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.