Will the FOMC Tilt The Risks?

The stock market will continue to be impacted by developments in the Iran war this week, with the announced agreement to end the war a positive.  In addition, the market will focus on this week's FOMC Meeting -- the first when the new Chair, Kevin Warsh, will preside.  A key question is whether he convinces the Committee not to include language in the Statement suggesting the risks in the outlook have tilted toward higher inflation and thus to tightening.  Powell had said there was some discussion about doing so at the prior FOMC Meeting.  An unchanged tilt in the outlook risks in the FOMC Statement would likely be a positive for the stock market.

The latest evidence supports a case not to tilt the risks:

The subdued 0.2% m/m Core CPI in May resulted from fairly widespread soft prints.  More than half of the major components posted price changes of 0.2% or less.  So, the modest increase in Core was an accurate depiction of the overall inflation situation.  (The high May PPI, in contrast, was boosted by just a handful of components.)  To be sure, the Core CPI's y/y rose to 2.9% from 2.8% in April.  However, the uptick appears to be caused by a small boost from y/y shifts in seasonality.  The y/y of the seasonally adjusted Core was steady at 2.8%.   

Although higher energy prices continued to boost the Total CPI in May, the decline in oil prices in June points to a more subdued Total in coming months.  Food Prices may be stabilizing, as well.  They rose 0.2% m/m in May, with Food At Home rising only 0.1%.   

An impediment to achieving the Fed's 2% target for inflation is the stickiness in housing rent, particularly the heavily weighted Owner's Equivalent Rent (OER).  It's been running well above 2% (3.3% y/y in May).  This means that other components of the CPI would need to rise by 1.0% or less to achieve the 2% target, unless OER slows sharply.  The economy may need to weaken significantly for such a broad softening in inflation to happen.

The Fed knows this consequence, which is why Powell always pointed to the Core PCE Deflator Excluding Shelter as a better way to measure inflation.  In May, the Core CPI Excluding Shelter rose 0.1%.  Its y/y was 2.4%.  Warsh's favorite inflation measure -- the Trimmed PCE Deflator -- presumably includes OER, but it rose 2.3% on both a 6-month and 12-month basis in April. 

Evidence on labor costs offers a reason to base policy on the low pace of these measures. Labor Costs rose by just over 3.0% (y/y) according to all the major measures.  This pace should be consistent with about 2.0% price inflation, taking account of productivity gains.  

It is questionable whether OER -- which accounts for a quarter of the Total CPI and about a third of Core -- should be included in a policy target.  This is because nobody pays it!  It's an imputed rent, measuring what homeowners would pay if they paid rent.  Moreover, if they did pay rent, they would be paying it to themselves.  It's used in the CPI because it was meant to be an improvement over the prior method of measuring the price of "housing services" to homeowners -- basing it on the mortgage rate and home price.  This prior method had its own problems.  

Regarding the labor market, the Unemployment Claims are beginning to show some softening.  Both Initial and Continuing Claims have inched up in the past few weeks. 

The Meeting will have updates to the Fed's Central Tendency Forecasts.  There could be an upward adjustment to Real GDP Growth and inflation.

                                                Fed Central Tendency Forecasts 

                (Q4/Q4% change except for Unemployment which is the level in Q426) 

                                                      2026              Latest  Actual         

 Real GDP                                  2.2-2.5%              2.5% *         

Unemployment Rate                  4.3-4.5%              4.3%    

PCE Deflator                              2.6-3.1%              3.8%      

Core PCE Deflator                     2.5-2.8%              3.3%

*  H126 average of 1.6% Q126 Real GDP Growth and Atlanta Fed Model Estimate of 3.3% for Q226.

 

 

 

A Supportive Macroeconomic Background Continues

The stock market should continue to be subject to two non-economic factors this week: /1/ a pullback in tech stocks, possibly in anticipation of large IPOs and /2/ developments in the Iran war.  The macroeconomic background remains supportive.  This week's release of the May CPI is expected to show a more subdued Core than in April.  And, the May Employment Report points to moderate economic growth with contained wage inflation.  The latter keeps open the door for Fed policy easing at some point.

Consensus looks for the run-up in oil prices to continue to impact the May CPI.  It expects +0.5% m/m for the Total and 0.3% for Core, which would lift the y/y for both.  The risk is for a higher-than-consensus Total and lower-than-consensus Core.  However, with oil prices having declined in the past week or so, the market will likely dismiss a high Total.  The downside risk to Core comes from /1/ the possibility that Primary and Owners' Equivalent Rent fall back to 0.2% m/m rather than 0.3% after the technical catch-up boosted them to 0.5% in April and /2/ no significant speedup in other components.  The lower print should keep the y/y steady at 2.8%.

The May Employment Report implied no need for the Fed to change monetary policy, but it did not close the door for an easing at some point.  The contained Average Hourly Earnings should encourage Fed officials to expect price inflation to eventually move down toward their 2% target once the oil and tariff shocks dissipate.  And, there may have been less than meets the eye with regard to the jobs growth:    

First, although the Report showed a larger-than-expected +172k m/m increase in Nonfarm Payrolls, the increase was narrowly based.  Only 3 sectors accounted for most of the gain: Leisure and Hospitality (+70k), Health Care and Social Assistance (+47k), and State Non-Education Government (+44k) -- +161k in total.  Most other sectors were little changed.  Second, Private Payrolls slowed for the second month in a row, slowing more between April and May than between March and April (-57k versus -25k).  The large gains in March and April conceivably could be just a post-winter rebound, and the more moderate May increase could be on a path to a trend-like pace.      

                                 Private Payrolls (m/m change, 000s)

                                    Jan     Feb      Mar    Apr    May

                                    180     -148       202     177    120                   

The steady 4.3% Unemployment Rate and trend-like 0.3% m/m Average Hourly Earnings (AHE) support the Fed's view that inflationary pressures are not stemming from the labor market.  The moderate pace of wage gains continued to be fairly widespread.   Eight of thirteen sectors showed AHE up by 0.3% or less, not much different from the nine in April when AHE overall rose 0.2%.  The y/y fell to 3.4% from 3.6%, keeping it line with other measures of labor cost inflation.  

Another Report last week underscored the absence of inflation pressures from the labor market.  Compensation/Hour -- the broadest measure of labor costs -- was revised down sharply for both Q425 and Q126 (see table below).  The downward revisions brought the y/y to 3.3% in Q126.  It was 4.3% in Q425 and 4.9% in Q424.

                 Percent Change

        (q/q, saar) 

Compensation/Hr Unit Labor Costs

Revised  Prelim Revised Prelim

Q126     2.1    3.1     1.8   2.3

Q425    3.7    6.3             2.1   4.6

There was some evidence in the May Employment Report supporting the perception that job search by college graduates is difficult.  Both Labor Force Participation and Employment fell for people with a college degree in May.  The lower Participation could reflect discouragement.   The lower Employment shows weak hiring.  Nevertheless, Participation fell by more than Employment, so the Unemployment Rate for them dipped to 2.7% from 2.8% in April.

 

   

 

   

What Will Be Important In The May Employment Report?

The stock market should continue to be dominated by developments in the Iran war this week.  It should take the May Employment Report in stride, as consensus expects little deviation from recent trends.  The wage component could be important for stocks, particularly if it comes in on the soft side. 

The Unemployment Claims data support the consensus expectation of a slowdown in May Nonfarm Payrolls.  Continuing Claims rose between the April and May Payroll Survey Weeks.  Consensus looks for +96k m/m, versus +115k in April.  Private Payrolls (Total Ex Government) are seen slowing to +85k from +123k.   Continuing Claims correctly predicted speedups/slowdowns in Private Payrolls in 10 of the past 12 months, but it missed in April (see table below).  

The Claims data suggest little change in layoffs and hiring in May.  Initial Claims averaged 209k per week in May, about the same 208k seen in both April and March.  Continuing Claims have moved up slightly since the April Payroll Survey Week.  

An historically weak Payroll gain mostly reflects the slowdown in population growth, tied to the drop-off in immigration.   An increase in the 50-100k range would be consistent with little change in the Unemployment Rate if there is no change in the Labor Force Participation Rate.  Consensus looks for a steady 4.3% Unemployment Rate in May, suggesting near-trend job growth.  A speedup in GDP Growth would depend on a longer workweek, increased labor force participation, or faster productivity growth.  AI would work through the last channel.  Consensus looks for a steady 34.3 Hour Nonfarm Workweek in May.

With the bulk of the May Employment Report expected to be consistent with near-trend growth, the most important component could be Average Hourly Earnings (AHE).  A consensus 0.3% m/m or lower print would suggest that the run-up in oil and other commodity prices have not resulted in a wage-price spiral so far.  It would support the Fed's preference for a wait-and-see policy approach.

                                     Private Payrolls (m/m change, 000s)   

                        ADP Estimate        First-Print BLS        Latest-Print BLS    Continuing Claims *        

    April  25             62                          167                            133                               14                            

    May                    37                          140                              69                              -74           

    Jun                    -33                            74                             -27                              -57                              

    Jul                    104                            83                               77                               18   

   Aug                     54                            38                               -4                                 2                            

   Sep                    -32                           119                              104                             28 

   Oct                     42                             na                                  1                             -41 

   Nov                   -32                            69                                41                               14

    Dec                   41                            37                                 48                               30     

    Jan 26               22                          172                               146                               94   

   Feb                    63                           -86                              -148                              -14   

   Mar                   62                           186                               190                                 6     

   Apr                  109                          123                                  na                               40    

   May                122                            na                                   na                               -9                                                                              

 * the inverted change in Continuing Claims between Payroll Survey Weeks, 000s  

 

US/Iran Development May Impact Fed Policy Positively For Stocks

The stock market rally should get a boost from the announcement of an apparent movement toward  a 60-day cease fire in the Iran war and opening up of the Strait of Hormuz.  It raises the possibility of an unwinding of the run-up in oil prices, although the extent and speed of a price drop are uncertain.  The announcement comes on top of very strong corporate earnings (with the S&P 500 earnings up 27% y/y in Q126).  And, the macroeconomic background remains positive.  The latter continues to show solid growth, little change in the labor market, and high inflation.  However, much of the high inflation can be attributed to relative price changes resulting from tariffs and higher oil prices -- the latter which now look likely to be temporary.

The effects of a US/Iran agreement could impact Fed monetary policy.  A significant drop in oil and other commodity prices, if they in fact happen, would unwind the run-up in inflation in the past few months from their war-related surge.  As a result, Fed officials may hold back from altering the FOMC Statement to eliminate an easing bias at the next meeting on June 16-17, in contrast to the sentiment expressed at the April 28-29 meeting (see below).  The new Fed Chair Kevin Warsh, who is likely to be more open to easing than Powell, could argue to keep the Statement as is now that oil prices may be moving down (or already have by the time of the Meeting).  Maintaining an easing bias in the Statement would be a positive for the stock market.

The Minutes of the April 28-29 FOMC Meeting did not contain any surprises.  The Fed staff raised its economic forecast a bit, looking for growth to exceed its longer-run 1.8-2.0% potential pace over the next few years.  It cited "favorable financial conditions, continued gains in AI-related capital spending, and a reversal of some of the factors that were expected to weigh on activity this year, including weak foreign growth and uncertainty about the outlook."  The Unemployment Rate was expected to remain close to current levels into 2027 before dipping in 2028.  Inflation was expected to slow in the second half of 2026 as the one-off effects of tariffs and the Iran war wear off.  It is seen slowing to close to 2.0% by the end of the year.  There were downside risks to the real-side forecasts and upside risks to the inflation forecast.  A drop in energy prices should reinforce the thrust of this outlook.  

Most participants' views appear to be similar to the staff's forecast.  Regarding inflation, they noted that measures of longer-term inflation expectations remain stable.  However, "the vast majority of
participants noted an increased risk that inflation would take longer to return to the Committee’s
2 percent objective than they had previously expected."  In contrast, while "participants generally expected labor market conditions to remain stable in the near term ... most judged the risks to the employment side of the Committee's dual mandate were tilted to the downside."  

The combination of contained longer-term inflation expectations and balanced risks calls for steady monetary policy, which the Committee members agreed is the case.  However, there was concern that higher rates in the future might be necessary.  "A majority of participants highlighted, that some policy firming would likely become appropriate if inflation were to continue to run persistently above 2 percent. To address this possibility, many participants indicated that they would have preferred removing the language from the post-meeting statement that suggested an easing bias regarding the likely direction of the Committee’s future interest rate decisions."  

The latest update of the University of Michigan Consumer Sentiment Survey's measure of longer-run inflation expectations was likely a concern to these Fed officials.  The 5-Year Inflation Expectations jumped to 3.9% in May, well above the 3.2-3.4% recent range.  However, the May level is still within the 3.2-4.4% range seen since March 2025 and now, with a potential US/Iran agreement in sight, could be discounted as temporary.

 

 

 

 

A Hawkish Fed?

The stock market should continue to be impacted by the Iran war and corporate earnings this week.  It also will likely focus on the release of the April 28-29 FOMC Minutes on Wednesday for signs of a more hawkish Fed.  While the Minutes should show some movement in sentiment away from policy easing prospects, they will affirm that steady policy is currently the appropriate stance.  Although a steady policy should be neutral for stocks, the shift in sentiment could exacerbate the market consolidation that began on Friday.  (This exacerbation could be short-lived since Nvidia reports earnings after the close on Wednesday.)  Rate hikes at future FOMC meetings could be the factor that eventually derails the stock market rally.  The latest inflation-related data don't call for one as yet -- steady Fed policy is appropriate.

Fed Chair Powell gave insights into the policy debate at the April FOMC Meeting during his post-meeting news conference.  He made four points about monetary policy:  /1/ The current steady policy is in a good place -- able to move in either direction if needed, /2/ The Fed funds rate is now at the high side of neutral or slightly restrictive, /3/ There is too much uncertainty to say what the next policy move will be, and /4/ While there was a shift among FOMC members to move toward a more neutral stance in the FOMC Statement, they decided it was not appropriate to do so at this meeting.  

The Minutes may not be much different from those of the prior meeting (March 17-18 FOMC Meeting). The latter showed concern about high inflation, but more in terms of a potential future threat.   At this earlier meeting, officials said that a long Iran war could result in "more persistent increases in energy prices and these higher input costs would be more likely to pass through to core inflation."  Officials concluded that "progress toward the Committee's 2 percent objective could be slower than previously expected and judged that the risk of inflation running persistently above the Committee's objective has increased."  Many officials said this situation "could call for rate increases to help bring inflation down to the Committee's 2 percent objective and keep longer-term inflation expectations firmly anchored."  However, most participants held to the position that they should wait and monitor developments before deciding on the "appropriate stance of monetary policy."  The important word to looks for in the April Minutes is whether "Many" becomes "Most" in a sentence calling for rate increases at some point.

Regarding inflation, last week's data gave a somewhat distorted picture, but underscored that the pass-through of higher oil and other commodity prices will likely lift prices of other goods and services.  The distortion was in the April CPI, while the pass-through effect was pronounced in the April PPI.

The high prints for the April CPI (+0.6% m/m Total and +0.4% Core) reflected a technical adjustment to Primary and Owners' Equivalent.  Their calculation involves comparing the sample's rents with what they were six months earlier.  In April 2026, the 6-month comparison was with October 2025.  The latter, however, was not measured because of the government shutdown.  BLS had plugged in the level of April 2025 for October 2025.  This substitution was lower than it would have been had it been measured, so the 6-month change in April 2026 was lifted as a result.   It is a one-off adjustment, so Primary Rent and OER should revert to the 0.2-0.3% m/m trend in May.  If this trend had been used in April 2026, Total would have been 0.5-0.6% and Core would have been 0.2-0.3% (2.4-3.7% annualized).  So, the high prints overstated inflation, and a more accurate measure shows core inflation only somewhat above the Fed's 2% target.

There are still risks that inflation will pick up as higher energy and commodity prices are passed through and other special factors spark price hikes.  The April PPI shows these channels.  The April PPI prints were high (Total +1.4% m/m Total and +0.6% Core Less Trade Services).  However, there were only a few Core components with large increases.   Some clearly resulted from a pass-through of higher oil prices.  Freight transportation -- rail, air and truck -- surged.  Other special factors may have been responsible for large increases in other areas --Electronic Components, Household Furniture, and Internal Combustion Engines.  All these price increases presumably will show up in consumer prices in coming months.

The prospect for higher prices ahead should keep the Fed on hold.  However, in principle the Fed should not react by tightening policy if oil or other special factors are responsible.  The higher prices are better viewed as relative price changes than a ratcheting up of inflation.  At some point these prices and their pass-through will stop.  The Fed should be more concerned if the higher prices spur a speedup in wage increases.  This could result in a wage-price spiral -- true inflation.  So far, wages remain in check.  So, prospects for a wage-price spiral are not an actionable risk at this point and the Fed can afford to wait.

 

 

 

Not-So-Bad CPI?

The stock market should continue to be dominated by developments in the Iran war and corporate earnings this week.  It also will likely focus on inflation data -- April CPI and PPI.  They are expected to be lifted by higher energy prices and tariffs.  However, there is a risk that consensus estimates are too high.  Even if they're not, the market will probably discount high prints as temporary.  A below-consensus print should be viewed positively as keeping the door open for a Fed easing at some point.

Consensus looks for a high April CPI, with Total up 0.6% m/m and Core up 0.4%.  Airfares are likely a major catalyst behind these estimates, reflecting higher fuel costs.  However, there are reasons to think there could be some offsets.  Seasonal factors hold down Airfares substantially this month.  Also, there could be offsets in other CPI components.  Owners' Equivalent Rent could revert to the smaller increases seen in Primary Rent seen since January.  Also, Lodging Away From Home (hotels) could remain modest for a second month in a row, helped by seasonal factors.  And, the impact of tariffs on items like Apparel could ease. 

A lower-than-consensus CPI print would suggest that a moderation in inflation will accompany moderate economic growth ahead.  Friday's April Employment Report supported this outlook.  Although job growth exceeded consensus, the growth was not widespread.  Almost all of the gain was accounted for by only three sectors -- Health Care, Transportation and Warehousing, and Retail.  There also was a sizable increase in part-time jobs for economic reason, according to the Household Survey.  Nevertheless, the Nonfarm Workweek rebounded, helping to lift Total Hours Worked 0.8%(annualized) above the Q126 average.  This q/q increase is in line with the 1.0% (q/q, saar) increase in Q126, when Real GDP Growth was 2.0%.  The steady 4.3% Unemployment Rate also suggests near-trend GDP Growth.  Regarding inflation, the Employment Report shows that wage inflation remains in check.  Average Hourly Earnings rose only 0.2% m/m for the second month in a row.  

This week's releases of real-side US economic data are expected to support the idea of decent growth in Q226.  Both April Retail Sales and Industrial Production are expected to climb.   Although the data appear to be lining up to reflect near-trend growth, the Atlanta Fed model's early estimate of Q226 Real GDP Growth is a strong 3.7% (q/q, saar).  This would require a jump in productivity, given the moderate increase in Total Hours Worked, perhaps AI-related at least to some extent.  Of course, the model's estimate is subject to change as more data come in.  At this point, the risk would seem to be that the estimate will come down.

 

 

Strong April Employment Report?

The stock market should continue to be dominated by developments in the Iran war and corporate earnings this week.  The latter have been beating expectations.  The April Employment Report also will be a focus, particularly since there is disagreement among Fed officials whether the FOMC Statement should be biased toward an easing.

Economic growth is back to looking on the speedier side going into the Spring.  Besides a spate of solid data last week, some evidence points to a strong April Employment Report this week.  If the latter is the case, the market will likely agree with the three dissenters at last week's FOMC Meeting who wanted to eliminate the easing bias in the FOMC Statement.  Looking ahead, a slowdown in inflation in coming months, as the effects of tariffs and oil prices end, may be what triggers a Fed rate cut -- rather than a weakening economy.

Consensus expects a moderate Employment Report.  Nonfarm Payrolls are seen slowing to +73k m/m from +178k in March.  Strike adjusted, the comparison would be +74k versus +146k.  A steady 4.3% Unemployment Rate also is expected, as is a return to a trend 0.3% m/m increase in Average Hourly Earnings after +0.2% in March.  

Some evidence argues for stronger prints.  The Unemployment Claims data suggest a speedup in Payrolls from the March pace, as Continuing Claims fell by more between Survey Weeks in April than in March (see table below).  This relationship has remained a more accurate predictor of speedups/slowdowns in Private Payrolls than has the ADP Estimate.  The April Conference Board Consumer Confidence Survey was more upbeat about the labor market, as well.  The spread between Jobs Plentiful and Jobs Hard to Get increased m/m.  Rounding analysis shows that a 4.2% print for the Unemployment Rate can't be ruled out.  The Rate was 4.26% in March, not far off a rounded 4.2%. 

Last week's US economic data surprised on the strong side.  In particular, Durable Goods Orders Excluding Transportation posted large increases of 0.9-1.2% m/m in March and February, well above the 0.6-0.7% pace in H225.  In particular, Nondefense Capital Goods Orders Excluding Civilian Aircraft surged 3.3% m/m after +1.6% in February and 0.8% on average in H225.  High Tech orders were a major contributor to the February-March increases.  They point to further strength in business equipment investment ahead.

Most of the inflation-related data released last week were higher than desired by the Fed.  The Core PCE Deflator rose 0.3% m/m, which pushed up the y/y to 3.2% from 3.0%.  And, the Q126 Employment Cost Index sped back up to the prevalent 0.9% q/q pace of the previous year and a half, following a 0.7% increase in Q425.  At best, it points to steady underlying inflation.  However, Kevin Warsh, the nominee for Fed Chair, should be happy that the Dallas Fed Trimmed PCE Deflator rose only 0.2% m/m in March.  Its y/y edged up to 2.4% from 2.3%, staying closer to the Fed's 2% target than the official Core PCE Deflator.   

                                     Private Payrolls (m/m change, 000s)   

                        ADP Estimate        First-Print BLS        Latest-Print BLS    Continuing Claims *        

    March  25          155                          209                            120

    April                   62                          167                            133                               14                            

    May                    37                          140                              69                              -74           

    Jun                    -33                            74                             -27                              -57                              

    Jul                    104                            83                               77                               18   

   Aug                     54                            38                               -4                                 2                            

   Sep                    -32                           119                              104                             28 

   Oct                     42                             na                                  1                             -41 

   Nov                   -32                            69                                41                               14

    Dec                   41                            37                                 48                               30     

    Jan 26               22                          172                               146                               94   

   Feb                    63                           -86                              -129                              -14   

   Mar                   62                           186                                  na                                 6     

   Apr                  109                           na                                   na                               40                                                                                

 * the inverted change in Continuing Claims between Payroll Survey Weeks, 000s  

 

Warsh And US Economic Data

The stock market is likely to continue to be dominated by developments in the Iran war and corporate earnings this week.   The FOMC Meeting should be a non-event, with policy remaining unchanged.  Fed Chair Powell's news conference will probably have less to do about monetary policy and more to do with his job plans after his term as Fed Chair ends in May.  In the background, this week's slew of US economic data should support stocks, if consensus estimates print.   They would contain good news for growth and inflation, but not enough to change the overall picture.

US economic data should be market important now that the possibility of a Fed rate cut at some point was lifted by the DoJ's dropping its probe of Powell.  It clears the way for Senate approval of Kevin Warsh as the next Fed Chair, who could be more inclined to ease at some point than Powell if the data suggest so.  Besides the possibility that he may respond quickly to softer US economic data, his intention to reduce the Fed's balance sheet substantially by selling longer-dated securities could prompt a Fed rate cut.  The latter would be an offset to the higher longer-term yields stemming from these sales.

To be sure, this week's US economic data are not expected to change the macro background and thus the Fed's intent to keep policy steady.  The data are seen showing solid economic growth and higher-than-targeted inflation.  However, the most important report could be the Q126 Employment Cost Index (ECI).  This is because Warsh has testified that he puts more weight on measures of underlying inflation than headline figures.  And, Labor Costs are a major determinant of underlying inflation.  

The Q126 ECI is expected to show that labor costs are contained.  The Index is expected to rise 0.8% q/q.  While a speedup from the low 0.7% in Q426, it still would be below the 0.9-1.0% increases seen in 6 of the past 9 quarters and the y/y should fall.  A consensus or below-consensus print would likely be viewed favorably by Warsh and the markets.  It should give hope that the recent speedup in price inflation will prove temporary. 

Warsh has testified that a trimmed measure of price inflation is preferable to the standard measures since it would eliminate outliers.  This is a reasonable view, particularly since special factors could boost or lower a handful of CPI components each month.  Also, a trimmed measure could eliminate large relative price changes, either temporary or persistent, that impact the Core CPI but should be ignored by policymakers.  (To be sure, a moving average of the CPI or Core CPI tends to eliminate swings in components that quickly unwind.)  The latest trimmed inflation measures are mixed relative to the official measures (see table).  The Dallas Fed's measure shows the underlying inflation rate much closer to the Fed's 2% target than the headline figure. 

                                                     March Y/Y Percent Change                

Core CPI                                                             2.6%

Cleveland Fed Trimmed Mean CPI                    2.6% 

Core PCE Deflator                                              3.0%

Dallas Fed Trimmed-Mean PCE Deflator           2.3%  

As for other data to be released this week, consensus looks for Q126 Real GDP Growth to be 2.1% (q/q, saar), up from 0.5% in Q425.   The Atlanta Fed model's latest estimate is 1.2%.  However, the model may have missed the full boost to growth this quarter from the re-opening of the federal government after it underestimated the drag from the shutdown in Q425.   The same risk applies to the consensus estimate.  So, a higher-than-consensus print can't be ruled out.   The 2-quarter average of GDP Growth should give a better measure of the underlying pace.

Nevertheless, the bounce-back from the government shutdown could have spurred the economy's momentum.  This could be a factor behind the strength expected in March Consumer Spending and Durable Goods Orders.  Consensus expects March Consumption to jump 0.9% m/m, with about half resulting from higher prices.  The "real" increase would be a decent gain.  Consensus also expects March Durable Goods Orders to climb about 0.5% both for Total and Ex Transportation.  This pace is below the 0.8% m/m Q126 average for Ex Transportation, but is still a solid increase.

This week's inflation-related data should not be a problem for the market.  The March Core PCE Deflator is seen slowing to 0.3% m/m from 0.4% in February.  It would remain above the pace consistent with the Fed's 2% inflation target.  The market, though, would likely discount it as a potentially temporary reflection of higher oil prices and tariffs.  The trimmed  measure may be given more attention.

 

 

 

 

 

Market Focus Moving Back To Economy?

The stock market should continue to be dominated by news from the Iran war and strong corporate earnings this week.  In the background, the market focus may begin shifting back toward whether the macroeconomic data point to a Fed rate cut.  So far, the data are not conclusive.

While business-related surveys (including last week's April Phil Fed Mfg Survey) and some key US economic data, like March Payrolls and Unemployment Rate, suggest an improving economy going into the Spring, not all data are consistent with this implication.  Manufacturing Output (part of Industrial Production) ended Q126 on a soft note.  Motor Vehicle Assemblies dropped in March after two strong months, although they stayed above the Q425 pace.  High Tech Output rebounded last month but did not fully offset the February decline.  And, Manufacturing Output Excluding Motor Vehicles and High Tech slowed.  The weak prints suggest the decline in the Nonfarm Workweek and Total Hours Worked (as a result) in March should be viewed meaningfully.  Questions remain whether the decline was temporary and whether it resulted from supply constraints or weaker demand.

The Claims data also keep open the possibility that the labor market is not as strong as the March Employment Report had suggested.  To be sure, layoffs remain low, since Initial Claims are hovering around their lows for the move down.  However, Continuing Claims may have flattened out, suggesting hiring remains sluggish.  It's too soon to say what these data imply for April Nonfarm Payrolls, but last week's bounce in Continuing raises the possibility of a slowdown from the March pace.

This week's release of March Retail Sales is expected to be strong.  Consensus looks for +1.3% m/m Total and +1.0% Ex Auto.  However, much of the expected bounce could be price related, particularly in gasoline and apparel.  The drop in the University of Michigan Consumer Sentiment Index could mean weaker-than-expected retail sales, but often a soft Index coincides with a bounce in retail sales.  Perhaps, consumers try to bury their concerns by shopping more?!

Fed officials continue to indicate a preference to keep monetary policy steady in the foreseeable future.  And, while there are good reasons for them to do so,  the markets may very well change their views if it looks like economic growth is slowing significantly and markets react accordingly.

 

 

 

 

 

 

 

 

 

   

Strong Corporate Earnings To Help

The stock market should continue to be impacted by the Iranian war this week.  However, expectations of strong corporate earnings for Q126, to be reported over the next few weeks, should help support the market.  In the background, evidence is building suggesting a speedup in economic growth into the Spring.  And, Friday's March CPI offers hope that underlying inflation may stay contained in the face of the oil price shock.

Consensus expects a 13.2% y/y jump in S&P 500 corporate earnings, just below the 14% increase in Q425 but still strong.  The macroeconomic evidence supports another strong quarter (see table below).  Real GDP Growth should speed up on a y/y basis, based on the Atlanta Fed Model's latest estimate.  Base effects help, since Real GDP fell in Q125.  The jump in oil prices should help that sector.  While economic activity may have slowed outside of the US, based on the Mfg PMI for the Euro Area, the weaker dollar make earnings abroad more valuable in dollar terms.  

A slew of surveys points to a speedup in economic activity going into the Spring.  Both the Mfg and Non-Mfg ISM Indexes have ratcheted up to a new range in the past few months.  The Mfg ISM in March exceeds the Q126 average.   Although the Non-Mfg ISM slipped in March, it was the highest level since December 2024 except for the prior month.  The Logistics Index has risen in each of the past 3 months.  This has been the case for the Philadelphia Fed Mfg Index as well.

The Unemployment Claims data show little change in the pace of layoffs but a possible improvement in hiring.  Initial remain in the range seen since the end of 2024.  Continuing made a new low for the move down in the latest week.  If they stay at this level for the next couple of weeks, they would suggest a speedup in April Nonfarm Payrolls (at least strike-adjusted).  

Meanwhile, the March CPI contained some encouraging signs for the Fed's inflation fight.  Although the Total was boosted by the jump in energy prices, food prices were flat in grocery stores and slowed at restaurants.  The Core printed a modest 0.2% m/m even though the pass-through effects of tariffs and higher oil prices appeared in some components.  The Report shows that many factors impact inflation, some positive and some negative.   Unfortunately, the components boosted by tariffs and oil prices appear to be weighted more heavily in the PCE Deflator than in the CPI.  They also may get more weight in this week's March PPI Report, as consensus looks for a high 1.2% m/m Total and +0.5% Core.  Nevertheless, the Fed is right in waiting to see how all settle down.

                                                                                                                                        Euro  Area   

                  Real GDP     Oil Prices      Trade-Weighted Dollar    AHE     Core CPI    Mfg PMI  

                     [                y/y percent change                                                            ]          (level)

Q424             2.5               0.0                      +3.5                               4.1           3.4               45.4       

 

 Q125            2.1              -6.5                      +6.0                               4.1           3.1               47.6                                       

Q225            2.0             -16.0                      +3.5                               3.9           2.8               49.3     

 

Q325            2.3              -11.0                      -1.5                               3.9           3.1               50.0  

 

Q425            2.0              -14.0                      -4.0                                3.9           2.6               53.3  

 

Q126            2.5 *            40.0                       -8.0                               3.6           2.5                50.5                                                                                      

                                                                           

* Based on the Atlanta Fed Model's latest projection of 1.3% for Q126 (q/q, saar).

 

 

A High CPI After A Strong Employment Report

The stock market should continue to be dominated by developments in the Iran war this week.   In addition, it will likely contend with a high March CPI.  Much of the CPI's jump this month is tied to the war-related surge in oil prices.  So, this Report should not affect Fed policy and will likely be forgotten quickly by the market.

Consensus looks for +0.9% m/m Total and +0.3% Core CPI for March.   The risk is for an even higher print.  Pass-through of higher energy prices will likely show up in a jump in airfares, as well as in other components.  Used Car Prices also could move up sharply, as the CPI measure does not appear to have caught up to the increases seen in the Manheim Used Car Price Index so far this year.  (Used Car Prices have a negligible impact on the Fed's favorite inflation measure, the PCE Deflator.)  The y/y is expected to shoot up to 3.4% from 2.4% for Total and move up to 2.7% from 2.5% for Core CPI.

Consensus also expects a high print for the February PCE Deflator.  Consensus sees 0.4% m/m for both Total and Core.  These estimates seem too high, based on the more moderate February CPI (0.3% Total, 0.2% Core).  However, Fed Chair Powell had predicted a near-consensus print, having estimated a steady 2.8% y/y for Total and a dip to 3.0% from 3.1% for Core at the March FOMC Meeting.

The Fed is not likely to be moved by these reports, even if they come in higher than expected, as officials already have said they are waiting to see whether these war-related price hikes prove temporary.  Similarly, the Fed will not be swayed by the March Employment Report, in which some key components were on the stronger side.

Even though the Employment Report will not likely move the Fed, it should be a positive for the stock market inasmuch it mostly argues against the idea of stagflation.   Using the 22.5k m/m 2-month average of Payroll changes to adjust for strike and weather impacts,  job growth over the past two months has been more than double the anemic 10k pace of 2025.  The decline in the Unemployment Rate to 4.3% from 4.4% confirms that economic growth is solid so far in 2026, despite the m/m volatility in Payrolls.

Wage inflation, moreover, remains subdued.  The 0.2% m/m increase in Average Hourly Earnings lowered the y/y to 3.5% from 3.7%.  The 0.4% m/m prints in the prior two months now look to be part of a volatile pattern around a 0.3% trend.  The latter is the Q126 average (0.27% m/m unrounded) and is within the 0.2-0.3% range seen since Q125.

The soft part of the Report was the dip in the Nonfarm Workweek.  It pushed down Total Hours Worked enough that the March level is 0.6% (annualized) below the Q126 average -- a weak take-off point for Q226.  However, the decline in hours worked could reflect business caution or shortages related to the Iran war or bad weather.  If so, the decline could point to a bounceback this Spring as these problems dissipate.  It may join military arms replenishment as a catalyst for growth ahead.

 

 

 

 

 

Stagflation?

The stock market should remain captive to developments in the Iran war this week.  At the same time, concerns are developing that the US is entering into a period of "stagflation," with sluggish growth and high inflation -- a difficult scenario for the Fed and bad for stocks.  This week's key US economic data are not expected to end these concerns.

However, there may be positive surprises, and there are reasons to think these concerns may be overdone.  Recent data show high inflation.  And, slow population growth works toward slow growth.  It is not certain, however, that slow economic growth is below its longer-run trend nor necessarily bad for corporate earnings.  Moreover, it is too soon to say whether a combination of high inflation and near-trend growth will persist and lead to Fed tightening.  

Slow population growth appears to be behind consensus expectations for March Nonfarm Payrolls.   Consensus expects Payrolls to rebound 48k m/m, after they dropped 92k in February.  The Claims data support the idea of a March improvement (see table below).   However, February-March Payrolls should be adjusted for strikes.  Strikers impacted both months' Payroll figures, subtracting 31k from February and adding 32k to March.  Strike adjusted, Payrolls would climb 16k in March after falling 61k in February, according to the consensus estimate.  The Q126 average would be +27k m/m.  Both the March adjusted gain and the Q126 average would exceed the +10k m/m average in 2025.  So, while the expected modest increase in March is low from a longer historical perspective, it is not low relative to the more recent trend.  

Indeed, last year's slow Payrolls pace was not associated with below-trend GDP Growth.  Real GDP Growth was 2.0% (Q4/Q4) in 2025, in line with the Fed's 1.8-2.0% estimate of longer-run growth.  The latter was associated with strong corporate earnings.  So, this growth scenario is not necessarily bad for stocks.

The Atlanta Fed model's latest estimate of Q126 Real GDP is 2.0% (q/q, saar), a continuation of the 2025 growth rate.  The model's estimate may be too low, moreover, as it does not seem to build in the rebound in federal government purchases coming from the shutdown's end.  The latter subtracted at least 1% point from Q425 Real GDP Growth.  

The consensus expectation of a 0.1% point uptick in the Unemployment Rate to 4.5%, a new high for the move up, argues for below-trend economic growth.  This expectation, however, is questionable, since the Claims data do not decisively point to an increase in the Rate.  A 0.1% point m/m change is within statistical noise, so cannot be ruled out, however.

Most of the latest inflation-related data are mostly high and not favorable for the Fed.  Compensation/Hour and Unit Labor Costs were revised up for Q425.  And, Import and Export Prices posted large increases for February.  Moreover, the consensus estimate of +0.4% m/m in March Average Hourly Earnings would be the second above-trend increase in a row (trend was 0.3%).  In contrast, the longer-term 5-year inflation expectations measure from the University of Michigan Consumer Sentiment Survey slipped to 3.2%, staying within its range.  Contained longer-term inflation expectations is important to the Fed and holds out hope that the recent spate of high inflation figures will be temporary.  

Compensation/Hour -- the broadest measure of labor costs -- were revised up in both Q425 and Q325, particularly for Q325 (see table below).  It rose 6.2 or 6.3% in 3 of the 4 quarters of 2025.  The q/q pace was more moderate in 2024, ranging between 4.3% and 5.8%.  Nevertheless, the Q4/Q4 pace was 5.0% in 2025, not much different from the 4.9% in 2024 and 5.3% in 2023.  At best, labor cost inflation can be viewed as sticky.  At worst, it can be seen speeding up.  

Reflecting the downward revision in Productivity as well, Unit Labor Costs were revised up sharply.  The Q4/Q4 pace was 2.4%, about the same as the 2.6% in 2024.  Both exceeded the 1.7% in 2023.  They are slightly above the pace consistent with the Fed's 2% inflation target.  Fed Chair Powell could continue to stick with his assertion that labor costs are not a source of inflationary pressure, but these revisions could temper his view.

The other bad inflation news was the jumps in February Import and Export Prices.  Higher oil and other commodity prices played a role, but large price increases were widespread.  Nonfuel Import Prices surged 1.1% m/m, the second outsized increase in a row.  They followed a slight decline over H225.  Pass-through of higher energy costs may have been behind the widespread price hikes.  Note that tariffs are not included in this measure of Import Prices.  Nonfood Export Prices jumped 1.7%, after a large 0.7% in January.  The surge in Export Prices mirrors the high PPI in the first two months of the year.  

                                               Revisions

                                  (q/q percent change, saar)

                     Compensation/Hour            Unit Labor Costs

                    Latest     Previous                 Latest    Previous

Q425            6.3         5.7                            4.4        2.8      

Q325             6.2        3.3                           1.0       -1.8              

 

                                     Private Payrolls (m/m change, 000s)   

                        ADP Estimate        First-Print BLS        Latest-Print BLS    Continuing Claims *        

    March               155                          209                            120

    April                   62                          167                            133                               14                            

    May                    37                          140                              69                              -74           

    Jun                    -33                            74                             -27                              -57                              

    Jul                    104                            83                               77                               18   

   Aug                     54                            38                               -4                                 2                            

   Sep                    -32                           119                              104                             28 

   Oct                     42                             na                                  1                             -41 

   Nov                   -32                            69                                41                               14

    Dec                   41                            37                                 48                               30     

    Jan 26               22                          172                               146                               94   

   Feb                    63                           -86                                 na                              -14   

   Mar                   62                            na                                  na                                 3                                                                                     

 * the inverted change in Continuing Claims between Payroll Survey Weeks, 000s