Markets Ignore Weakness, But For How Long

The markets ignored the soft US economic data this week, as stocks rallied and Treasury yields edged up.  Perhaps the markets were relieved that the prior month's large declines were not repeated.  Or, perhaps they thought the softness will prompt a Fed response.  Or, perhaps some non-economic factor was responsible.   For example, Peolosi's ruling out of a Trump impeachment was a big plus for the stock market, making all subsequent Democratic attacks on the President just background noise.

However, the markets will not likely ignore a US economic slowdown indefinitely if it does not look to be ending soon or the Fed appears slow to react.  Last week's data did not offer much hope for a sharp bounce-back in US economic growth.   The January/February prints failed to fully offset the prior month's drops, while some fell.   The Claims data worsened so far in March, which could be weather related but also could suggest the softening is not ending over the quarter.  The Atlanta Fed model's projection of Q119 Real GDP Growth slipped to +0.4% (q/q, saar) from +0.5% after this week's data.

This week's inflation data were soft.  Besides the below-consensus 0.1% m/m February Core CPI, the NY Fed's Inflation Expectations measure slowed to 2.8% in February from January's 3.0%.

While the Fed could announce it will start ending its long-term asset sales at this week's FOMC meeting, as I suggested in last week's blog, the stock market's rally last week may keep it from doing so.  Officials could decide to be cautious in light of the market's rally, waiting to see how much economic growth picks up in the Spring.  They could stick to their earlier plan to stop the sales later this year.  Stocks could find such a decision disappointing.

                                                                     (m/m pecent change) 
                                                               January *                         December **
      Retail Sales                                            0.2                                        -1.6                                         
      Ex Auto Sales                                        0.4                                        -2.1
      Durable Goods Orders                          0.4                                          1.3                      
      Ex Transportation
      Durable Goods Orders                         -0.1                                           0.1
      Core Durables Orders                           0.8                                          -0.9
      New Home Sales                                 -6.9                                           3.8
      Industrial Production                            0.1                                          -0.4
      Mfg Output                                          -0.4                                          -0.5

*    Industrial Production and Mfg Output are for February.
**  Industrial Production and Mfg Output are for January.

The markets will have to face up to softening macroeconomic backdrop -- both here and abroad -- when Q119 corporate earnings season begins in a few weeks.  Consensus looks for a 1.5% y/y decline.  Macroeconomic fundamentals softened for the most part in the quarter.  Real GDP Growth slowed, based on the Atlanta Fed model's 0.4% q/q and consensus 1.5% q/q estimates for Q119.  Domestic profit margins remained pressured, based on the spread between the Core CPI and Average Hourly Earnings.  Oil earnings could have fallen, as did oil prices.  Moreover, earnings from abroad should continue to be weak, because of the stronger dollar and continuing soft economic activity.    

                                                                                                                                          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            2.8               +21.5                 -6.6                              2.7           1.9               59.1
Q218            2.9               +41.0                 -1.8                              2.7           2.2               55.9
Q318            3.2               +45.4                 +5.1                             2.8           2.2               54.3
Q418            3.1                 +6.7                 +6.5                             3.3           2.2               51.7

Q119            2.6-2.9         -14.0                 +7.8                              3.2           2.1               51.9