The Federal Reserve will take center stage this week, as the rest of the economic data calendar is fairly quiet after a jam-packed week.
There’s a historic event in New York on Thursday featuring Fed chair Janet Yellen and all her living predecessors: Paul Volcker, Alan Greenspan and Ben Bernanke. It would be the first time the four living Fed chiefs have spoken on a public stage.
Also, we’ll hear from four voting members of the Federal Open Market Committee (FOMC) during the week.
Referring to the minutes of the Fed’s March meeting due Wednesday, Wells Fargo’s Sam Bullard wrote: “Indeed, investors will be paying close attention to the evidence that led all officials to cut their median interest rate projections in 2016 from four hikes to two.”
Yellen’s comments last week in a New York speech reinforced this dovish view, lifting stocks and sinking the dollar.
The labour market is still in top shape: We got the March jobs report on Friday which showed the economy added more jobs than expected. The data from the Bureau of Labour Statistics showed a gain of 215,000 nonfarm payrolls. Wages inched higher, by 0.3% month-on-month and 2.3% year-on-year — both more than expected.
Here’s Deutsche Bank chief US economist Joseph LaVorgna: “The story remains the same: The labour market continues to generate relatively solid job gains despite what is likely to be another quarter of soft top-line economic activity. If aggregate demand does not accelerate soon, we are worried that firms will dramatically slow their pace of hiring in order to stabilise profit margins, which we believe deteriorated further last quarter.”
“The underlying employment details of the report were less robust,” cautioned LaVorgna. He points out the drop in manufacturing jobs by 29,000, the largest one-month decline since December 2009. Also, mining jobs fell 12,000 in an 18th straight monthly slump.
The unemployment rate rose to 5% from 4.9%, but this was largely due to a rise in the labour force participation rate to 63%. This was the sixth-straight rise in the series, reflecting the surge of Americans back into the labour force. But even as plenteous jobs make the workforce attractive, demographics have always mattered more to participation. And so, some economists are forecasting that the rate is set to decline in the long run, especially driven by retiring baby boomers.
Manufacturing expanded for the first time in seven months: Following a series of solid regional reports, the final, national reading of the Institute of Supply Management’s index confirmed the sector’s improvement in March. The index, at 51.8, climbed above the expansion/contraction threshold of 50, reflecting the strongest activity since last July. The industry has been impacted by the strong dollar’s drag on exports and the energy sector’s woes.
Here’s RBC Capital Markets chief US economist Tom Porcelli: “The bifurcation between strong domestic growth and soft globally-sensitive sectors of the US economy has been a prevalent narrative in recent quarters. Recent trends suggest a turning point for the latter is in the offing … Survey respondent comments were overwhelmingly positive, with words such as “booming” used to characterise activity. We expect the unwind of what had been an important source of weakness will allow the firmer underlying trends in the US economy to reassert themselves and look for constructive topline activity near 3% over the Q2 – Q4 period.”
Saudi Arabia may not participate in a production-cut agreement: A meeting between OPEC and non-OPEC members, during which a freeze agreement could be reached, is scheduled for April 17. The country’s deputy crown prince Mohammad bin Salman told Bloomberg on Friday that Saudi would only agree to a freeze if Iran also does. Iran is trying to revamp its exports, following the removal of economic sanctions that prevented it from doing so. The comment from Saudi helped push oil prices lower on Friday, with West Texas Intermediate crude oil falling 4% to as low as $36.64 per barrel, and erasing its year-to-date gains.
“We doubt that this is Saudi Arabia’s final word on the subject and still think that some sort of compromise is likely,” wrote Capital Economics’ head of commodities research Julian Jessop. “For example, a deal could be done on the basis that Iran would increase output by a certain amount, but no more.”
Factory Orders (Mon.): Economists estimate that orders fell 1.8% in February, following a 1.6% gain in the prior month. Excluding the transportation category, the forecast is -1.5%. The advance durable goods report showed a decline in civilian aircraft, and core capital goods orders and shipments. “In short, the orders figures were disappointing and dashed hopes that January’s gains might mark the start of a new upward trend,” wrote Wells Fargo. “If the factory orders print corroborates the durable goods orders’ reading, it will reinforce our expectations for a weak first quarter for equipment spending.”
Trade Balance (Tues.): Economists estimate that the trade deficit widened to -$46.2 billion from -$45.7 billion. Here’s Bank of America Merrill Lynch: “The total trade balance is largely driven by goods trade, and the advance goods report this week showed deterioration. Both imports and exports grew at a nice clip, but the level change in imports exceeded exports. On the services side, we anticipate modest gains in both exports and imports as well.”
Markit US Services PMI (Tues.): Economists estimate that the final March reading comes in at 51.2, slightly improved from the flash print of 51.
ISM non-manufacturing Index (Tues.): Economists estimate an index of 54.1 in March. “This would suggest modest acceleration in growth,” BAML economists wrote. “The services sector has remained resilient amid increased uncertainty and weakness on the goods side of the economy. With manufacturing now looking better, the ISM nonmanufacturing index should also benefit.”
Job Openings and Labour Turnover Survey (JOLTS) (Tues.): Economists estimate that there were 5.57 million job openings in February, pushing this metric further towards record levels. But hirings slowed as openings increased in February. And, the quit rate, a gauge of worker confidence, fell to 2% in January from 2.2% in December. Here’s Wells Fargo: “Given the stronger-than-expected February nonfarm payroll performance, the consensus expects to see some improvement in the JOLTS report which would suggest the labour market remains on a positive track.”
FOMC Minutes (Wed.): Minutes of the FOMC’s March meeting will be released. Here’s RBC: “Overall the Minutes should cement the idea that the Fed is now operating under a multivariate reaction function that goes beyond US employment and inflation, and is increasingly giving more weight to the global backdrop.”
Initial Jobless Claims (Thurs.): Economists estimate that initial jobless claims fell last week to 270,000 from 276,000 prior. Here’s Deutsche Bank: “In our view, an increase in claims to around 300k would presage a significant slowdown in the labour market and substantially slower output growth. Unless and until this occurs, however, claims remain a bright spot on the growth horizon.”
Consumer Credit: (Thurs.): Economists estimate that consumer credit rose to $14.9 billion in February from $10.538 billion in January.
The stock market enjoyed hearing a dovish Fed this week.
Following the March statement that cut the FOMC’s expectation of rate hikes this year to two from four, Yellen restated Tuesday that the Fed is in no rush. The S&P 500 closed at its highest level of the year on that day
The fact that the Fed has more tools to tighten policy should the economy outperform than it does to loosen policy if the economy goes bust. And so, the risk is tilted more towards raising rates too quickly.
For Deutsche Bank’s David Bianco, the most important thing for markets was Yellen’s comment that a historically low neutral Fed funds rate is likely, not much higher than 0% in real terms. He wrote, “this suggests the Fed doesn’t have a war to wage with the long-term bond market in the coming years. If the 10yr Tsy yield stays under 3% for the rest of this cycle with inflation expectations near 2%, then long-term real interest rate will stay under 1%. Currently, the 10yr TIPS yield is ~20bp, a low for recent years. This would support a 5.0% real cost of equity for the overall S&P 500 or 20 S&P PE, certainly ex. Energy & Financials, versus our 5.5% standing real cost of equity estimate.”
However, the Fed’s emphasis on the risks the global economy poses to America makes it harder for investors to ‘Fed watch’ for clues on what it may do next.
Here’s RBC’s Tom Porcelli: “With this Fed it is not just about the data flow. It is about events. It is about headlines. And you cannot forecast those things. They just happen. And therein lies the problem with forecasting the Fed’s next move. Think about China devaluing back in August. There was no way to forecast the precise timing of that event. And when it happened, it spooked the Fed enough to take a pass at the September meeting. So it’s not enough to say “this particular data point looks better” when the Fed is in a reactionary mode. It is the unknown events in the context of a soft global backdrop that may matter more to this skittish Fed.”
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