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