It’s a short week as markets will be closed or will close early on Good Friday.
It’s also jobs week. On Friday, we’ll get the March US employment situation report. Economists expect it to confirm what we already know: job growth is healthy as the unemployment rate continues to fall.
However, if you were only focused on the labour market, then you probably wouldn’t have guessed that most of the other major economic indicators have been deteriorating.
Here’s your Monday Scouting Report:
Job growth seems to be the only thing good that’s going on lately. Job growth continues to surprise economists to the upside. But according to Bloomberg LP Chief Economist Michael McDonough, the same can’t be said about housing, industrial production, spending, retail sales, and the various manufacturing surveys. The unexpected March plunges in retail sales and durable goods orders stand out as they reflect weakness in both consumers and businesses.
This is all a bit perplexing considering all of the extra spending money Americans supposedly have thanks to falling gas prices. Rather than spending, evidence suggests they’re saving that money.
Late Thursday, Goldman Sachs’ Kris Dawsey hacked his forecast for Q1 GDP growth on the concerns. However, he’s optimistic that the consumer will spend some of those savings in upcoming quarters, which should get GDP growth back to 3%. Unfortunately, a recent NY Fed survey suggests that’s becoming less and less likely.
- Personal Income and Spending (Mon): Economists estimate income climbed 0.3% in February as spending increased by 0.2%. Core PCE is estimated to have risen by 0.1%. From Credit Suisse: “A weather-driven surge in utility spending is expected to push nominal consumer demand up 0.5%, although spending outside of utilities looks soft (car sales were lower on the month, core retail sales were flat). Real personal spending will be a key input into Q1 GDP tracking estimates (our current estimate is 1.4%). Headline inflation should rise 0.2% after last month’s energy-induced plunge. The core PCE deflator is expected at a modest +0.1%.”
- Pending Home Sales (Mon): Economists estimate the pace of sales increased by 0.4% month-over-month in February. From Bank of America Merrill Lynch: “The challenging weather conditions in parts of the country could weigh on activity since pending home sales track signed contracts and prospective buyers need to be able to go out and search for a property. However, it does not appear that new home sales, which also track signed contracts, were impaired. In fact, new home sales surged in February to the highest in seven years.”
- Dallas Fed Manufacturing Activity (Mon): Economists estimate this manufacturing index improved to -9.0 in March from -11.2 in February. “Regional surveys are suggesting some slowing in output in late Q1,” UBS’s Kevin Cummins said.
- S&P Case-Shiller Home Prices (Tues): Economists estimate home prices increased by 0.7% month-over-month in February or 4.6% year-over-year. From Bank of America Merrill Lynch: “The Core Logic home price index, which trends with the Case Shiller data, climbed by 1.1% mum in January, suggesting some risk of an even bigger gain in Case Shiller. That said, the Core Logic data tend to be more volatile than Case Shiller – since Case Shiller is a three-month moving average change – and is also subject to revisions. We also think the data are currently biased higher by poor seasonal adjustments, similar to last year which showed very strong gains in the winter followed by weakness in the spring and summer months. Looking past the noise, it seems that home prices are still running at a solid clip, exceeding the pace of disposable income growth.”
- Chicago Purchasing Managers Index (Tues): Economists estimate this regional activity index jumped to 51.8 in March from 45. 8 in February. From Barclays: “Last month, the index fell the most since the 2008 recession, as what looked likely to be a weak print was exacerbated by harsh weather and the West Coast port slowdown. The February reading overstated the degree of the slowdown, in our view, and we look for a rebound to 52.0 in March, signalling a slow pace of expansion.”
- Consumer Confidence (Tues): Economists estimate the Conference Board’s index of sentiment was unchanged at 96.4 in March. From Barclays: “The preliminary estimate of the University of Michigan index declined from February levels; however, we expect the effects of an uptick in financial market volatility and the rebound in gasoline prices to be buffered by lower monthly jobless claims.”
- Auto Sales (Wed): Analysts estimate the pace of auto sales improved to an annualized rate of 16.9 million units in March. From Nomura: “Inclement weather in late February probably caused many consumers to delay their new vehicle purchases until March. Thus, some demand for vehicles may have shifted away from February to March.”
- ADP Employment Change (Wed): Economists estimate US private payrolls increased by 225,000 in March.
- Markit US Manufacturing PMI (Thurs): Economists estimate this index climbed to 55.3 in March from 55.1 in February. “Manufacturing regained further momentum from the slowdown seen at the turn of the year, with output, new orders and employment growth all accelerating in March,” Markit’s Chris Williamson said.
- Construction Spending (Wed): Economists estimate Spending slipped by 0.1% in February. From Bank of America Merrill Lynch: “Housing starts collapsed in February and a delay in new building will hold back overall construction spending. Moreover, we suspect that renovation projects will be delayed as well. Nonresidential construction spending is also likely to be weak, but perhaps the decline won’t be as severe given it is following a sharp 1.6% decline in January.”
- ISM Manufacturing (Wed): Economists estimate this manufacturing index slipped to 52.5 in March from 52.9 in February. From UBS’s Kevin Cummins: “Regional surveys have been a bit softer so far in March. In contrast, the Markit PMI improved slightly. At 52.9, the February reading for the ISM manufacturing index was down sharply from the peak of 58.1 six months earlier. However, the ISM index had looked somewhat exaggerated relative to more direct measures of manufacturing activity. The level still looks consistent with at least moderate growth in manufacturing output. More broadly, according to ISM officials, February’s level of 52.9 is typically associated with a 3.1% growth rate in real GDP.”
- Initial Jobless Claims (Thurs): Economists estimate the weekly jobless claims climbed to 285,000 from 282,000 a week ago. “Claims have remained low as the labour market continues to register solid improvement,” Nomura economists said.
- Trade Balance (Thurs): Economists estimate the trade deficit shrunk slightly to $US41.3 billion in February from $US41.8 billion in January. “Higher oil prices should have boosted imports and we also expect a pause in exports after the plunge in January, although the trend is clearly lower,” UBS’s Cummins said. From BNP Paribas: “A labour strike at West coast ports was resolved in late February, but trade flows were likely still disrupted for most of the month.”
- Factory Order (Thurs): Economists estimate orders fell by 0.4% in February. From Nomura: “Factory orders have been on the soft side since late summer, posing some concern for business investment. This is likely to continue into February, with the 1.4% decline in durable goods orders providing a low baseline for overall factory orders.”
- The Jobs Report (Fri): Economists estimate US companies added 248,000 nonfarm payrolls in March, driven by a 240,000 increase in private payrolls. The unemployment rate is expected to be unchanged at 5.5% with the labour force participation rate sitting at 62.8%. Average hourly earnings are estimated to have increased by 0.2% month-over-month or 2.0% year-over-year. From Wells Fargo’s John Silvia: “The absence of stronger wage growth has been a key concern for the Fed. Jobless claims continue to fall lower and point to further employment gains; however, the exceptionally strong pace we have seen most recently is unlikely to be sustainable. We expect that the pace of hiring moderated to a still-strong 240,000 net gain in March. Despite the strong gains, the unemployment rate should hold at 5.5 per cent in the month.”
Volatility has picked up a bit in the stock market. The S&P 500 lost about 2% last week, and it’s now up just 0.1% for the year.
“The equity market’s very recent retrenchment while rapid should not be that surprising,” Citi’s Tobias Levkovich said on Thursday. Here were some of the warning signs:
“The ECRI weekly leading index was dipping and the Citi Economic Surprise Index had fallen back but the equity market had just experienced a strong February rally taking stocks to levels we deemed more likely for mid-2015. The top 50 intra-stock correlation had dipped below 30% and that usually signalled some reason for near-term caution as well. Plus, valuations had become stretched especially in the biotechnology area as our model for likely performance had moved into unattractive territory for a good while and history has shown that rising bond yields could be a problem for the pharma and biotech stocks in the past.”
Levkovich reiterated his expectation that the S&P would hit 2,200 by year-end.
BMO Capital’s Brian Belski is slightly more bullish with a year-end target of 2,250. From Belski’s Friday note:
“While stocks have enjoyed a remarkable run the past six years, the believability and sustainability of US strength is fervently debated based on our client interactions. We believe 2015 can be defined as “two great unwinds.” First and foremost, the drawdown in oil prices is the last straw in terms of prior-cycle leadership, which also included EM, credit, small cap and low quality. The second unwind are strategies built around QE — namely stocks go up as interest rates decline. Once and for all, investors desperately need to accept reality: the “anywhere but the US” fascination and QE are over”
With a 2,150 year-end target, Deutsche Bank’s David Bianco is a bit more cautious than his peers. But he recognises there is some upside risk. From Bianco’s Friday note:
“We’ve argued, strong job growth and falling [unemployment] amidst still slow GDP justifies the start of Fed hikes from 0% in June or Sept. Hikes would boost the dollar, keep US inflation low and flatten the yield curve. If a strong dollar and initial Fed hikes stave off rising unit labour costs, then, in this world of scant long-term real interest rates, the [Fed funds] rate and 10yr Treasury yields should plateau well below historical norms this cycle at ~2% and <3%. This would support further S&P PE upside…”
By “PE upside,” Bianco is saying that investors would be willing to pay a higher premium for stocks relative to earnings.
For more insight about the middle market, visit mid-marketpulse.com.
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