Four Keys To The Week Ahead

There are four events that will shape market psychology in the week ahead.  They are Yellen’s speech to the NY Economic Club, US jobs data, eurozone March CPI and PMI, and Japan’s Tankan Survey.  

The broad backdrop is characterized by the rebuilding of risk appetites since the middle of February, though the MSCI emerging market equity index put in its low on January 20, as did the CRB Index.  The price of oil appeared to bottom then as well, but it retested the lows in mid-February and made a marginal new low.  

The easing of monetary policy by the ECB, BOJ and PBOC helped rekindle the risk appetites. The Federal Reserve hinted, and then acknowledged formally in mid-March that the four rate hikes that had seemed reasonable in December were less so now.  At the same time, fears that the US was slipping into a recession were exaggerated.  

It turns out that US Q4 growth was not as poor as it initially appeared.  The first estimate was 0.7% at an annualized pace.  The first revision brought it up to 1.0%.  The second revision, released before the weekend, puts it at 1.4%.  To be sure, although twice the initial estimate, Q4 GDP is still disappointing.  However, if trend growth is around 2%, then an occasional quarter like this ought to be expected.

The cause of the revision from 1.0% to 1.4% is worth considering.  It was primarily driven by an increase in consumption.  Consumption of services were revised from 2.1% to 2.8%.  Overall consumption rose 2.4% rather than 2.0%. This is important. Consumption is the main engine of growth. The key to consumption is income, and the key to income is employment.  Disposable income has also been bolstered by the drop in gasoline prices.  

Employment growth has been extremely steady, despite what appears to be month-to-month vagaries. Consider that the three-month average of non-farm payroll growth through February stood at 238k. The average over the past 24-months has been 242k.  The consensus is for March nonfarm payrolls to grow a little more than 200k. 

The fact that full employment is being approached is not evident in hourly earnings data, which is expected to sustain the 2.2% year-over-year pace.  We expect average hourly earnings to begin rising again in Q2.  

One of the concerns about the labor market is the decline in corporate profits reported alongside the second revision of GDP.  Corporate profits fell 7.8% in Q4 15 and 11.5% over the course the year. The idea is that squeezing profit margins will see businesses retrench; slowing their hiring and investment plans.