Corporate Earnings and The US Economy Now The Focus

The stock market may trade cautiously but with an upside tilt this week, as the Q423 corporate earnings season begins.  Consensus looks for a slowdown in earnings, but the expectation may be too soft.  In addition, after the high December CPI, the market will be even more focused on the implication of  upcoming US economic data for Fed policy.  Without confirmation of low inflation, strong economic growth can't be dismissed.  Nevertheless, consensus expects mostly softer data this week, which could help stocks. 

Q423 Corporate Earnings

Consensus estimates about +1.0% y/y for Q423 corporate earnings, a slowdown from the 5.9% increase in Q323.  There is upside risk, as the macroeconomic backdrop is very similar to that of Q323.  Real Growth, oil prices and the dollar moved about the same on a y/y basis in both quarters and economic activity abroad improved slightly in Q423 (see table below).  However, there may have been further margin compression, as the Core CPI slowed by more than Average Hourly Earnings (AHE).  Indeed, it is the first quarter in a while when the Core CPI rose by less than AHE on a y/y basis.

                                                                                                                                         Markit
                                                                                                                                          Eurozone                        Real GDP     Oil Prices        Trade-Weighted Dollar    AHE     Core CPI    PMI  
                [                                y/y percent change                                                   ]    (level) 

Q122            3.5                  63.4                +2.7                              5.4           6.4               57.8  

Q222            1.8                  60.9                +5.3                              5.3           6.0               53.9

Q322            1.9                  31.9                +9.0                              5.1           6.3               49.3

Q422            0.9                    6.7                +8.9                              4.9           6.0               47.1    

 

Q123            1.9                -19.5                 +3.0                              4.5           5.5               47.9 

Q223            2.4                -32.0                 +0.5                              4.4           5.2               44.7

Q323            2.9                -12.0                 -2.5                               4.3           4.4               43.2

Q423            2.8 *             -12.0                 -2.5                               4.1           3.9               43.8

                                                                           

* Based on the Atlanta Fed Model's latest projection of 2.2% (q/q, saar).

This Week's US Economic Data

Most consensus estimates suggest a slowdown from Q323 when Real GDP Growth was 4.9% (q/q, saar).  Retail Sales and Industrial Production are expected to be below their Q323 pace.  Manufacturing surveys are seen up m/m, but mixed relative to their Q323 averages.  Housing Starts are seen exceeding their's slightly.  The Unemployment Claims Data have a mixed message -- layoffs have edged down but re-hiring has worsened.  The latter is suggested by the increase in Continuing Claims.  Since the Claims data are the broadest of this week's data, the weakness in Continuing may have the biggest influence on Fed officials' outlook.  This week's Claims data, however, could continue to be distorted by faulty seasonal adjustment of the New Year holiday.  They risk rebounding after the prior week's decline, but they should be viewed with caution.

                                                            Consensus Estimate *        Q323 Average

NY Empire State Mfg Index                     - 5.0  level                      -5.3 level

Retail Sales                                                 0.3% m/m                      0.7% m/0

Retail Sales Ex Auto                                   0.2% m/m                      0.6% m/m   

Retail Inventories Ex Auto                                                                0.0% m/m     

Industrial Production                                  0.0% m/m                      0.3% m/m                                          

Mfg Output                                                        na                            0.2% m/m      

NAHB Housing Mkt Index                               37                               50 level   

Housing Starts                                            1.45 Mn Units                1.37 Mn Units

Housing Permits                                         1.48 Mn Units                1.48 Mn Units           

Phil Fed Mfg Index                                      -8.0 level                       -5.0 level      

Existing Home Sales                                 3.82 Mn Units                4.02 Mn Units

Initial Unemployment Claims                     207k level                     227k level

Continuing Claims                                       na                                1.695 Mn level

 * All data are for December, except for NY Empire State Mfg, NAHB Housing Market Index and Phil Fed Mfg Index.  They are for January.  Claims data are for latest week.

The December CPI

The 0.3% m/m December CPI (both Total and Core) was above the Fed's target.  However, the Report probably did not shut the door on Fed rate cuts this  year.  The excessive inflation was not widespread.  Owners' Equivalent Rent remains the main roadblock to achieving the Fed's 2% inflation goal.  All Items Less Shelter rose 0.2% m/m, and its y/y was 1.9%.  Core Less Shelter also rose 0.2% m/m, and its y/y was 2.2%.  At the post-FOMC news conference, Fed Chair Powell could express patience to see if OER slows in coming months.  Indeed, there was some suggestion in the Report that housing rent may be beginning to slow -- Primary Rent slowed to 0.4% m/m from 0.5%.  Or, he could take a more aggressive stand, arguing that economic growth has to weaken further to pull down inflation.  The high Average Hourly Earnings prints in November and December would support such a stand.