Look for another inflation report this week. This time–on March 31–it’s the Federal Reserve’s favorite inflation model, the Personal Consumption Expenditure (PCE) index. And, there’s potential trouble in this report–if projections from the Cleveland Federal Reserve Bank’s Inflation NowCast are accurate.
I expect that in the coming week, the financial markets will be dominated by fears that the February jobs report, to be issued by the Bureau of Labor Statistics Friday morning before the market opens, will repeat January’s huge blowout when the official data showed the economy adding a whopping 517,000 jobs. Nothing in that January number to suggest that the U.S. economy was slowing down or that the Federal Reserve should stop raising interest rates to fight inflation
A similar blowout report for February would, probably, convince investors and traders that the Fed will raise interest rates by at least 25 basis points at its March 22 meeting. And that the U.S. central bank will continue to raise interest rates in May and June.
For the week ahead, I’m expecting more slippage in the major stock market indexes. Because? Let’s face it–give me a reason, any reason, to put money to work in stocks ahead of the March 22 meeting of the Federal Reserve. On the upside there’s…well what is there?
I expect Federal Reserve to raise interest rates by 25 basis points on Wednesday, February 1. As of Friday, everybody from Elon Musk to my Amish egg guy thinks the Fed will raise rates by 25 basis points instead of the 50 basis points at the Fed’s December meeting. A 25 basis point move would, the consensus thinking goes, pave the way to a March end to this cycle of interest rate increases. And with a pause in effect, can a pivot to interest rate cuts by far behind? (I think this is very wishful thinking, but reality has never stopped a rally before.) On Friday, the CME FedWatch tool, which calculates the odds of a Fed move by looking at prices in the Fed Funds futures market, put the odds of a 25 basis point increase by 98.4%. No one, I repeat, no one was putting money on a 50 basis point move. The remaining 1.6% of the market was looking for the Fed to hold rates steady–in other words no interest rate increase. (I think even this tiny percentage might simply be an artifact of a few traders speculating on a big market reaction to a 25 basis point increase.)
So here’s what I think happens before and after the news.
Expect another big macroeconomic report to hang over stocks, depressing volatility. After all, who wants to get out ahead of Thursday’s Consumer Price Index inflation report for October?
Yes, interest rates and the Federal Reserve and the Ukraine/Russia conflict are likely to dominate stock market direction this week, but don’t forget the power of the Iran/United States nuclear talks to move oil prices or the power of moves by Chinese regulators to wipe billions off the value of the country’s Internet stocks
In the week ahead expect the financial markets to pay more attention to the crisis unfolding in Ukraine. War between Russian and Ukrainian forces on Ukrainian soil remains a low probability event in my opinion but it odds aren’t nearly as low as they were a month ago.
I’m look for a test of the Friday’s rotation into technology stocks and away from anything that depends on economies remaining relatively free of Pandemic restrictions. On Friday, the winners were technology shares–Apple, Amazon, Tesla, Nvidia, for example–that have in the past been able to show revenue and earnings growth despite any economic slowdown resulting from Covid shutdowns. And the losers were the stocks of companies–such as Six Flags, United Airlines, Macy’s, for example, that depend on the continued recovery in economic activity. The immediate impetus for this sentiment came from news that Austria would impose Pandemic economic lockdowns–again–in an effort to slow soaring rates of infection. The believe is that Germany, the Netherlands, France, and the United Kingdom aren’t far behind. And the fear is that the United States will follow some time this winter. Add that to worries of elevated and rising inflation–where technology companies are seen as one of the few sectors able to outgrow inflation–and you’ve got significant sentiment to push technology shares higher. Logically.
Netflix (NFLX) earnings, due to be reported after the close on Tuesday, July 20, will be a major test of market sentiment. But beyond Netflix I’ll be looking to see if last week’s pattern of selling stocks dependent on a post-vaccine economic recovery continues. On Friday, for example, we saw Macy’s (M) drop 3.56% and amused,ent park operator Cedar Fair (FUN) fall 1.45%. Cyclicals such as Dow (DOW and Omnicom (OMC) were off 3.1% and 1.43%, respectively.
This week will bring positioning for what’s looking like a record quarter for earnings growth for the first quarter of 2021 that’s likely to keep the stock market trend pointing upward. The first earnings report for the quarter are due from the big banks on April 14 and 15.
On April 1 FactSet reported that the bottom-up analyst earnings projection for the stocks in the Standard & Poor’s 500 for the first quarter had climbed 6% as the quarter itself progressed. That’s the biggest increase in analyst projections since FactSet began tracking quarterly bottom-up earnings estimates in the second quarter of 2002. Normally, analyst estimates slip downwards as the quarter progresses with the average decrease of the last five years at 4.2%
What we’re looking at the the possibility of an almost unbelievable surge in earnings in the first quarter of 2021, the second quarter, and for the whole year–caused by year-to-year comparisons with the pandemic recession in these quarters of 2020.
All eyes will be on Friday’s report on March jobs from the Bureau of Labor Statistics. Economists surveyed by Bloomberg project that the economy will add 642,000 new jobs in the month and that the official unemployment rate will drop to 6.0% from 6.2% in February. That would keep the economy on track to hit a 4.9% official unemployment rate by the end of 2021 as per the Federal Reserve’s most recent economic update. That would still be above the 3.5% unemployment rate for 2019, before the pandemic gut-punched the U.S. and global economies. That rate was the lowest official unemployment annual rate since 1969. And a drop to 6.0% unemployment would be a strong sign that the U.S. economy is on the mend.
