Corporate Earnings, Inflation and the Fed

The markets will face the start of Q119 corporate earnings releases, as well as the March FOMC Minutes and Fedspeak this week.  Among the US economic data scheduled for release, the March CPI is probably the most important.  In the background is expanding evidence that economic growth has begun to pick up.

The Q119 corporate earnings season is not likely to undermine this year's stock market rally, although individual company stocks could be pummeled by disappointing results.  Consensus expectations of a y/y decline in Q119 earnings are well known.  But, earnings have tended to come in above estimates in the recent past.  Companies' forward guidance will be important, but they are not likely to be bad, given signs the overall economy is beginning to perk up.

Consensus looks for a benign 0.2% m/m March Core CPI, keeping the y/y steady at 2.1%.  There could be some upside risk on balance, however.   Drug and medical services prices could rise after they dropped 1.0% m/m and were flat, respectively, in February.  And, some of the recent bounce in oil prices may be passed through.  But, vehicle prices may have been cut further, given the jump in motor vehicle sales that month.  And, apparel prices could be a wild card, given the difficulty of seasonally adjusting the transition to Spring clothing.

Fedspeak, with Powell and Clarida scheduled to make speeches, as well as the FOMC Minutes should reinforce the Fed's intention to stay patient and wait to see if growth and inflation speed up.  They will not likely hint that the Fed will pull forward ending long-term asset sales from "later in the year."  An H219 timing of this policy is already built into the markets.

There has been some concern in the press regarding the two people Trump either has nominated or intends to nominate to be Governors of the Federal Reserve Board -- Stephen Moore and Herman Cain.  Putting aside their personal attributes or deficiencies, their impact on Fed credibility will probably be insignificant. Monetary policy is conducted by 12-member Federal Open Market Committee -- the 7 Governors, NY Fed President and 4 of the other 11 Federal Reserve District Presidents.  The latter 4 rotate each year.  The Chair (currently Powell) builds a consensus among the other members of the FOMC in deciding policy and has considerable influence on the final decision.  While there can be dissents, two votes will not dominate the full vote.
 
And, without commenting on Moore's or Cain's qualifications, I would note that two of the recent Fed Chairs -- Greenspan and Bernanke, both of whom were considered highly qualified to lead the Fed -- made major mistakes on the job.   The current Chair, Powell, probably made a mistake, as well, tightening in December.  So, I am cautious about judging whether the candidates' qualifications suggest one way or the other that they will be successful Fed Governors.