This Week's Key US Economic Data

Key US economic data are expected to add to evidence that the worst of the slowdown is behind us.  Consensus-like prints could boost expectations for Q219 Real GDP Growth.  However, the evidence regarding these data is mixed.  For example, the effects of bad weather could muddy next week's key US economic data -- March Retail Sales, Mfg ISM and Employment Report.   It may take a couple more months to get a clearer picture of the economy's underlying strength or weakness.  Meanwhile, stocks act as if they expect stronger growth ahead, while Treasuries behave as if they expect weaker growth.

One way to rationalize the apparently divergent outlooks of the stock and Treasury markets is from an optimal control perspective.   Since the Fed said it would like to see economic growth and inflation pick up, both markets are moving in ways that serve this goal.  If the economic data become more in line with the Fed's targets, they would be negatives for stocks and Treasuries.  Both markets would not have to work as hard to achieve the Fed's goals.

Macroeconomic Evidence
Evidence continues to build showing that the worst of the economic slowdown is behind us.  Initial Claims fell back to their low range in the latest report.  The Atlanta Fed model's projection of Q119 Real GDP Growth is now up to 1.7%, well above its initial 0.5% estimate.   And, the ECRI Leading Index jumped in the week ended March 22, despite the stock market's decline that week (see chart below).  The Index is now up in each of the latest 6 weeks.  

This week's key US economic data have mixed risks.  Consensus looks for +0.4% m/m for February Ex Auto Retail Sales, a decent gain after the December/January volatility.  But, bad weather could weigh on sales.  While regional manufacturing surveys were mixed for March, the most reliable predictor of the Mfg ISM -- the Richmond Fed Mfg Index -- rose.   An increase in the Mfg ISM would be stronger than the steady 54.2 consensus estimate.  However, I wonder whether there is downside risk from Larry Kudlow's comment on Friday that the Fed should cut the funds rate "immediately" by 50 BP.   He may have had advance notice of the Mfg ISM, and a decline (maybe to under 50.0) could have been the trigger behind his comment.

Consensus has March Payrolls recovering to +170k m/m, close to the January-February average (+166k) after the weather-depressed +20k in February.  It is still below the +223k 2018 m/m average.  Nevertheless, there may be downside risk to consensus, since many parts of the country saw bad weather in the March Payroll Survey Week.  The Unemployment Rate tends to be less affected by bad winter weather than are Payrolls.  Consensus looks for a steady 3.8%.  Such a print would put the Q119 average at 3.9%.  This would be up from 3.8% in Q418 and suggest below-trend Real  GDP Growth in Q119.  Consensus also expects +0.3% m/m in Average Hourly Earnings.  This above-trend estimate is consistent with calendar considerations.  But, the risk is for a lower-than-consensus print, reflecting an unwinding of composition effects that seemed to boost AHE by 0.1% pt in February.

Q119 Corporate Earnings
Stocks will face Q119 corporate earnings reports in a few weeks.  They are expected to be down 1.9% y/y, although they have tended to exceed expectations in recent quarters.   Even if they post a gain, the latter should be modest and well below the double-digit increases seen last year.  The most interesting new information will be whether companies see the slowdown persisting.

Inflation Risks
Inflation is not a problem now.   The Core PCE Deflator's y/y fell to 1.8% in January from 1.9% in December.   But, this disinflation could reverse if economic growth picks up this Spring.   It is noteworthy that the University of Michigan's long-term 5-year inflation expectations measure rebounded to 2.5% in March from 2.3% in February. 

ECRI Leading Index (level)