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.