The macroeconomic outlook supports the possibility for the stock market to break to the upside near term. Next week's FOMC meeting may very well have a "dovish" outcome. And, Q118 corporate earnings should be strong. Longer-term Treasuries also risk rallying this Spring, as some of the US economic data that have been strong recently are likely to soften in the next few months.
The Fed may very well keep its gradual approach to tightening in place at the FOMC meeting on Tuesday and Wednesday. While tightening the funds rate by 25 BPs, its "dots" should retain expectations for only 2 more rate hikes this year and 3 next year. Real-side US economic data have been mixed: Q118 Real GDP tracking estimates have move down to under 2% but job growth has been strong. Inflation remains low so far this year, once the distortion from the temporary jumps in apparel prices are removed. And, the risks around the real-side and inflation outlooks remain balanced. Although fiscal stimulus has increased, the risk of a trade war works the other way with regard to economic growth. There is no reason for the Fed to lift its expectations for the trajectory of the funds rate. A caveat is that the Fed officials' projections may have been submitted before some of the softer recent data were released.
The combination of weak Real GDP Growth and strong Payroll Growth in Q118 may have resulted from winter weather effects and faulty seasonals. The same combination occurred in Q117. It reversed in Q217 -- with payback for the strong gains in Payrolls showing up in March-May.
Nonfarm Payrolls Real GDP Growth
(m/m change, 000s) (q/q % change, saar)
2018 2017 2018 2017
Jan 239 259
Feb 313 200
Mar 73 1.2
Apr 175
May 155
Jun 239 3.1
The slowdown to a near-trend Real GDP Growth Rate in Q118 is consistent with the steady 4.1% Unemployment Rate seen since October. If last year is a guide, the Rate should begin to fall in March -- even though Payrolls should slow.
Jumps in apparel prices boosted the Core CPI by 0.1% pt in both January and February. Excluding apparel, the Core CPI rose 0.2% m/m in January and 0.1% in February. What may be important in the latter was the slowdown in owners' equivalent rent. If that stays low, inflation is likely to stay dormant. Moreover, apparel prices are likely to slow in the next few months, particularly if some of the January-February jumps resulted from early introduction of higher-priced Spring clothing in stores. Seasonals will look to offset these higher-priced goods in March-April.
Last year, the stock market rose over April-June after a sluggish February-March. The 10-year Treasury yield fell over April May after rising in March.
S&P 500 Index 10-Year Treasury Yield
(% change over month) (level, percent, monthly avg)
2018 2017 2018 2017
Jan 5.6 1.8 2.58 2.43
Feb -3.9 -0.6 2.86 2.42
Mar 1.4 0.0 2.86 * 2.48
Apr 0.9 2.30
May 1.2 2.19
Jun 0.5 2.32
* 2.84% on Friday
The macro evidence supports expectations of strong corporate earnings in Q118, to be reported mostly in April and early May. Domestic activity, as measured by Real GDP, sped up on a y/y basis even with the q/q slowdown in Q118. Oil companies should be helped by the further speedup in oil prices. Companies with earnings abroad will benefit from the weaker dollar and solid foreign economic growth. And, while labor costs appear to have sped up, so did prices, thus maintaining good profit margins. All these factors strengthened in Q118 relative to Q417. So, the corporate tax cut may not be the only reason why S&P 500 earnings are expected to rise faster in Q118 than in Q417 (17% y/y versus 15%).
Markit
Eurozone Real GDP Oil Prices Trade-Weighted
Dollar AHE Core CPI PMI
[ y/y percent
change ] (level)
Q117 2.0 +65.3 2.3 2.7 2.2 55.6
Q217 2.2 +13.1 3.1 2.5 1.8 56.8
Q317 2.3 +6.0 -1.9 2.5 1.7 57.4
Q417 2.5 +12.7 -4.1 2.5 1.7 59.7
Q118 2.7 +20.2 -6.6 2.6-2.7 1.9 59.1
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