The fundamentals look stock-market friendly for the rest of August -- which could limit if not offset the market's seasonal weakness this month. US economic data should ratify moderately strong growth. A 0.2% m/m consensus print for the July Core CPI, due Friday, looks reasonable, while a lower print cannot be ruled out. Even if the Core CPI prints above consensus, it could be attributable to temporary boosts from tariffs or higher oil prices. None of the data should persuade the Fed to depart from its gradual approach to tightening. And, the trade disputes with Mexico, Canada and the EU may become tailwinds, as their resolutions look more and more likely. The next steps in the trade dispute with China are known and won't be put into effect until September at the earliest.
The 0.2% consensus estimate for the July Core CPI looks reasonable. But a lower print cannot be ruled out, as the impact of tariffs may have peaked. Motor vehicle prices already rose sharply in May and June. And, household appliance prices slowed sharply in June after a couple of months of large increases.
Treasuries could be helped over the month by a ratcheting down in the
Atlanta Fed model's projection of Q318 Real GDP Growth. After last Friday's July Employment Report, the model's
forecast was cut to 4.4% (q/q, saar) from 5.0%,. But, it still looks too high relative to Payrolls
and Total Hours Worked that month. So, the risk is that the forecast
will be trimmed further to under 4.0% as more data come in.
Some Street economists have been warning that the huge Federal Deficit will steepen the Treasury curve in H18. I'm not so sure. The last piece of research I had done at the New York Fed (in 1985), together with another economist, expanded the Fed model's term structure equation to include the Federal Deficit. We found that it was the expected Deficit over the following 4 quarters, as projected by the CBO, that mattered. If this is correct, the impact of the higher Deficit into 2019 already should be embodied in longer-term yields. The fact that yields have not risen much probably reflects offsets from other factors, such as the stronger dollar.
The risk to Treasuries may very well be a weaker dollar in H218. The resolution of the trade disputes could be the catalyst behind a decline in the dollar. This would be the case if its recent strength reflected expectations of a smaller trade deficit resulting from US tariffs.
Follow me on Twitter at @cjslyce. I may comment on just-released US economic data or other market developments.
Monday, August 6, 2018
Friday, August 3, 2018
July Employment Report Shows Above-Trend Growth With Little Inflation
The July Employment Report shows above-trend growth continuing with little
inflation pressures in Q318. But, it suggests GDP Growth may come in below 4.0% (q/q, saar).
Payrolls slowed to +157k and the workweek dipped from its June high. Total Hours Worked in July are 0.9% (annualized) above the Q218 average. While a good start to the quarter, it will be difficult to match the 3.0% (q/q, saar) increase in Q218. Productivity growth would need to jump to get GDP Growth above 4.0% in Q318.
The most interesting components of Payrolls were gains in manufacturing, construction and retail. These are cyclical components and are strong.
Despite the slowdown in overall job growth, Q318 GDP Growth should be well above trend. This is most clearly seen in the decline in the Unemployment Rate to 3.87%, below the 3.91% Q218 average. Some of the decline could be a lagged effect of the very strong economic growth in Q218, but it likely reflects above-trend growth in Q318, as well.
Average Hourly Earnings rounded up to 0.3% m/m (0.259%), with the y/y steady at 2.7%. The increase is slightly above the pace suggested by calendar considerations. But, the m/m and y/y increases are in line with recent history.
Payrolls slowed to +157k and the workweek dipped from its June high. Total Hours Worked in July are 0.9% (annualized) above the Q218 average. While a good start to the quarter, it will be difficult to match the 3.0% (q/q, saar) increase in Q218. Productivity growth would need to jump to get GDP Growth above 4.0% in Q318.
The most interesting components of Payrolls were gains in manufacturing, construction and retail. These are cyclical components and are strong.
Despite the slowdown in overall job growth, Q318 GDP Growth should be well above trend. This is most clearly seen in the decline in the Unemployment Rate to 3.87%, below the 3.91% Q218 average. Some of the decline could be a lagged effect of the very strong economic growth in Q218, but it likely reflects above-trend growth in Q318, as well.
Average Hourly Earnings rounded up to 0.3% m/m (0.259%), with the y/y steady at 2.7%. The increase is slightly above the pace suggested by calendar considerations. But, the m/m and y/y increases are in line with recent history.
Monday, July 30, 2018
This Week's Key US Economic Data
This week's US economic data are likely to pull back a bit, with the risk that the pullbacks are somewhat larger than consensus expects. They might be trumpeted as supporting expectations of a slowdown in Q318 -- although this is not a foregone conclusion.
The Richmond Fed Mfg Index points to a decline in the July Mfg ISM. Richmond correctly predicted the direction of Mfg ISM in each month so far this year. The consensus estimate of a dip to a still-high 59.5 from 60.2 in June is in line with this forecast.
The evidence is somewhat mixed for Payrolls, but likely nets out to a somewhat slower pace than June's +213k m/m. Manufacturing jobs could jump, given the decline in Initial Claims in early July. Summer plant closings may have been fewer than normal, as auto and other companies built inventory ahead of the imposition of tariffs. (Buying autos ahead of price hikes could result in July Motor Vehicle Sales coming in above the 17.1 Mn consensus.) But, the ratcheting up in Continuing Claims from late-June through mid-July suggests a general slowdown in hiring, perhaps in fear of trade wars. Furthermore, the clampdown on immigration could limit the availability of workers for seasonal jobs. The consensus estimate of +190k for July Payrolls is in line with these considerations. Payrolls averaged 211k m/m in Q218 and 218k in Q118.
Other parts of the Employment Report also risk being softer than consensus. A steady 4.0% Unemployment Rate cannot be ruled out, given the higher level of Continuing Claims. Consensus looks for a dip to 3.9%. Calendar considerations suggest 0.1-0.2% m/m in Average Hourly Earnings (2.5-2.6% y/y), versus the consensus estimate of +0.3% (steady 2.7% y/y).
The evidence from the 4.1% (q/q, saar) Q218 Real GDP report does not rule another "4" handle in Q318. While the approximately 0.5% pt contribution to Q218 GDP Growth from farm exports could unwind, Nonfarm Inventory Investment will likely snap back after falling in Q218. (The decline may have been an offset to a Q118 buildup in anticipation of tariffs.) Furthermore, hot weather should boost consumer spending on air conditioning in July. (But, the GDP benchmark revisions and new seasonal factors look to have smoothed out consumption of electricity and natural gas, which is one reason why consumer spending was so strong in Q218.) And, the uptrend in Core Durable Goods Orders (Nondefense Capital Goods Orders Excluding Civilian Aircraft) points to another quarter of strong capital spending.
The latest evidence on inflation has softened. The y/y for the Core PCE Deflator was 1.9% for Q218. This suggests either a downward revision to May's 2.0% or a 1.9% print for June in this coming Tuesday's report. Friday's report on the University of Michigan Consumer Sentiment showed that longer-run 5-year inflation expectations -- important to the Fed -- fell back to a low 2.4% in July from 2.6% in June.
The Richmond Fed Mfg Index points to a decline in the July Mfg ISM. Richmond correctly predicted the direction of Mfg ISM in each month so far this year. The consensus estimate of a dip to a still-high 59.5 from 60.2 in June is in line with this forecast.
The evidence is somewhat mixed for Payrolls, but likely nets out to a somewhat slower pace than June's +213k m/m. Manufacturing jobs could jump, given the decline in Initial Claims in early July. Summer plant closings may have been fewer than normal, as auto and other companies built inventory ahead of the imposition of tariffs. (Buying autos ahead of price hikes could result in July Motor Vehicle Sales coming in above the 17.1 Mn consensus.) But, the ratcheting up in Continuing Claims from late-June through mid-July suggests a general slowdown in hiring, perhaps in fear of trade wars. Furthermore, the clampdown on immigration could limit the availability of workers for seasonal jobs. The consensus estimate of +190k for July Payrolls is in line with these considerations. Payrolls averaged 211k m/m in Q218 and 218k in Q118.
Other parts of the Employment Report also risk being softer than consensus. A steady 4.0% Unemployment Rate cannot be ruled out, given the higher level of Continuing Claims. Consensus looks for a dip to 3.9%. Calendar considerations suggest 0.1-0.2% m/m in Average Hourly Earnings (2.5-2.6% y/y), versus the consensus estimate of +0.3% (steady 2.7% y/y).
The evidence from the 4.1% (q/q, saar) Q218 Real GDP report does not rule another "4" handle in Q318. While the approximately 0.5% pt contribution to Q218 GDP Growth from farm exports could unwind, Nonfarm Inventory Investment will likely snap back after falling in Q218. (The decline may have been an offset to a Q118 buildup in anticipation of tariffs.) Furthermore, hot weather should boost consumer spending on air conditioning in July. (But, the GDP benchmark revisions and new seasonal factors look to have smoothed out consumption of electricity and natural gas, which is one reason why consumer spending was so strong in Q218.) And, the uptrend in Core Durable Goods Orders (Nondefense Capital Goods Orders Excluding Civilian Aircraft) points to another quarter of strong capital spending.
The latest evidence on inflation has softened. The y/y for the Core PCE Deflator was 1.9% for Q218. This suggests either a downward revision to May's 2.0% or a 1.9% print for June in this coming Tuesday's report. Friday's report on the University of Michigan Consumer Sentiment showed that longer-run 5-year inflation expectations -- important to the Fed -- fell back to a low 2.4% in July from 2.6% in June.
Sunday, July 22, 2018
A "4" Handle on Q218 Real GDP Growth?
While fears of trade/currency wars hover in the background, strong
fundamentals should continue to underpin stocks this week. Corporate
earnings have been exceeding estimates, with the S&P 500 companies
reporting to date up about 27% y/y (versus the aggregate estimate of
20%). And, consensus looks for 4.1% (q/q, saar) for Q218 Real GDP
Growth (due Friday) -- the most important US economic data in the week.
Even if Real GDP comes in below 4.0%, which I do not rule out, growth
would be well above trend. Trade/currency wars could dominate the stock
market in the seasonally weak August.
My concern about a "4" handle on Q218 Real GDP is that the Atlanta Fed model's 4.5% projection is based in part on an estimate of Consumer Spending that risks being too high. The model estimates 3.2% for Q218 Real Consumer Spending, well above the 2.3% q/q annualized growth seen in May. To get to the Atlanta Fed's estimate requires either a surge in June spending (not suggested by the retail sales or motor vehicle sales data) or a large upward revision to April-May. Even a large rebound in spending on natural gas and electricity, after they dropped in May, would not likely be enough to attain the model estimate. The risk is that slower-than-estimated consumption would subtract at least 0.5% pt from the model's GDP projection.
A sub-4.0% Q218 Real GDP print would likely elicit a negative response by stocks and a positive one by Treasuries, particularly if they moved in anticipation of 4.0% ahead of Friday's release. But, this knee-jerk reaction should be short-lived. Growth and corporate profits still would be strong. And, the Fed should stick with its gradual approach to tightening.
A print above 4.0% also has to be dissected carefully. The well-publicized jump in soybean exports could be a one-off boost to exports, for example. If it is responsible for the 4+% print, the markets could give back some of their moves on the GDP headline -- as these exports should subtract from GDP in Q318. In contrast, if spending on natural gas and electricity did not rebound sharply in June, it will in July. The June data won't be released until Tuesday, July 31.
But, regardless of how Q218 Real GDP prints, economic growth looks like it will stay strong in Q318. Initial Claims ratcheted down in early July, a good sign. But, seasonal adjustment of Claims in early July is difficult, so not much should be made of their strength at this point -- particularly since it is not yet confirmed by Continuing Claims. It is too early to have a reliable estimate of Q318 Real GDP.
My concern about a "4" handle on Q218 Real GDP is that the Atlanta Fed model's 4.5% projection is based in part on an estimate of Consumer Spending that risks being too high. The model estimates 3.2% for Q218 Real Consumer Spending, well above the 2.3% q/q annualized growth seen in May. To get to the Atlanta Fed's estimate requires either a surge in June spending (not suggested by the retail sales or motor vehicle sales data) or a large upward revision to April-May. Even a large rebound in spending on natural gas and electricity, after they dropped in May, would not likely be enough to attain the model estimate. The risk is that slower-than-estimated consumption would subtract at least 0.5% pt from the model's GDP projection.
A sub-4.0% Q218 Real GDP print would likely elicit a negative response by stocks and a positive one by Treasuries, particularly if they moved in anticipation of 4.0% ahead of Friday's release. But, this knee-jerk reaction should be short-lived. Growth and corporate profits still would be strong. And, the Fed should stick with its gradual approach to tightening.
A print above 4.0% also has to be dissected carefully. The well-publicized jump in soybean exports could be a one-off boost to exports, for example. If it is responsible for the 4+% print, the markets could give back some of their moves on the GDP headline -- as these exports should subtract from GDP in Q318. In contrast, if spending on natural gas and electricity did not rebound sharply in June, it will in July. The June data won't be released until Tuesday, July 31.
But, regardless of how Q218 Real GDP prints, economic growth looks like it will stay strong in Q318. Initial Claims ratcheted down in early July, a good sign. But, seasonal adjustment of Claims in early July is difficult, so not much should be made of their strength at this point -- particularly since it is not yet confirmed by Continuing Claims. It is too early to have a reliable estimate of Q318 Real GDP.
Sunday, July 15, 2018
Stocks Still A Go, Impacts of Tariffs Playing Out
Stocks should continue to rally this week, as the Fed reaffirms its gradual tightening policy and view of a strong economy in Powell's Semi-Annual Monetary Policy Testimony (Tuesday and Wednesday). Corporate earnings continue to beat expectations, and headline risks translate into volatility.
It's anybody's guess how the trade war salvos will evolve. An auto tariff deal with Europe and conciliation with Mexico and Canada seem doable near term. Issues regarding Chinese business practices would seem to require time to resolve, and, from a market perspective, fade into the background.
Meanwhile, the macroeconomic impacts of tariffs are playing out. The dollar has strengthened, helping to keep import prices and overall US inflation subdued. The stronger dollar and low inflation help keep the Fed on a gradual tightening path.
The tariff's impact on inflation is not clear. The dollar's restraining impact on inflation is more general than the narrow boost from tariffs. So, the extensiveness of the stronger dollar's impact may balance the large boost to a few items from the tariffs. Moreover, the impact of a stronger dollar is not easy to disentangle, in contrast to that of a tariff. The latter can be isolated in the data and dismissed as a relative price change.
The net effect of tariffs on real economic activity also is indeterminate, and GDP forecasts are likely to be little affected by them. On the positive side, the tariffs should help the protected domestic industries. Also, a gradual Fed supports overall economic growth. On the negative side, some industries will be hurt to the extent tariffs boost the prices of inputs. And, the stronger dollar is a negative for US exports and industries that face competition from imports. Most analysis of tariffs in the press leave out the effects of the tariffs on the dollar and Fed policy -- it is "partial equilibrium" rather than "general equilibrium" analysis.
It's anybody's guess how the trade war salvos will evolve. An auto tariff deal with Europe and conciliation with Mexico and Canada seem doable near term. Issues regarding Chinese business practices would seem to require time to resolve, and, from a market perspective, fade into the background.
Meanwhile, the macroeconomic impacts of tariffs are playing out. The dollar has strengthened, helping to keep import prices and overall US inflation subdued. The stronger dollar and low inflation help keep the Fed on a gradual tightening path.
The tariff's impact on inflation is not clear. The dollar's restraining impact on inflation is more general than the narrow boost from tariffs. So, the extensiveness of the stronger dollar's impact may balance the large boost to a few items from the tariffs. Moreover, the impact of a stronger dollar is not easy to disentangle, in contrast to that of a tariff. The latter can be isolated in the data and dismissed as a relative price change.
The net effect of tariffs on real economic activity also is indeterminate, and GDP forecasts are likely to be little affected by them. On the positive side, the tariffs should help the protected domestic industries. Also, a gradual Fed supports overall economic growth. On the negative side, some industries will be hurt to the extent tariffs boost the prices of inputs. And, the stronger dollar is a negative for US exports and industries that face competition from imports. Most analysis of tariffs in the press leave out the effects of the tariffs on the dollar and Fed policy -- it is "partial equilibrium" rather than "general equilibrium" analysis.
Sunday, July 8, 2018
Window for Stocks to Rally?
Stocks should have a window to rally over the next few weeks. Headline risk will probably fade into the background, corporate earnings should be strong, and inflation fears may recede.
Headlines will probably become less market negative. On the tariff front, an auto deal between the US and Europe is likely to be viewed as having a better than 50-50 chance of succeeding. The US/China dispute will probably devolve into a war of words for awhile. On North Korea, neither side is likely to jettison the "understanding" from the Trump/Kim summit after just one meeting -- whether or not it was successful. Away from these issues, Trump will likely be focusing on his Supreme Court nominee and upcoming summit with Putin.
Corporate earnings for Q218 will be coming out in earnest. Consensus looks for a strong 20.7% (y/y), and the macro evidence does not argue otherwise (see my June 17 blog). Thompson Reuters says, "Of the 20 companies in the S&P 500 that have reported earnings to date for Q2 2018, 90.0% have reported earnings above analyst expectations. This is above the long-term average of 64% and above the average over the past four quarters of 75%."
US inflation data will take center stage this week. Consensus looks for a 0.2% m/m increase in June Core CPI (due Thursday), a reasonable expectation and equal to the average pace seen so far this year. While pass-through of tariffs or higher oil prices is a risk, there are potential offsets. The stronger dollar means prices of imports not subject to a tariff could fall. Also, news stories indicate a slowdown in housing rents. The latter comes into the CPI gradually, however. Consensus looks for the y/y to edge up to 2.3% from 2.2%. If the Core CPI rounds up to 0.2% m/m from 0.18% or lower, the y/y could stay at 2.2%, however.
Headlines will probably become less market negative. On the tariff front, an auto deal between the US and Europe is likely to be viewed as having a better than 50-50 chance of succeeding. The US/China dispute will probably devolve into a war of words for awhile. On North Korea, neither side is likely to jettison the "understanding" from the Trump/Kim summit after just one meeting -- whether or not it was successful. Away from these issues, Trump will likely be focusing on his Supreme Court nominee and upcoming summit with Putin.
Corporate earnings for Q218 will be coming out in earnest. Consensus looks for a strong 20.7% (y/y), and the macro evidence does not argue otherwise (see my June 17 blog). Thompson Reuters says, "Of the 20 companies in the S&P 500 that have reported earnings to date for Q2 2018, 90.0% have reported earnings above analyst expectations. This is above the long-term average of 64% and above the average over the past four quarters of 75%."
US inflation data will take center stage this week. Consensus looks for a 0.2% m/m increase in June Core CPI (due Thursday), a reasonable expectation and equal to the average pace seen so far this year. While pass-through of tariffs or higher oil prices is a risk, there are potential offsets. The stronger dollar means prices of imports not subject to a tariff could fall. Also, news stories indicate a slowdown in housing rents. The latter comes into the CPI gradually, however. Consensus looks for the y/y to edge up to 2.3% from 2.2%. If the Core CPI rounds up to 0.2% m/m from 0.18% or lower, the y/y could stay at 2.2%, however.
Sunday, July 1, 2018
Trade War/Slowdown Fears to Continue, Inflation Fears Too?
The stock market is likely to remain on edge this week in the face of trade war fears and important US economic data. To be sure, stocks tend to do well ahead of the July 4th holiday, and there may be some bounceback from month-/quarter-end window dressing last week.
Trade war fears will likely rise ahead of the July 6th effective date for US tariffs on $34 Bn of Chinese imports and Chinese tariffs on US-made cars and agricultural products. The Canadian retaliatory tariffs, imposed on Friday, show a stern response to the US, reducing the odds of a step back by China, Europe or the US. However, Canada did not signal a further escalation, leaving the next move to the US. The worst case scenario is if a stock market drop is needed to persuade the Trump administration to ease up in its trade offensive.
Fears of a US economic/profits slowdown should remain a concern, given the strength of the dollar and oil prices. The Atlanta Fed model lowered its projection of Q218 Real GDP Growth sharply to 3.8% last week (was 4.5%), largely a result of weak consumer spending in May. Much of the latter's weakness stemmed from a weather-related drop in spending on electricity and natural gas, as cooler-than-normal temperatures depressed the use of air conditioning. This drop is temporary and will rebound either in June or during Q318, as the weather returns to normal. The Atlanta Fed's latest projection assumes the snapback occurs in June, which may be too optimistic. The NY Fed model's Q218 Real GDP projection continues to edge down, now at 2.8%. It forecasts 2.5% for Q318.
This week's US economic data should continue to signal solid growth. Even if consensus is right that the June Mfg ISM edges down to 58.0 from 58.7, the level would be historically high. And, the risk is for a counter-consensus increase, matching once again the direction of the Richmond Fed Mfg Index (each of past 5 months). Consensus looks for a +200k m/m increase in June Payrolls, in line with the +207k m/m average so far this year. The Unemployment Rate is expected to be a steady 3.8%.
The most interesting data should be June Average Hourly Earnings. Consensus looks for +0.3% m/m. Although consistent with the implications of calendar considerations, it could spark market talk of a pickup in wage inflation. This is because AHE was stronger than implied by calendar considerations when it rose 0.3% in May. Another 0.3% in June would heighten concerns the May jump was not an aberration but the start of a ratcheting up in wage inflation. At 0.3% m/m in June, the y/y would rise to 2.8% from 2.7% in May. It was 2.7% over 2017, as well.
Trade war fears will likely rise ahead of the July 6th effective date for US tariffs on $34 Bn of Chinese imports and Chinese tariffs on US-made cars and agricultural products. The Canadian retaliatory tariffs, imposed on Friday, show a stern response to the US, reducing the odds of a step back by China, Europe or the US. However, Canada did not signal a further escalation, leaving the next move to the US. The worst case scenario is if a stock market drop is needed to persuade the Trump administration to ease up in its trade offensive.
Fears of a US economic/profits slowdown should remain a concern, given the strength of the dollar and oil prices. The Atlanta Fed model lowered its projection of Q218 Real GDP Growth sharply to 3.8% last week (was 4.5%), largely a result of weak consumer spending in May. Much of the latter's weakness stemmed from a weather-related drop in spending on electricity and natural gas, as cooler-than-normal temperatures depressed the use of air conditioning. This drop is temporary and will rebound either in June or during Q318, as the weather returns to normal. The Atlanta Fed's latest projection assumes the snapback occurs in June, which may be too optimistic. The NY Fed model's Q218 Real GDP projection continues to edge down, now at 2.8%. It forecasts 2.5% for Q318.
This week's US economic data should continue to signal solid growth. Even if consensus is right that the June Mfg ISM edges down to 58.0 from 58.7, the level would be historically high. And, the risk is for a counter-consensus increase, matching once again the direction of the Richmond Fed Mfg Index (each of past 5 months). Consensus looks for a +200k m/m increase in June Payrolls, in line with the +207k m/m average so far this year. The Unemployment Rate is expected to be a steady 3.8%.
The most interesting data should be June Average Hourly Earnings. Consensus looks for +0.3% m/m. Although consistent with the implications of calendar considerations, it could spark market talk of a pickup in wage inflation. This is because AHE was stronger than implied by calendar considerations when it rose 0.3% in May. Another 0.3% in June would heighten concerns the May jump was not an aberration but the start of a ratcheting up in wage inflation. At 0.3% m/m in June, the y/y would rise to 2.8% from 2.7% in May. It was 2.7% over 2017, as well.
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