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.