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