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.