9% in Q416, cannot be dismissed, based on a few macro considerations. The y/y rate of increase for Real GDP should be at least as strong as in Q416 (with the range in the table based on the two Fed models' estimates for Q117), oil prices are well above year-ago levels, dollar appreciation has slowed since Q416, and wage inflation remains stable.
(y/y percent change)
Real GDP Oil Prices Trade-Weighted Dollar Average Hourly Earnings
Q316 1.7 -3.4 2.2 2.6
Q416 1.9 +16.4 3.9 2.7
Q117 1.9-2.4 +65.3 2.2 2.7
Although most of the data to be released over the rest of March are minor, they could serve to narrow the large difference between the two Fed models regarding Q117 Real GDP Growth. The Atlanta Fed model projects +0.9% (q/q, saar), while the NY Fed model projects +2.8%. Having a more precise estimate of Q117 Real GDP could help get a better handle on that quarter's corporate earnings. But, the Fed's view that economic growth is proceeding in line with expectations would not likely be dented if the low Atlanta Fed model projection turns out to be right. Some of the weakness results from consumers spending less on energy in the relatively warm winter. Spending on electricity and natural gas should rebound into the Spring.
The data to be released through the end of March, themselves, are not likely to change the Fed's positive view of the economy. Consensus looks for little change in New and Existing Home Sales and moderate gains in Durable Goods Orders -- all for February. In this coming week, note that Initial Claims could drop as a result of the Northeast snowstorms having interfered with the processing of Claims. If so, they should rebound the following week.
More significant US economic data are due in the first week of April, with the March Mfg ISM and Employment Reports, could present a window for Treasuries to rally somewhat. A pullback in the Mfg ISM is suggested by the Phil Fed Mfg Index, and job growth risks slowing as the boosts from a warm winter and post-election catch-up unwind.
Aside from the data, Q117 corporate earnings releases should on balance support a further rally in stocks in April. The consensus estimate of a strong 9.0% y/y increase in Q117 S&P 500 Earnings, versus 4.9% in Q416, cannot be dismissed, based on a few macro considerations. The y/y rate of increase for Real GDP should be at least as strong as in Q416 (with the range in the table based on the two Fed models' estimates for Q117), oil prices are well above year-ago levels, dollar appreciation has slowed since Q416, and wage inflation remains stable.
(y/y percent change)
Real GDP Oil Prices Trade-Weighted Dollar Average Hourly Earnings
Q316 1.7 -3.4 2.2 2.6
Q416 1.9 +16.4 3.9 2.7
Q117 1.9-2.4 +65.3 2.2 2.7
Sunday, March 12, 2017
What's Important in Next Week's FOMC Outcome and US Economic Data Releases
While this week's 25 BP rate hike at the FOMC Meeting will likely get the most attention, the forward guidance in the "dots" chart should be more important for the markets. The rate hike has been well signaled at this point. So, the question is whether the Fed is sticking with its gradual approach to tightening. Stocks and Treasuries should take the rate hike in stride if the forward guidance of 2-3 hikes this year does not change. In particular, stocks should rally after the Statement is released on Wednesday if forward guidance does not change.
This week's US economic data releases may be the more important news -- particularly if they begin to lay the groundwork for slower-than-expected economic growth into the Spring. Even without laying this groundwork, consensus-like prints would support the gradual approach to monetary policy tightening that the Fed will likely say again in its FOMC Statement and embodied in its forward guidance. In particular, consensus looks for modest increases in February Retail Sales (+0.1% m/m Total, +0.2% Ex Auto) and the CPI (+0.1% Total, +0.2% Core). So, the markets are likely to take near-consensus prints in stride, as well. Weaker-than-consensus data, however, would raise questions whether economic growth is as strong as markets believe -- negative for stocks, positive for Treasuries. And, weak data could push back market odds of the next Fed rate hike toward September and away from June. A key piece of evidence to watch is whether Initial Claims climb above the 244k Q117 average.
There already is a sharp disagreement between the Atlanta Fed and New York Fed models regarding Q117 Real GDP Growth. The Atlanta Fed projects 1.2% (q/q, saar), but NY Fed projects 3.2% (as well as 3.0% for Q217 Real GDP Growth). In the past two quarters, the NY Fed model did a better job predicting current-quarter GDP Growth -- as the Atlanta Fed model had difficulty predicting the large swings in net exports that happened then. These projections can change as more data come in.
It is conceivable that Q117 Real GDP Growth will come in between these projections, as the fact that the Unemployment Rate did not fall in Q117 hints of GDP growth around the 1.5-1.7% trend. The strong job growth in January and February may have been caused by factors other than above-trend GDP growth. The warm weather could have boosted job growth more than GDP growth, especially as a decline in heating oil expenditures held down the latter. Also, some of the job growth in Q117 could have been catch-up after a slowdown in Q416 -- independently of GDP. The Q117 earnings season could depend on which of the model's GDP projections is correct.
This week's US economic data releases may be the more important news -- particularly if they begin to lay the groundwork for slower-than-expected economic growth into the Spring. Even without laying this groundwork, consensus-like prints would support the gradual approach to monetary policy tightening that the Fed will likely say again in its FOMC Statement and embodied in its forward guidance. In particular, consensus looks for modest increases in February Retail Sales (+0.1% m/m Total, +0.2% Ex Auto) and the CPI (+0.1% Total, +0.2% Core). So, the markets are likely to take near-consensus prints in stride, as well. Weaker-than-consensus data, however, would raise questions whether economic growth is as strong as markets believe -- negative for stocks, positive for Treasuries. And, weak data could push back market odds of the next Fed rate hike toward September and away from June. A key piece of evidence to watch is whether Initial Claims climb above the 244k Q117 average.
There already is a sharp disagreement between the Atlanta Fed and New York Fed models regarding Q117 Real GDP Growth. The Atlanta Fed projects 1.2% (q/q, saar), but NY Fed projects 3.2% (as well as 3.0% for Q217 Real GDP Growth). In the past two quarters, the NY Fed model did a better job predicting current-quarter GDP Growth -- as the Atlanta Fed model had difficulty predicting the large swings in net exports that happened then. These projections can change as more data come in.
It is conceivable that Q117 Real GDP Growth will come in between these projections, as the fact that the Unemployment Rate did not fall in Q117 hints of GDP growth around the 1.5-1.7% trend. The strong job growth in January and February may have been caused by factors other than above-trend GDP growth. The warm weather could have boosted job growth more than GDP growth, especially as a decline in heating oil expenditures held down the latter. Also, some of the job growth in Q117 could have been catch-up after a slowdown in Q416 -- independently of GDP. The Q117 earnings season could depend on which of the model's GDP projections is correct.
Friday, March 10, 2017
February Employment Report Strong, But...
The strong February Employment Report provides the Fed with final justification for a 25 BP rate hike at next week's FOMC Meeting. But, the Report also suggests the possibility that job growth will slow this Spring. This macro-economic outlook would likely provide a window in the next month or so for both stocks and Treasuries to rally.
February Payrolls (+235k) came in below the ADP Estimate (+298k), but still above consensus (+190k) and trend (75-125k). But, the real question is whether the outsized-gains in January and February will reverse in March. Seasonal factors may have overly boosted job growth in these unusually warm winter months. Also, there could have been catch-up in January and February from the slow job growth that occurred in Q416, the latter possibly resulting from election-related caution in hiring. A March increase in the 100-125k range is not out of the question, as that would bring the Q117 m/m average in line with the +192k m/m H216 average.
While the Unemployment Rate ticked down to 4.7%, the components suggests that the "supply-side" of the labor market is expanding along with demand -- thus raising the possibility that a pickup in economic growth will be non-inflationary. Both the Labor Participation Rate and Employment-Population Ratio rose.
To be sure, Average Hourly Earnings shows that wage inflation remains an upside risk in the inflation outlook, but is not a problem yet. While AHE rose a below-consensus 0.2% m/m in February, it was revised up in December and January. As a result, the y/y rose to 2.8% from 2.6% in January but stayed below the 2.9% in December 2016. Note that calendar considerations suggest another 0.2% m/m increase in AHE in March, which would keep the y/y at 2.8%.
Average Hourly Earnings (y/y percent change)
February 2017 2.8
January 2017 2.6
December 2016 2.9
December 2015 2.6
February Payrolls (+235k) came in below the ADP Estimate (+298k), but still above consensus (+190k) and trend (75-125k). But, the real question is whether the outsized-gains in January and February will reverse in March. Seasonal factors may have overly boosted job growth in these unusually warm winter months. Also, there could have been catch-up in January and February from the slow job growth that occurred in Q416, the latter possibly resulting from election-related caution in hiring. A March increase in the 100-125k range is not out of the question, as that would bring the Q117 m/m average in line with the +192k m/m H216 average.
While the Unemployment Rate ticked down to 4.7%, the components suggests that the "supply-side" of the labor market is expanding along with demand -- thus raising the possibility that a pickup in economic growth will be non-inflationary. Both the Labor Participation Rate and Employment-Population Ratio rose.
To be sure, Average Hourly Earnings shows that wage inflation remains an upside risk in the inflation outlook, but is not a problem yet. While AHE rose a below-consensus 0.2% m/m in February, it was revised up in December and January. As a result, the y/y rose to 2.8% from 2.6% in January but stayed below the 2.9% in December 2016. Note that calendar considerations suggest another 0.2% m/m increase in AHE in March, which would keep the y/y at 2.8%.
Average Hourly Earnings (y/y percent change)
February 2017 2.8
January 2017 2.6
December 2016 2.9
December 2015 2.6
Monday, March 6, 2017
A March Fed Rate Hike, the February Employment Report and the Markets
The markets -- stocks, Treasuries and FX -- should be able to weather a 25 BP rate hike at the March 14-15 FOMC Meeting, which is now a near-certainty given last week's Fedspeak, without much if any damage. What will be required is that the Fed not change its 2017 forward guidance of 2-3 rate hikes nor its Central Tendency forecast of 1.9.0-2.3% Real GDP Growth and 1.7-2.0% Inflation. By the Fed sticking with this outlook, the rate hike just would be one step on an already known path, and the stock market should continue to rally and Treasuries and the dollar remain range-bound.
It is likely that the Fed will not change its forward guidance or forecasts. Yellen and other Fed officials said last week that they favor a gradual approach to tightening, consistent with the existing forward guidance. Also, this Friday's February Employment Report should support the view of decent economic growth with little inflationary pressures, consistent with the Fed's forecast. Somewhat higher short-term interest rates in the context of a strong economy should not precipitate a stock market correction. And, longer-term Treasuries could tolerate the economy's growth if inflation does not appear to be a developing problem.
The continuing warm weather likely resulted in an above-trend gain in Payrolls this month. (Fed officials consider trend payroll growth to be in the 75-125k range, mentioned by Yellen last week.) This Wednesday's ADP Estimate should give a reliable handle on whether Payroll will print above this trend. The February ADP Estimate has under-estimated Private Payrolls in each of the past 5 years, with a 6-76k range of underestimates (average under-estimate 34k). So, the risk is for Payrolls to print somewhat higher than the ADP Estimate -- a mirror image of what history had suggested for January Payrolls. Consensus is for both the ADP Estimate and Payrolls to print 190k m/m.
Calendar considerations suggest a 0.1-0.2% m/m increase in February Average Hourly Earnings. The y/y would inch up to 2.6% from 2.5% in January, staying within its recent range.
It is likely that the Fed will not change its forward guidance or forecasts. Yellen and other Fed officials said last week that they favor a gradual approach to tightening, consistent with the existing forward guidance. Also, this Friday's February Employment Report should support the view of decent economic growth with little inflationary pressures, consistent with the Fed's forecast. Somewhat higher short-term interest rates in the context of a strong economy should not precipitate a stock market correction. And, longer-term Treasuries could tolerate the economy's growth if inflation does not appear to be a developing problem.
The continuing warm weather likely resulted in an above-trend gain in Payrolls this month. (Fed officials consider trend payroll growth to be in the 75-125k range, mentioned by Yellen last week.) This Wednesday's ADP Estimate should give a reliable handle on whether Payroll will print above this trend. The February ADP Estimate has under-estimated Private Payrolls in each of the past 5 years, with a 6-76k range of underestimates (average under-estimate 34k). So, the risk is for Payrolls to print somewhat higher than the ADP Estimate -- a mirror image of what history had suggested for January Payrolls. Consensus is for both the ADP Estimate and Payrolls to print 190k m/m.
Calendar considerations suggest a 0.1-0.2% m/m increase in February Average Hourly Earnings. The y/y would inch up to 2.6% from 2.5% in January, staying within its recent range.
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