This week is stacked with top-shelf economic data, include new reports on manufacturing, housing, and consumer sentiment.
We’re also going to get the first official estimate of GDP growth in Q1. This week also comes with the Q1 employment cost index (ECI) report, which economists will watch closely for signs of wage growth.
There’s also a Federal Open Market Committee (FOMC) meeting, which is unlikely to come with major surprises. Nevertheless, the combination of the Fed meeting, economic data, and all-time high stock prices could set the stage for a bumpy ride in the markets.
Here’s your Monday Scouting Report:
Stand by for the best overall measure of labour costs. Stagnant wage growth in the US is one of the hottest topics being discussed by economists everywhere. In recent weeks, an increasing amount of the monthly data point to a labour market with accelerating wage growth.
But the money workers take home represent just one component of what it costs an employer to have someone on the payroll. This is why economists anxiously wait for the comprehensive quarterly employment cost index (ECI) report, which will be released on Thursday.
Here’s Credit Suisse: “The ECI often is considered the best overall measure of labour costs because it includes other forms of compensation besides hourly pay (such as commissions) as well as benefit costs (which account for more than 30% of the total). Also, the ECI is not distorted by shifts in the industry mix, unlike average hourly earnings… We estimate headline ECI (total compensation) rose by 0.6% in Q1, after a similar rise of 0.6% in Q4 last year. A quarterly gain in line with our forecast would boost the year-on- year rate to 2.6% (from 2.3%), still a touch below its pre-recession range of 3%-4% but showing some signs of acceleration, partly due to an easy comparison with a weak Q1 2014. A stronger Q1 reading, which is a risk, would be consistent with the observation that compensation growth is picking up as labour market slack diminishes.”
- Markit US Services PMI (Mon): Economists estimate the this services activity index slipped to 58.8 in April from 59.2 in March.
- Dallas Fed Manufacturing Activity (Mon): Economists estimate this regional activity index improved to -12.0 in April from -17.4 in March. From UBS’s Sam Coffin: “Regional surveys and the Markit PMI have suggested no significant re-acceleration from winter weakness. That said, the Markit measure has been implying more strength than the ISM survey and much more strength than in actual output figures. The extra weakness in the Dallas Fed figure reflects its greater sensitivity to the energy industry.”
- S&P/Case-Shiller Home Price Index (Tues): Economists estimate home prices climbed 0.7% month-over-month in February or 4.7% year-over-year. From Bank of America Merrill Lynch economists: “We take signal from the CoreLogic home price index, which surged 1.5% mum during the month. This measure is constructed slightly differently and tends to be more volatile (and subject to notable downward revisions), so we do not anticipate as big of a gain in the Case-Shiller index. Demand for homes is on a steady track higher amid low inventory, leaving home prices to head higher.”
- Consumer Confidence Index (Tues): Economists estimate the conference board’s index of sentiment climbed to 102.5 in April from 101.3 in March. From Barclays: “The preliminary estimate of the University of Michigan consumer sentiment index showed solid gains in early April, supported by lower jobless claims and gains in stock prices. We expect the Conference Board’s index to show an improvement on the month, though less than the preliminary U of M estimate given the uptick in retail gasoline prices since mid-month.”
- Richmond Fed Manufacturing Index (Tues): Economists estimate this regional activity index improved to -2 in April from -8 in March.
- GDP (Wed): Economists estimate Q1 GDP climbed 1.0% with personal consumption increasing at a 1.7% rate. Here’s BNP Paribas: “Harsh weather likely weighed on consumption and residential investment, while west coast port disruptions and a strong dollar are expected to have presented drags to business investment. The dollar’s appreciation, which made US exports pricier, also likely led to a significant widening in the trade balance.”
- Pending Home Sales (Wed): Economists estimate pending sales climbed 1.2% in March. From BAML: “The recent improvement in pending home sales has been confirmed by the strong showing in existing home sales in February. We expect the trend to remain higher, albeit bumpy. The backdrop has become more favourable with steady job gains, improving consumer confidence and low mortgage rates.”
- FOMC Rate Decision (Wed): The Fed will release its FOMC statement at 2:00 p.m. ET. From Goldman Sachs’ Karen Reichgott and Jan Hatzius: “In recent speeches, Fed Chair Yellen, New York Fed President Dudley, and Boston Fed President Rosengren seemed to reinforce the risk of a later liftoff, specifically highlighting the recent weaker-than-expected data… We expect the language in the April statement to remain similar to that in March. The reference to “strong job gains” may be moderated due to the disappointing March employment report and the comment that “inflation has declined further” could be adjusted as inflation trends have not changed significantly.”
- Employment Cost Index (Thurs): Economists estimate this measure of wages increased by 0.6% in Q1. Here’s Nomura: “The ECI showed better performance in 2014 as total compensation grew by 0.6% or more in the last three quarters. The National Federation of Independent Businesses (NFIB) small business survey indicates that about the same amount of businesses reported raising worker compensation in Q1 2015 as did in Q4 2014. Moreover, consumers reported better optimism about income gains in the first quarter. Taken together with a steady increase in average hourly earnings of private workers in Q1, we forecast that total compensation increased by 0.7% q-o-q in Q1. As wages and salaries make up 70% of total compensation, we believe wages and salaries grew at the same rate in Q1.”
- Personal Income And Spending (Thurs): Economists estimate income climbed 0.2% in March while personal spending increased by 0.5%. Here’s Nomura: “Aggregate weakly earnings (from the BLS employment report) disappointed in March as earnings were unchanged from the prior month. This suggests that personal income likely fell short of recent trend growth (~0.4% m-o-m) in March… As for personal spending, headline retail sales rebounded nicely in March after several months of decline. However, core retail sales came in below expectations, suggesting that households are still somewhat reluctant to spend, despite better optimism, low gasoline prices and improving labour markets. Moreover, as temperatures rose across the country, heating demand likely receded in March.”
- Initial Jobless Claims (Thurs): Economists estimate initial claims fell to 290,000 from 295,000 a week ago.
- Chicago Purchasing Manager Index (Thurs): Economists estimate this regional activity index climbed to 50.0 in April from 46.3 in March. Here’s Nomura: “Supply chain disruptions due to West Coast port slowdown, lingering effects of adverse weather conditions and low energy prices likely kept the March figure below 50. These factors should have a limited impact, if any, in April. However, recent regional business surveys have been mixed and do not point to a breakout in better business activity.”
- Auto Sales (Fri): Analysts estimate the pace of US auto sales slipped to an annualized rate of 16.9 million units in April from 17.05 million units in March. Here’s BAML: “The boost to sales from the easing of winter-weather disruptions likely ran its course by April, but we don’t expect too much of a decline, owing solid consumer demand. A healthy pace of hiring and a relatively subdued gasoline price are also helping to keep autos sales supported.”
- Markit Manufacturing PMI (Fri): Economists estimated a reading of 54.2, down from 55.7 in March. From UBS’s Coffin: “Stabilisation in the Empire State manufacturing measure and improvement in the Philadelphia Fed measure suggest a rise in the manufacturing ISM index. For the Markit index, which has not shown the same deterioration as other measures, we project little change. The export orders index is projected to decline further to 47.0 — its fifth consecutive drop. The stronger dollar and deterioration abroad continue to weigh on activity. The largest US importers mostly reported falling Purchasing Manager Indexes (PMIs).”
- Construction Spending (Fri): Economists estimate spending increased by 0.4% in March. Here’s UBS’s Coffin: “Bad weather appears to have weighed on housing starts in March but we forecast improvement in nonresidential spending.”
- ISM Manufacturing (Fri): Economists estimate this manufacturing index climbed to 52.0 in April from 51.5 in March. Here’s Credit Suisse: “Headline ISM should continue its five-month losing streak in April, in our view. We expect the US goods sector to bounce going into the summer — PMI new orders and the Philly Fed survey have already shown signs of rebounding — but the ongoing energy sector slowdown and weak Kansas City and Empire Surveys tilt the weight of evidence towards more sluggishness in the near term.”
- U. of Michigan Consumer Sentiment (Fri): Economists estimate this measure of sentiment increased to 96.0 in April from 95.9 in March. Here’s Barclays, who expects a deterioration to 95.5: “Retail gasoline prices have risen 3.5% from the end of the preliminary survey period as of this writing, which we expect will offset stocks gains and push the index down slightly at month-end.”
Not only did the S&P 500 close at new all-time highs last week, the Nasdaq also hit an all-time closing high. In other words, the Nasdaq is at levels last seen at the peak of the dotcom bubble. Valuations are high, but thanks to earnings growth they’re not as astronomically high as they were 15 years ago.
Nevertheless, earnings growth has been going negative and economic activity has been decelerating, something that’s being better reflected in the commodities market. In fact, the pace of the current economic recovery is the slowest of any economic recovery in the post-WWII era.
Here’s JP Morgan’s Jan Loeys discussing it in a note to clients on Friday: “Why the strongest equity rally in the weakest recovery, and can this last? The only equity rally that was stronger in the post-war period was the 1990s tech boom that was driven by a stronger economy and faster multiple extension. The rally of the past six years was instead driven by low wage growth pushing earnings up with easy money killing the attraction of cash. But weak growth cannot continue to push equity prices up forever. The strongest major market in this cycle thus far, the US, is facing falling profit margins, by our forecasts, and record high household equity holdings. If growth continues to disappoint for a much longer time, then a deflation mentality risks setting in which, in Japan at least, killed off equity returns for two decades.”
There’s no shortage of reasons to be nervous about the stock market…
For more insight about the middle market, visit mid-marketpulse.com.