Stocks are likely to start the week cautiously, ahead of Apple earnings, the FOMC Meeting and a slew of US economic data. The Treasury market has the Treasury refunding announcement to contend with, as well. However, the risks are for softer-than-consensus prints for most of the key US economic data, which could temper concerns about Fed policy and keep the markets in a range. The FOMC Statement should maintain the message of gradual tightening path ahead.
The table below shows the risks associated with this week's key US economic data. The March Core PCE Deflator has downside risk relative to consensus, because the high component of the CPI (owners' equivalent rent) has a smaller weight in the PCE Deflator while the weak component of the CPI (apparel prices) has a larger weight. The April Mfg ISM risks a counter-consensus increase, since the early surveys (Markit and Phil Fed) rose. But, theses are not reliable predictors. The best predictor recently has been the Chicago PM, which come out on Monday and risks rebounding more than consensus after a low print in March. The April ADP Estimate risks a below-consensus print, since it could be pulled down by the very weak March Payroll increase (the latter feeds into its model). Q118 Unit Labor Costs look like it could come in below consensus, based on the parts of the GDP report. Friday's April Nonfarm Payrolls risk a low print, as was the case last year. The labor market components of the April Conference Board Consumer Confidence Survey weakened. This is not a reliable predictor of the Unemployment Rate, but raises the risk that the Rate could rise or be steady. Calendar considerations point to 0.1-0.2% m/m for Average Hourly Earnings, but layoffs in the retail sector could boost it for composition reasons.
Monday Consensus Risk Relative to Consensus
Core PCE Deflator 0.2% m/m 0.1-0.2% m/m
1.9% y/y 1.8-1.9% y/y
Chicago PM +0.5 to 57.9 higher
Tuesday
Mfg ISM -0.7 to 58.6 m/m increase
Weds
ADP Estimate 203k m/m lower
Thursday
Nonfarm Productivity 1.0% q/q (saar) in line or lower
Unit Labor Costs 2.9% q/q (saar) lower
Friday
Nonfarm Payrolls 195k m/m lower
Unemployment Rate 4.0% 4.0-4.1%
Avg Hourly Earnings 0.2% m/m 0.1-0.2% m/m
2.7% y/y 2.6-2.7% y/y
Sunday, April 29, 2018
Friday, April 27, 2018
Q118 Real GDP Decent, ECI Less Inflationary Than on Surface
The GDP report was decent, as expected. The inflation components were mixed. The Employment Cost Index was less inflationary than it looks on the surface.
The 2.3% (q/q, saar) print for Q118 Real GDP Growth does not look to have contained any significant surprises. It was slightly above consensus and the Atlanta Fed model's estimate (both 2.0%), and it was above estimated longer-term trend (1.8%). But, the composition was pretty much as expected. There is little new information to add to forecasts of Q218 Real GDP Growth. Nevertheless, it was a strong showing, given the tendency for GDP Growth to slow in Q1 of a year. It should keep the Fed on a gradually tightening path at next week's FOMC Meeting (little change in the Statement, but no hike then).
The GDP and PCE Deflators were mixed. The GDP Deflator was below consensus (2.0% versus 2.2% -- q/q saar) and lower than the H217 pace ( 2.2%) The Core PCE Deflator was a bit higher than consensus (2.5% versus 2.4%). On a y/y basis, the Core PCE Deflator was 1.7% -- highest since Q117 (1.8%) but still below the 2.0% Fed target.
The Q118 Employment Cost Index sped up by more than consensus expected, rising 0.8% q/q versus 0.7% expected and 0.6% in Q417. But, the speedup is not as inflationary as it looks -- the speedup was caused primarily by an increase in sales commissions. The latter reflects improved productivity of sales people and thus is not inflationary.
The impact of commissions is broken out in the y/y data. The overall ECI rose 2.7% y/y in Q118, versus 2.6% in Q417. Excluding sales-incentive occupations, it rose 2.6% (y/y), the same as in Q417 and just a tad above the 2.5% seen in Q117. For Private Workers, the ECI rose 2.8% y/y, versus 2.6% in Q417. Excluding sales-incentive occupations, it sped up slightly to 2.7% from 2.6% in Q417.
The 2.3% (q/q, saar) print for Q118 Real GDP Growth does not look to have contained any significant surprises. It was slightly above consensus and the Atlanta Fed model's estimate (both 2.0%), and it was above estimated longer-term trend (1.8%). But, the composition was pretty much as expected. There is little new information to add to forecasts of Q218 Real GDP Growth. Nevertheless, it was a strong showing, given the tendency for GDP Growth to slow in Q1 of a year. It should keep the Fed on a gradually tightening path at next week's FOMC Meeting (little change in the Statement, but no hike then).
The GDP and PCE Deflators were mixed. The GDP Deflator was below consensus (2.0% versus 2.2% -- q/q saar) and lower than the H217 pace ( 2.2%) The Core PCE Deflator was a bit higher than consensus (2.5% versus 2.4%). On a y/y basis, the Core PCE Deflator was 1.7% -- highest since Q117 (1.8%) but still below the 2.0% Fed target.
The Q118 Employment Cost Index sped up by more than consensus expected, rising 0.8% q/q versus 0.7% expected and 0.6% in Q417. But, the speedup is not as inflationary as it looks -- the speedup was caused primarily by an increase in sales commissions. The latter reflects improved productivity of sales people and thus is not inflationary.
The impact of commissions is broken out in the y/y data. The overall ECI rose 2.7% y/y in Q118, versus 2.6% in Q417. Excluding sales-incentive occupations, it rose 2.6% (y/y), the same as in Q417 and just a tad above the 2.5% seen in Q117. For Private Workers, the ECI rose 2.8% y/y, versus 2.6% in Q417. Excluding sales-incentive occupations, it sped up slightly to 2.7% from 2.6% in Q417.
Sunday, April 22, 2018
More of the Same This Week
Stocks should be helped by several factors at the start of this week, including the latest dovish comments by the North Korean president, the announcement of a possible trip to China by US Treasury Secretary Mnuchin to discuss trade issues, and favorable profit expectations for some large tech and non-tech companies.
But, an increase in stocks will likely be temporary. Rising Treasury yields should remain a problem, if only because of increased supply. And, fears of a more aggressive Fed Statement at the May 1-2 FOMC Meeting may pick up as the meeting approaches. The US economic data are mostly minor, except for the advance report of Q118 Real GDP on Friday (see below). Most estimates are for an above-trend print.
Supply is an issue for Treasuries. Treasury auctions this week and the refunding announcement in the following week could weigh on Treasury prices. The possibility that the ECB will end its QE in September is in the background.
Treasuries also are being "spooked" by inflation fears arising from the run-up in oil prices. These fears are likely overdone, however, since the increase in oil prices, like the price boosts from tariffs, is not truly inflation. The run-up is a relative price change and should not continue indefinitely. It is not something that should impact Fed policy. Higher oil prices have mixed implications for the economy. On the one hand, they act as a tax on the consumer. On the other hand, they spur production and investment in domestic oil.
The most important inflation-related data this week should be the 5-year inflation expectations figure in the April University of Michigan Consumer Sentiment Index. The markets did not seem to pay attention to the downtick in these long-term inflation expectations to 2.4% from 2.5% in the Mid-April Sentiment Survey. But, if they stay at the low level in the final release for the month, they could help calm the markets' fears. They also would be an important piece of evidence for Fed officials.
While most of this week's US economic data are minor, it will be noteworthy if they hint at a slowdown in GDP growth this Spring or argue against an inflation scare. A downshift in growth expectations could relieve pressure on Treasuries and help stocks have a more sustained rally later in the Spring or Summer. The evidence regarding an economic slowdown so far has been mixed. The Claims data and 1-Family Housing Starts/Permits (most important part of the housing construction data) softened in March/early April. But, Motor Vehicle Sales/Production rose in March.
Consensus and the Atlanta Fed model are now both at 2.0% (q/q, saar) for Q118 Real GDP. The NY Fed model is at 2.9%. Any print above the potential growth rate (estimated to be about 1.8%) should be viewed as strong, given the tendency for GDP growth to weaken in the winter quarter.
But, an increase in stocks will likely be temporary. Rising Treasury yields should remain a problem, if only because of increased supply. And, fears of a more aggressive Fed Statement at the May 1-2 FOMC Meeting may pick up as the meeting approaches. The US economic data are mostly minor, except for the advance report of Q118 Real GDP on Friday (see below). Most estimates are for an above-trend print.
Supply is an issue for Treasuries. Treasury auctions this week and the refunding announcement in the following week could weigh on Treasury prices. The possibility that the ECB will end its QE in September is in the background.
Treasuries also are being "spooked" by inflation fears arising from the run-up in oil prices. These fears are likely overdone, however, since the increase in oil prices, like the price boosts from tariffs, is not truly inflation. The run-up is a relative price change and should not continue indefinitely. It is not something that should impact Fed policy. Higher oil prices have mixed implications for the economy. On the one hand, they act as a tax on the consumer. On the other hand, they spur production and investment in domestic oil.
The most important inflation-related data this week should be the 5-year inflation expectations figure in the April University of Michigan Consumer Sentiment Index. The markets did not seem to pay attention to the downtick in these long-term inflation expectations to 2.4% from 2.5% in the Mid-April Sentiment Survey. But, if they stay at the low level in the final release for the month, they could help calm the markets' fears. They also would be an important piece of evidence for Fed officials.
While most of this week's US economic data are minor, it will be noteworthy if they hint at a slowdown in GDP growth this Spring or argue against an inflation scare. A downshift in growth expectations could relieve pressure on Treasuries and help stocks have a more sustained rally later in the Spring or Summer. The evidence regarding an economic slowdown so far has been mixed. The Claims data and 1-Family Housing Starts/Permits (most important part of the housing construction data) softened in March/early April. But, Motor Vehicle Sales/Production rose in March.
Consensus and the Atlanta Fed model are now both at 2.0% (q/q, saar) for Q118 Real GDP. The NY Fed model is at 2.9%. Any print above the potential growth rate (estimated to be about 1.8%) should be viewed as strong, given the tendency for GDP growth to weaken in the winter quarter.
Sunday, April 15, 2018
Corporate Earnings Versus Headline Risk, Then...
Stocks should be helped at the start of this week by the successful bombing of Syria without significant repercussions, a decent March Retail Sales report, and good corporate earnings releases.
Strong corporate earnings will likely be pitted against headline risk over the next few weeks, however. Also, fear of an aggressive sounding Fed could weigh on the market as the May 1-2 FOMC Meeting approaches. The risks surrounding some of these factors are balanced. On the one hand, some key earnings reports may disappoint, given how high expectations are. On the other hand, some political/international actions may turn out more restrained than seemed possible, as have other Trump initiatives.
Potentially important, the macroeconomic story may change this Spring. Evidence of softening labor market conditions could build, resulting in market talk of the Fed skipping a hike at the June FOMC meeting. Payrolls should be soft again in April, if last year's pattern holds. In particular, retail jobs should continue to fall sharply this month. The Claims data already have begun to weaken. Even though Initial Claims fell in the latest week, they remained above the March average.
Initial Claims
(monthly average, 000s)
Jan 235
Feb 220
Mar 228
Apr (1st wk) 233
The US economic data over the remainder of April are mostly minor. Monday's March Retail Sales report could be the most important (besides the Claims data ). A stronger-than-consensus print is the risk, given that the delayed tax refunds may have been spent that month and weather improved. Consensus is +0.4% m/m Total and +0.2% Ex Auto. A decent gain in March Retail Sales could result in an upward revision in the Atlanta Fed's projection of Q118 Real GDP from its current 2.0% estimate. Consensus for Q118 Real GDP is 2.5%. The NY Fed's model projects 2.8% Real GDP Growth for Q118 and 2.9% for Q218. Q118 Real GDP will be released April 27.
Strong corporate earnings will likely be pitted against headline risk over the next few weeks, however. Also, fear of an aggressive sounding Fed could weigh on the market as the May 1-2 FOMC Meeting approaches. The risks surrounding some of these factors are balanced. On the one hand, some key earnings reports may disappoint, given how high expectations are. On the other hand, some political/international actions may turn out more restrained than seemed possible, as have other Trump initiatives.
Potentially important, the macroeconomic story may change this Spring. Evidence of softening labor market conditions could build, resulting in market talk of the Fed skipping a hike at the June FOMC meeting. Payrolls should be soft again in April, if last year's pattern holds. In particular, retail jobs should continue to fall sharply this month. The Claims data already have begun to weaken. Even though Initial Claims fell in the latest week, they remained above the March average.
Initial Claims
(monthly average, 000s)
Jan 235
Feb 220
Mar 228
Apr (1st wk) 233
The US economic data over the remainder of April are mostly minor. Monday's March Retail Sales report could be the most important (besides the Claims data ). A stronger-than-consensus print is the risk, given that the delayed tax refunds may have been spent that month and weather improved. Consensus is +0.4% m/m Total and +0.2% Ex Auto. A decent gain in March Retail Sales could result in an upward revision in the Atlanta Fed's projection of Q118 Real GDP from its current 2.0% estimate. Consensus for Q118 Real GDP is 2.5%. The NY Fed's model projects 2.8% Real GDP Growth for Q118 and 2.9% for Q218. Q118 Real GDP will be released April 27.
Sunday, April 8, 2018
China and the March CPI
There are two important events this week -- a speech by Chinese President Xi Jinpin (Tuesday) and release of the March CPI (Wednesday). Friday's stock market sell-off may have been partly in anticipation of these events, and the markets could trade cautiously ahead of them. But, both events could turn out better than feared.
The fear is that the speech could dial up the tariff threats between the US and China, or at least not back off from them. However, it could leave open the door for talks, as well -- if Xi wants to "take the high road" in the dispute with Trump. The March Core CPI is likely to show a "2" handle on the y/y (1st time in the past few years) from 1.8% in February, as last year's telephone price war drops out of the calculations (well advertised by Fed officials). But, it risks coming in below consensus.
While a "2" handle on the Core CPI's y/y is an almost certainty, the consensus estimate of +0.2% m/m and 2.1% y/y may be too high. This is because the underlying pace may have slowed. Excluding the 1.5% m/m jump in apparel prices, the Core CPI rose only 0.12% in February. A slowdown in Owners' Equivalent Rent to 0.2% m/m and declines in some other components were responsible. And, they may hold down the Core CPI again in March. As for Apparel Prices, their large increases in January and February (1.7% m/m and 1.5%, respectively) were unusual. Since 1982, there were only two other times when they rose 1+% m/m in two consecutive months. In both cases, Apparel Prices were flat the following month.
Although the Treasury market has been wary of the putative inflationary effects of tariffs, it is not exactly correct that tariffs are inflationary. To be sure, domestic prices will rise when tariffs are imposed. But, these price increases are temporary, as they should end once the tariffs are fully passed through -- assuming that the entire tariff is passed through. The latter is not necessary. Not only could the world market price of the good decline, but importers' profit margins could absorb some of the tariff. Any resulting price increase would be a relative price change. It would transform into higher general inflation only if wages move up to offset the lost spending power -- thereby starting a wage/price spiral.
The fear is that the speech could dial up the tariff threats between the US and China, or at least not back off from them. However, it could leave open the door for talks, as well -- if Xi wants to "take the high road" in the dispute with Trump. The March Core CPI is likely to show a "2" handle on the y/y (1st time in the past few years) from 1.8% in February, as last year's telephone price war drops out of the calculations (well advertised by Fed officials). But, it risks coming in below consensus.
While a "2" handle on the Core CPI's y/y is an almost certainty, the consensus estimate of +0.2% m/m and 2.1% y/y may be too high. This is because the underlying pace may have slowed. Excluding the 1.5% m/m jump in apparel prices, the Core CPI rose only 0.12% in February. A slowdown in Owners' Equivalent Rent to 0.2% m/m and declines in some other components were responsible. And, they may hold down the Core CPI again in March. As for Apparel Prices, their large increases in January and February (1.7% m/m and 1.5%, respectively) were unusual. Since 1982, there were only two other times when they rose 1+% m/m in two consecutive months. In both cases, Apparel Prices were flat the following month.
Although the Treasury market has been wary of the putative inflationary effects of tariffs, it is not exactly correct that tariffs are inflationary. To be sure, domestic prices will rise when tariffs are imposed. But, these price increases are temporary, as they should end once the tariffs are fully passed through -- assuming that the entire tariff is passed through. The latter is not necessary. Not only could the world market price of the good decline, but importers' profit margins could absorb some of the tariff. Any resulting price increase would be a relative price change. It would transform into higher general inflation only if wages move up to offset the lost spending power -- thereby starting a wage/price spiral.
Friday, April 6, 2018
March Employment Report Does Not Change Macroeconomic Outlook
The March Employment Report does not change the macroeconomic outlook nor should it change the Fed's gradual approach to tightening. Real GDP Growth should continue to grow moderately with little inflationary pressures. The risk is still for Real GDP Growth to speed up in Q218, with job growth in Aprl-May continuing to pay back for the January-February strength -- just as it did last year.
The Report should be neutral to positive for stocks and Treasuries, once they look past the headlines. The markets, however, are focused on the threat of a trade war and the other policy threats coming out of Washington.
Payrolls were strong in Q118, despite the sharp slowdown to +103k m/m in March and net 50k downward revision to January-February. They averaged +201k m/m in the quarter, above the +182k m/m 2017 average. This relatively strong job growth probably means Payrolls still have more room to pay back for the January-February strength. They should remain soft in April-May, like last year (see my March 18 blog). The jump in layoff announcements in March, particularly in the retail sector (eg, Toys R Us), and last week's jump in Initial Claims support this view.
Wage pressures remain in check, despite the 0.3% m/m jump in March Average Hourly Earnings. The jump is consistent with calendar considerations. The latter point to a 0.2% m/m increase in April and 0.1% m/m increase in May. The y/y would be 2.6-2.7% in May, little changed from the 2.7% seen in March and in 2017.
Importantly, the Labor Force Participation Rate stayed high in March, edging down only 0.1% pt to 62.9%. This was the high point in 2017, attained in 5 of the 12 months. A high participation rate allows for faster GDP growth without putting upward pressure on wages.
The Report should be neutral to positive for stocks and Treasuries, once they look past the headlines. The markets, however, are focused on the threat of a trade war and the other policy threats coming out of Washington.
Payrolls were strong in Q118, despite the sharp slowdown to +103k m/m in March and net 50k downward revision to January-February. They averaged +201k m/m in the quarter, above the +182k m/m 2017 average. This relatively strong job growth probably means Payrolls still have more room to pay back for the January-February strength. They should remain soft in April-May, like last year (see my March 18 blog). The jump in layoff announcements in March, particularly in the retail sector (eg, Toys R Us), and last week's jump in Initial Claims support this view.
Wage pressures remain in check, despite the 0.3% m/m jump in March Average Hourly Earnings. The jump is consistent with calendar considerations. The latter point to a 0.2% m/m increase in April and 0.1% m/m increase in May. The y/y would be 2.6-2.7% in May, little changed from the 2.7% seen in March and in 2017.
Importantly, the Labor Force Participation Rate stayed high in March, edging down only 0.1% pt to 62.9%. This was the high point in 2017, attained in 5 of the 12 months. A high participation rate allows for faster GDP growth without putting upward pressure on wages.
Monday, April 2, 2018
Potential Policy Actions Driving Stocks, Macroeconomic Background Still Strong
Potential policy actions -- tariffs, internet regulations and taxation -- are now the drivers of the stock market. Uncertainty about how far these actions will go means that they will likely weigh on stocks for awhile. Meanwhile, the favorable macro outlook has not changed: the Fed remains on a gradual
tightening path, GDP growth is likely to speed up in Q218, and
expectations for corporate earnings are still strong. This background may keep the market drag in check until there is more clarity on the extent of these policy actions. Note that clarity will not necessarily be market positive.
The Claims data -- the broadest high-frequency measure of overall economic activity -- are moving in line with, if not better than, the path seen last year, when a Q1 marked by soft GDP growth and strong Payroll gains was followed by a Q2 with a speedup in GDP growth and a slowdown in Payrolls. Both Initial and Continuing Claims have begun to trend down as Q118 ends (table below). Initial Claims are behaving more strongly than they did in March 2017 -- they did not rise m/m as much and stayed below the Q2 average. Nevertheless, both Initial and Continuing need to stay below their Q218 averages to confirm stronger Q218 Real GDP Growth.
The relatively stronger Initial Claims raises the possibility that March Payrolls, due Friday, will not slow as much as they did in March 2017 (see my blog of March 18). However, downside risk to Payrolls is still suggested by last year's pattern, since biases from seasonal factors may have contributed to the January-February strength seen in both years. So, the consensus estimate of +190k Payrolls may be too high. The other consensus estimates of a 0.1% pt dip in the Unemployment Rate to 4.0%, and +0.3% m/m Average Hourly Earnings are not unreasonable.
The other important US economic data in this coming week is the March Mfg ISM and preliminary February Goods Trade Deficit. The risk is for the Mfg ISM to fall by more than the consensus estimate of -0.7 pt to 60.1, given how strong it was in February. But, the level should remain high. The risk is for the Trade Deficit to widen further, in contrast to the slight narrowing seen by consensus. It is possible that imports are being accelerated into the US ahead of potential tariffs. If so, the surge in imports should show up in inventory investment, with a negligible impact on GDP (except for measurement problems). The dollar should strengthen when the import acceleration settles down.
Consensus-like prints for Payrolls and the Unemployment Rate would represent above-trend economic growth. A high 0.3% print for AHE reflects calendar considerations. Both the Atlanta and NY Fed models now project above-trend growth for Q118 Real GDP -- 2.4% and 2.8%, respectively.
Initial Claims Continuing Claims
2018 2017 2018 2017
Dec 241k 258k 1.912 Mn 2.074 Mn
Jan 235 249 1.947 2.076
Feb 221 (227)** 234 (245)** 1.907 (1.906)** 2.066 (2.056) **
Mar 225 252 1.864 2.025
(215) *
Apr 241 1.978
May 240 1.917
Jun 242 1.947
* Latest week
** quarterly average
The Claims data -- the broadest high-frequency measure of overall economic activity -- are moving in line with, if not better than, the path seen last year, when a Q1 marked by soft GDP growth and strong Payroll gains was followed by a Q2 with a speedup in GDP growth and a slowdown in Payrolls. Both Initial and Continuing Claims have begun to trend down as Q118 ends (table below). Initial Claims are behaving more strongly than they did in March 2017 -- they did not rise m/m as much and stayed below the Q2 average. Nevertheless, both Initial and Continuing need to stay below their Q218 averages to confirm stronger Q218 Real GDP Growth.
The relatively stronger Initial Claims raises the possibility that March Payrolls, due Friday, will not slow as much as they did in March 2017 (see my blog of March 18). However, downside risk to Payrolls is still suggested by last year's pattern, since biases from seasonal factors may have contributed to the January-February strength seen in both years. So, the consensus estimate of +190k Payrolls may be too high. The other consensus estimates of a 0.1% pt dip in the Unemployment Rate to 4.0%, and +0.3% m/m Average Hourly Earnings are not unreasonable.
The other important US economic data in this coming week is the March Mfg ISM and preliminary February Goods Trade Deficit. The risk is for the Mfg ISM to fall by more than the consensus estimate of -0.7 pt to 60.1, given how strong it was in February. But, the level should remain high. The risk is for the Trade Deficit to widen further, in contrast to the slight narrowing seen by consensus. It is possible that imports are being accelerated into the US ahead of potential tariffs. If so, the surge in imports should show up in inventory investment, with a negligible impact on GDP (except for measurement problems). The dollar should strengthen when the import acceleration settles down.
Consensus-like prints for Payrolls and the Unemployment Rate would represent above-trend economic growth. A high 0.3% print for AHE reflects calendar considerations. Both the Atlanta and NY Fed models now project above-trend growth for Q118 Real GDP -- 2.4% and 2.8%, respectively.
Initial Claims Continuing Claims
2018 2017 2018 2017
Dec 241k 258k 1.912 Mn 2.074 Mn
Jan 235 249 1.947 2.076
Feb 221 (227)** 234 (245)** 1.907 (1.906)** 2.066 (2.056) **
Mar 225 252 1.864 2.025
(215) *
Apr 241 1.978
May 240 1.917
Jun 242 1.947
* Latest week
** quarterly average
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