More Favorable US Economic Data Expected This Week, But...

The stock market should continue to be helped this week by macroeconomic data if consensus estimates are correct.  In particular, estimates of the key components of the March Employment Report point to slower economic growth and inflation.   They support the Fed's projection of rate cuts later this year.  However, there are some market-negative risks to the estimates.  And, even if the estimates are correct, they may not be soft enough for the Fed to commit itself to a near-term cut.  

Consensus looks for a slowdown in Nonfarm Payrolls to about +200k m/m in March from +275k in February.  The jobs slowdown would be in the right direction, but still solid.  Consensus-like prints of the other important data in the Employment Report should allay concern about the jobs' strength.  The Unemployment Rate is seen staying at 3.9% -- the high end of its recent range -- and Average Hourly Earnings (AHE) is seen contained at 0.3% m/m (although up from the low 0.1% in February).  A 0.3% print for AHE would equal trend and be in line with the Fed's 2% price inflation target, taking account of productivity growth. 

The Claims data support an expectation of a smaller Payroll gain than January's +275k  Although Initial fell a bit in March, indicating fewer layoffs, Continuing rose, suggesting even less hiring.  While there is no reliable evidence regarding the Unemployment Rate or AHE, some unwinding of the big February moves is conceivable -- a potentially negative risk for the market.  A dip in the Unemployment Rate and a speedup in AHE to an above-consensus print are conceivable after their big moves in February.  They could trigger a negative market reaction to the Report.  But, the reaction could be short-lived, as the unfavorable prints should probably be viewed as partly noise.  And, a modest unwinding of their February moves would not significantly change the story of slower growth and inflation.  A dip to 3.8% would keep the Unemployment Rate above its prior 3-month average.  Any print below 0.5% for AHE should lower the y/y. 

Last week's report on the February PCE Deflator kept alive the idea of Fed rate cuts ahead, as. the 0.3% m/m Core PCE Deflator was encouraging in several respects.  The un-rounded increase was even lower at 0.26%.  And, the Market-Based Core PCE Deflator rose only 0.2%.  Over the first two months of the year, both Total and Core are running below last year's pace.

Rising commodity prices remain a potential problem for the inflation outlook.  Higher commodity prices can feed through to the CPI as they are passed through to the consumer.  Some of the recent increase in these prices is seasonal, however.  For example, retail gasoline prices jumped 6.4% m/m in March but only 1.8% after seasonal adjustment.   However, another factor behind their increase could be higher demand either domestically or abroad, perhaps reflecting a post-winter bounce-back in economic activity.  Economic activity appears to have improved in China in March.  Stronger growth into the Spring would likely keep the Fed from easing. 

 

Key Data Should Help Stocks This Week

The stock market should continue to climb this week, as the key February PCE Deflator is likely to better conform to the Fed's anti-inflation goal than the CPI.  Along with a modest increase in consumer spending that month, it should encourage market expectations that the Fed will follow through with its rate cut forecast at some point this year.  

Consensus looks for +0.4% m/m Total PCE Deflator and +0.3% Core, the latter being slightly lower than the 0.4% print for the Core CPI.  The risk is that Total and Core PCE Deflator come in below consensus.  The y/y should tick up for Total and tick down for Core, based on the consensus estimates and assuming no revisions to prior months.  The latter is possible, though.

Consensus expects a 0.4% m/m increase in Consumer Spending, after a 0.2% increase in January.  However,  there should be a downward revision to January Consumer Spending, based on the large downward revisions to January Retail Sales and Payroll Growth.  So, even with a February speedup, the data should suggest a slowdown in Consumer Spending in Q124 from 3.0% (q/q, saar) in Q423. 

Fed Chair Powell pointed out at his news conference that last year's path of inflation would suggest the high January-February CPI prints were "bumps" on the road to subdued inflation.  They were high in 2023 too and were followed by soft prints for the rest of the year.  In terms of the PCE Deflator, the m/m change in both Total and Core averaged 0.2% m/m from March through December after 0.5% on average in January-February.  Remarkably, these measures of inflation was close to the Fed's target in all but the first two months of 2023!  The annualized inflation rate for Total was 2.1% over the last 10 months of the year while the rate for Core was 2.5%.  For the full year, the inflation rate was 2.6% for Total and 2.9% for Core.

While a similar pattern is desirable for 2024, note that it could be difficult to bring down the y/y change from its February level for the rest of the year.   Regarding the 2023 pattern, it is encouraging that the PCE Deflator rose by less in January 2024 than in January 2023.   Consensus for February 2024 is slightly higher for Total and slightly lower for Core than last year, but the risk is that both will be below last year's prints.  .So, perhaps Total and Core Inflation will continue to be softer in the last ten months of 2024 than last year and hit the Fed's target?.

However, there are some potential problems.  First, softer inflation prints will likely require a slowdown in Owners' Equivalent Rent from the +0.5% m/m 2023 average.  This was not the case for the January-February 2024 average.  And, the speedup in Primary Rent in the February 2024 CPI was not a good sign. Second, commodity prices have to be subdued.  The recent run-up in oil prices is concerning in this regard.  It could filter through to airfares and other components of the Core CPI and PCE Deflator.

This Week's FOMC Meeting

The stock market will likely take this week's FOMC Meeting in stride, as the Fed's economic and policy outlook should not change fundamentally. 

The FOMC Central Tendency Forecasts still should expect slower growth and inflation in 2024 and two-three rate cuts.  Although recent data have been somewhat problematic with regard to this outlook, some of the difficulty may be temporary and, more importantly, it is too soon in the year for the Fed to react significantly to them.  In addition, lifting the inflation forecast could have adverse effects on its anti-inflation fight, as discussed below.  In any case, it is not clear whether the Fed's economic outlook for 2024 will work out or not.  This uncertainty should dampen any market reaction to the Fed's forecast. 

Evidence on the real-side of the economy so far is not out of line with the Fed's Central Tendency Forecast for 2024 made in December.  The Atlanta Fed model's forecast of 2.3% for the Q124 Real GDP is close to the 1.7% high end of the Central Tendency Forecast, while the 3.9% February Unemployment Rate is at the low end of the Forecast.  At this point, the Fed's 2024 forecasts of Real GDP Growth and the Unemployment Rate look attainable.  However, the markets still can't be certain this will be the case.  Indeed, there are signs of faster economic growth from Unemployment Claims, the Phil Fed Leading Index of Capital Spending, and commodity prices.  A weather-related bounce-back into the Spring, particularly in Retail Sales, is possible.  And, fiscal stimulus remains in effect.

Evidence on inflation has not been as soft as desired.  But, some of the high prints for the CPI and PPI could have resulted from one-off start-of-year price hikes.  And, the y/y increase in the Fed's favored Core PCE Deflator Less Shelter remained close to the Fed's 2% target, at 2.2%.  It will be important to see if wage inflation is contained ahead.  Higher unemployment helps, but statutory increases in the Minimum Wage work against it.  A slowdown in housing rent also is critical.  Although Owners' Equivalent Rent fell back to 0.4% m/m in February from January's 0.6%, it is somewhat disconcerting that Primary Rent sped up.  So, it's not clear that the Fed's inflation outlook will work out.  On a positive note, longer-term inflation expectations so far in check, according to the University of Michigan Consumer Sentiment Survey

Aside from the data, there could be a couple of problems for the Fed if it raises its inflation forecast.  They could make its anti-inflation fight more difficult to win.  /1/ Its rationale for cutting rates this year -- that keeping rates steady in the face of falling inflation would raise real interest rates -- could be undermined.  Steady rates with higher inflation would lower real rates -- and boost economic activity.  /2/ It could lift inflation expectations, thereby exacerbating the risk of a wage-price spiral.  These are reasons for the Fed not to raise its inflation forecast at this time.

Fed Chair Powell has indicated patience in achieving the Fed's goal and that a sense inflation is moving in the right direction may be enough to allow for a rate cut.  He may emphasize the need to see weaker economic growth to be comfortable with cutting rates.  Declining commodity prices and bond yields would provide supportive evidence.  They are not happening yet, but important to watch for.

 

Inflation Next

The stock market should take Tuesday's release of the February CPI in stride if consensus estimates print, but the latter can't be taken for granted.  A consensus-like print would likely translate into a smaller increase in the PCE Deflator.  In the background, Powell's testimony last week and the February Employment Report keep open the door for Fed rate cuts by mid year -- a positive for stocks. 

The consensus estimates of the February CPI (+0.4% m/m Total, +0.3% Core) look reasonable, but they may require Owners' Equivalent Rent (OER) falling back to +0.4% from the extraordinary +0.6% in January and most other components flattening.  There is upside risk to Core if less favorable prints are the case.  Indeed, last year, the Core CPI sped up in February after a high January increase.  A component that contributed to the high February Core then was Airfares.  This year, a reduction in the fuel surcharge tax could hold it down.  The y/y for Core CPI should fall somewhat from 3.9% in January. 

The February Employment Report is Fed-friendly and could encourage officials to think of a possible rate cut by mid year.  Nonetheless, the latter will probably require additional evidence that economic growth is slowing and inflation trending down.  The increase in Continuing Unemployment Insurance Claims over the past two weeks supports this possibility.

On its surface, the +275k m/m increase in February Nonfarm Payrolls is stronger than desired by the Fed.  It is well above the 100k area that would clearly show a softening labor market and exceeds the +212k m/m Q423 average.  But, more than half of the February Payroll strength resulted from large gains in non-economic sectors, such as health care and government.  Some of the strength also might reflect one-off rebounds from adverse weather effects in January.  A weather rebound also could explain the bounce-back in the Nonfarm Workweek to 34.3 Hours from an upward-revised 34.2 Hours in January (was 34.1 Hours).  The Workweek in both months remain below the earlier 34.4 trend and still suggest softer demand for labor.  The large downward revision to +229k from +353k in January Payrolls confirms that measurement error was largely responsible for the surprising initial print.

The Household Survey data tend to be less affected by weather than Establishment Survey data.  So, the decline in Civilian Employment -- the 3rd m/m decline in a row -- offers reasonably significant evidence of a weakening labor market.  The latter is reflected in the jump in the Unemployment Rate to 3.9% -- a good move from the Fed's perspective.

A softer labor market may be one reason for the low +0.1% m/m increase in Average Hourly Earnings (AHE) in February, after a downward-revised +0.5% in January (was +0.6%).  The low February print alternatively may be just an offset to the January jump, with the 2-month average equaling trend.  This would not be a bad result.  The 0.3% m/m 3-month average of AHE is consistent with the Fed's 2% price inflation target, taking account of productivity growth.

 

 

 

 

Powell and Employment Report Should Help Stocks This Week

The stock market is likely to be buoyed by Fed Chair Powell's Semi-Annual Monetary Policy Testimony (Wednesday -- House, Thursday- Senate) and key US economic data.  Powell should reiterate the message from the last FOMC Meeting -- that economic growth is strong; inflation is expected to continue to slow;  rate cuts are still on the table, but the timing is uncertain.  The February Employment Report is expected to pull back from the surprising surges in Payrolls and Average Hourly Earnings seen in the January Report.

The Fed's Semi-Annual Monetary Policy Testimony is meant to reflect the collective view of Fed officials.  This view is found in the latest FOMC Statement, issued at the January FOMC Meeting.  Its depiction of the economy highlighted economic activity "expanding at a solid pace," a moderate but still strong pace of job creation, a low unemployment rate, and slower but still high inflation.  This macroeconomic background is a positive for the stock market.  It points to further corporate earnings gains and steady to easier Fed policy.

Powell should maintain the Fed's forecast of rate cuts in 2024, but say that a near-term cut is not likely,  as he did at the post-FOMC meeting news conference.  As said in the Statement, the FOMC will need to have "greater confidence that inflation is moving sustainably toward 2 percent" before rate cuts will be appropriate.  Recent speeches by Fed officials have reiterated this point.   Nevertheless, stocks (and Congress) should like that the Fed still retains the possibility of rate cuts ahead.  This possibility reduces the downside risk to the economic outlook. 

Consensus estimates of the key elements of the February Employment Report support the Fed's outlook.  Nonfarm Payrolls are expected to slow to a still-strong +200k m/m from the surprising +353k in January.  A steady 3.7% Unemployment Rate is seen.  Average Hourly Earnings (AHE) are expected to slow to 0.3% m/m from 0.6% in January.  And, the Nonfarm Workweek is seen moving up to a still-low 34.3 Hours from the outlandishly low 34.1 Hours in January.  Most interesting will be if the unusual prints of the January Report are revised away -- lowering the January Payroll and AHE prints and raising the Workweek print.  

Evidence supports the expectation of a slowdown in February Payrolls.  The Unemployment Claims data moved up in the month.  The Employment Component of the Mfg ISM fell.  And, the lower Workweek in January argues for softer job growth in February.  Moreover, the extremity of the January prints begs the question whether there was a measurement problem that will be cleared up in the revision or reversed in February.

Meanwhile, the Atlanta and NY Fed models now project 2.1-2.2% (q/q, saar) for Q124 Real GDP Growth, revised down sharply from 3.0-3.2% as a result of last week's data releases.  The latest estimated pace is slightly above the Fed's 1.7-2.0% long-run trend estimate and its December Central Tendency Projection of 1.2-1.7% for 2024.  The model estimates' downward revisions nevertheless should be welcome news for the Fed, as they show an economy moving toward its goal.  The model estimates still suggest strong productivity growth in the quarter, based on the decline in Total Hours Worked in January.