Strong US Economic Data Expected This Week -- But Some Caveats

The stock and Treasury markets could clash again this week in the face of strong US economic data.  But, not all considerations support the consensus estimates.  So, there is a chance the stock market rally will survive this week's data prints and the longer-end of the Treasury market will stay in its range.

The markets will have to contend with a string of strong US economic data this week, if the consensus estimates are correct.  Strong prints are expected for March Conference Board Consumer Confidence, ADP Estimate, Chicago PMI, Mfg ISM, Nonfarm Payrolls and Unemployment Rate.  In particular, consensus looks for +655k m/m Payrolls and a 0.2% pt decline in the Unemployment Rate to 6.0%.

While most evidence would seem to support the consensus estimates, there are a couple of caveats.  /1/ All business surveys that so far have reported for March posted an increase.  But, many of them missed the increase in the February Mfg ISM.  So, at least some of their March gains could have been catch-up and thus give an overly positive view for the March Mfg ISM.  Indeed, a widening impact of chip shortages could weigh on the latter.  /2/ The Claims data argue for a speedup in March Payrolls and a decline in the Unemployment Rate.  However, at least some of the job strength could be offset by an increase in the Labor Force in the calculation of the Unemployment Rate.  The Claims data do not say anything directly about Labor Force.  So, the Rate may surprise to the upside relative to the consensus estimate.

An increase in the Labor Force, particularly the Labor Force Participation Rate, would be a positive for stocks and Treasuries.  It would suggest that strong economic growth could be accommodated without putting stress on the labor market -- and thus avoiding higher wage inflation.  This possibility would support corporate profit expectations and make economic growth less of a concern for Treasuries.

The near-term US economic growth outlook is strong, nonetheless -- which could mitigate, if not prevent, month-end/quarter-end selling of stocks.  Besides the additional fiscal stimulus and expanding re-openings, there should be a bounce-back from the bad winter weather in parts of the country.  Inventory re-building could be a catalyst for new orders and production in coming months, as well.  The Claims data improved notably in the latest report.  And, the ECRI Leading Index has made new highs for the year in mid March (see chart below).

ECRI Leading Index (level, weekly)

     

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