The first quarter was a weird one.
Last week, we learned from the Census bureau that US GDP growth nearly grinded to a zero, even as the employment cost index suggested worker pay growth was accelerating.
The Census’ take has been reflected in the message telegraphed by the managements of companies announcing their Q1 earnings in recent weeks.
“Similar to last quarter, companies have been discussing the impact of slower global economic growth, the stronger dollar, and lower oil prices during their earnings conference calls for Q1,” FactSet’s John Butters said on Friday.
We’ll get some more colour on all this as more companies announce earnings on a week that ends of the April US jobs report.
Here’s your Monday Scouting Report:
0.2%. US GDP grew at a pitiful 0.2% rate during the first three months of the year. This was far short of the 1.0% rate expected by economists. “Alongside last month’s weak employment report, the slowdown to just 0.2% has rekindled the question whether the US has really moved into a sustained above- trend growth environment,” Goldman Sachs’ Jan Hatzius wrote on Friday.
Hatzius is sceptical of any major negative signals being sent by the BEA’s GDP estimate. He offered three reasons why: 1) the BEA’s 0.2% estimate is at odds with Goldman’s proprietary current activity indicator, which is signalling 2.8% GDP growth; 2) “cold temperatures and ample snowfall” took an estimated 1.25 percentage points of growth from Q1 growth; and 3) “since 2010, GDP growth has averaged just 0.3% in Q1, compared with 2.9% in the remaining three quarters of the year. Some of this is due to the adverse weather in 2014 and 2015, but there is also evidence going back to the early 1990s that residual seasonality in several components of GDP has tended to weigh on Q1.”
Are wages suddenly booming? Anemic wage growth has been one of the disappointing themes of the post-financial crisis recovery. But the big 0.7% Q1 jump in the employment cost index had one economist even suggesting that the US economy has gone “beyond full employment.” This sign of wage inflation is likely to put some pressure on the Federal Reserve to raise interest rates sooner than later to prevent inflation from exploding. On Friday, Cleveland Fed president Loretta Mester, said a rate hike the the Fed’s next FOMC meeting in June is still “on the table.”
But Bloomberg economists Carl Riccadonna and Josh Wright doubt the ECI does enough to stoke that sense of hawkish urgency: “…weak first-quarter GDP results cloud the signal from the ECI. If slower growth is followed by a hiring slowdown, then the acceleration in wage pressures will be muted… Despite evidence from the ECI that labour inflation is increasing, the hurdle for the Fed liftoff to occur in June is extremely high given soft economic data elsewhere”
- Factory Orders (Mon): Economists estimate orders increased by 2.0% in March. From Barclays: “The advance report on durable goods showed a 4.0% m/m rise in durables orders, driven by surges in motor vehicles, aircraft, and defence orders. We expect that nondurable orders rose 0.1% on the month, which in total implies a 2.0% advance for total factory orders.”
- Trade Balance (Tues): Economists estimate the trade deficit expanded to $US41.3 billion in March from $US35.4 billion. From UBS’s Kevin Cummins: “We forecast a significant widening in the trade gap in March due to a rebound in imports. The West Coast port strike significantly depressed activity in the prior two months, particularly imports. In estimating Q1 GDP, Commerce Department officials appear to have assumed a change in the deficit in line with our almost $US10 billion forecast change.”
- Markit US Services (Tues): Economists estimate this services index fell to 57.8 in April from 59.2 in March. “The service sector enjoyed strong growth at the start of the second quarter, adding to evidence that the economy remains in good health,” Markit’s Chris Williamson said. “Although the pace of expansion slowed compared to March, April saw the second-largest rise in business activity for seven months.”
- ISM Non-Manufacturing (Tues): Economists estimate this services index slipped to 56.0 April from 56.5 in March. “Consumer confidence dipped in April, and extra dollars in consumers’ pockets have largely been saved or spent paying down debts so far this year,” Wells Fargo’s John Silvia said. “None of those factors point to a stronger nonmanufacturing sector.”
- ADP Employment Change (Wed): Economists estimate private payrolls increased by 200,000 in April, up from 189,000 in March. From Bank of America Merrill Lynch: “Last month’s weakness was likely a payback after several months of robust payroll growth, and the underlying trend for hiring is likely still solid. While the early April labour market indicators have been mixed, they nonetheless point to another month of healthy job gains.”
- Initial Jobless Claims (Thurs): Economists estimate initial claims climbed to 278,000 from 262,000 a week ago. From Nomura: “Claims have been below 300k for eight consecutive weeks and is a positive sign that the labour market is steadily tightening.”
- Consumer Credit (Thurs): Economists estimate consumer credit balances increased by $US15.9 billion in March. Here’s Nomura: “Non-revolving consumer credit growth accelerated last year (likely due to an increase in auto loans). However, revolving credit growth was slow, showing above-trend gains in only a few months. This slow trend has continued into 2015, with revolving credit declining in January and February. Households’ risk appetite remains tenuous, despite the better labour market and income growth. Solid growth in revolving consumer credit would suggest that consumers are more confident about their finances and could provide a boost for spending going forward.”
- The Jobs Report (Fri): Economists estimate US companies added 225,000 nonfarm payrolls in April, driven by a 223,000 increase in private payrolls. The unemployment rate is estimated to have fallen to 5.4%. Average hourly earnings is estimated to have increased by 0.2%. From Credit Suisse: “We expect a partial rebound in payrolls following the disappointing +126K March print … Initial jobless claims are at cycle lows. Last month’s ISM nonmanufacturing jobs index was a solid 56.6. And job openings are rising at an accelerated pace. We also expect some technical rebounds in residential construction, leisure/hospitality sectors, and state and local government, although manufacturing employment may remain soft, mirroring the recent slowdown in industrial production.”
Despite the disappointing GDP report, the consensus continues to expect the Fed to tighten monetary policy via rate hikes some time this year.
Deutsche Bank’s David Bianco thinks the stock market will be able to take this in stride: “Our market and sector strategy are guided by the view that the US economy is healthy enough for the Fed to hike this year, causing a stronger dollar that S&P EPS and especially GDP can withstand without declines. A stronger dollar helps to keep commodity and goods inflation low and should curb unit labour costs and longer-term inflation expectations at ~2%. This is important for long- term interest rates to stay low and support elevated PEs into the latter years of this expansion…”
JP Morgan’s Jan Loeys, however, takes the opposite view: “Are stronger equity markets this month and YTD proof of growth optimism? Again, not in our thinking, as we find easy money and low macro vol to be much better supports of stock prices. A growth surge that brings wage inflation and Fed tightening is more problematic for equities.”
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