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.
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