The stock market's focus is back to the strength of the US economy, after the supposedly weak April Employment Report raised questions. This focus should carry through June if not into July, the latter in the guise of earnings. The focus could shift to Washington during the summer, as President Biden's two proposed bills move toward a Congressional vote. The year should end with the focus on when the Fed will begin tapering its bond purchases. While Biden's bills would seem to argue for a pullback in monetary policy easing, it would be ironic if the tax hikes in the bills hit the economy sooner than do the spending components. So, the question of when the Fed begins tapering is an open one.
The April Employment Report was not all that weak. Although the +266k m/m increase in Payrolls is more than fully accounted for by the 331k jump in Leisure and Hospitality jobs, the lack of job growth elsewhere on balance could be just a pause after the outsized gain in February. It is also possible that seasonals exaggerated the strength in Q121 and then the weakness in April. The consensus expectation of 1 Mn was the problem, as I discussed in last week's blog (it ran counter to the implication of the Claims data). With the Workweek up in April, Total Hours Worked rose a solid 0.5% m/m and stand 4.8% (annualized) above the Q121 average -- a strong start to Q221 (THW rose 3.2% in Q121). While the Unemployment Rate edged up to 6.1%, this resulted from the Labor Force climbing by more than Civilian Employment as the Labor Force Participation Rate rose. This is a positive for the growth outlook. Further increases in the Participation Rate would mitigate wage pressures emanating from economic growth.
The Atlanta Fed model's early Real GDP Growth estimate is +11.0% (q/q, saar) for Q221, a speedup from +6.4% in Q121 But, it seems too high relative to THW. And, there is not enough data released yet for a reliable current-quarter forecast.
This week's Unemployment Claims data will bear on the question whether the $300 supplemental benefit, enacted in March, is keeping unemployed people from returning to work. Combined with the normal benefit, the supplemental brings the total to over $600 a week -- which is more than lower-paid people get working. So, people may decide to stay unemployed rather than return to work. Evidence supporting this idea will be if Continuing Claims do not fall commensurately with Initial Claims. Both Initial and Continuing should be falling now, as increasing demand reduces layoffs and boosts the hiring of formerly laid off workers.
Another possible reason for the weak April Payroll gain is continuing fear of the virus and its variants. People may be concerned of catching the virus if they go back to work. The increase in the Labor Force Participation Rate, however, argues against this being a dominant reason. It shows that a greater share of the population either have a job or, if not, want one.
Consensus looks for strong US economic data this week. It expects +1.0% m/m increase in April Retail Sales, with Ex Auto up 0.9%. A larger increase can't be ruled out, as the stimulus payments had just begun in March. But, the question will be how quickly their boost tapers off in following months. Consensus sees +1.1% m/m increase in April Industrial Production. But, the Manufacturing portion should be about 0.0%, based on Total Hours Worked in that sector. A decline can't be ruled out, if the chip shortage is pronounced. Consensus expects a high 0.3% m/m April Core CPI, after the +0.4% in March. A further pass-throughs of higher oil prices and weaker dollar could show up again, as they presumably did in the +0.4% March Core CPI. But, there is typically enough variability among the components to make a lower print possible, as well.
The strength of the economy and the pace of inflation will be important factors in the Fed's decision whether to begin ending its bond purchase program. But, the Fed's Financial Stability Report raised another issue. It said the run-up in stocks and other assets makes them vulnerable to a sharp sell-off "should risk appetite fail," which could threaten the stability of the financial system. So, Fed officials will likely be very cautious about beginning to taper.
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