This week, investors are eagerly anticipating the Fed chairman’s Semi-Annual Monetary Policy Report testimony hearings scheduled for March 7th and 8th. The chairman is expected to emphasize that the Fed still has work to do and that restoring price stability will require maintaining a restrictive stance for some time. The chairman is also likely to express concern around inflation, potentially signaling that the Fed’s terminal rate projection may need to be raised again. Additionally, the economic calendar for the upcoming weeks includes important reports such as the CPI and retail sales. Although most forecasters expect the February jobs report to decelerate from January’s booming pace, our projection is an increase of 175,000 jobs, resulting in a robust three-month average of 317,000 jobs. We also anticipate a pullback in the workweek and a mild rise in the unemployment rate, while earnings are likely to re-accelerate both on a monthly and yearly basis.
It is difficult to determine whether the FED will raise interest rates by 50 basis points instead of 25 on March 22. While the re-acceleration of inflation against a tight labor market could be a red flag for the Fed, there is still uncertainty about the various components of the upcoming employment report. Additionally, while wage pressures remain a critical factor in the Fed’s thinking about inflation risks, there is no clear indication as to whether the Fed will raise interest rates by 50 basis points instead of 25. Ultimately, the decision on interest rates will depend on a range of factors, including the upcoming CPI report and the tone of the February employment data, and it will be up to the FED to make the final call based on these factors.
The Hot Zones this Week
Each week there are zones where trading can get wild. I call these the hot zones.
The January Employment Situation Report has surprised everyone with stronger than expected payroll growth, with the addition of 517,000 jobs, beating the consensus estimate of 190,000. Furthermore, the report has upward revisions for both November and December, showing that the labor market was even stronger than previously reported. The unemployment rate also decreased to a historic low of 3.4%, with 128,000 jobs added in the leisure and hospitality sector, 105,000 jobs added in private education and health services, and a 25,900 increase in temporary jobs. Moreover, the average workweek increased from 34.4 to 34.7 hours, which has positively impacted wage growth. Average hourly earnings were up 4.4% year-over-year versus 4.8% in December. Overall, this report has made the market question its conviction about the prospect of the Fed cutting rates, as it supports the narrative of a soft landing with the helpful combination of strong payroll growth and a moderation in average hourly earnings.
It’s important to note that the non-farm payroll could decrease in the upcoming months, as external factors such as ongoing supply chain disruptions, and inflation, could negatively impact the job market.
Economic Calendar
Briefing.com has a good U.S. economic calendar for the week. Here are the main U.S. releases.
Briefing.com
Last Week’s Numbers
Review Last week’s numbers here.
Earnings
Source I/B/E/S data from Refinitiv
Aggregate Estimates and Revisions
- 22Q4 Y/Y earnings are expected to be -3.2%. Excluding the energy sector, the Y/Y earnings estimate is -7.4%.
- Of the 493 companies in the S&P 500 that have reported earnings to date for 22Q4, 67.7% have reported earnings above analyst estimates. This compares to a long-term average of 66.3% and prior four quarter average of 75.5%.
- During the week of Mar. 6, four S&P 500 companies are expected to report quarterly earnings.
According to recent aggregate estimates and revisions, 22Q4 year-over-year earnings are expected to be -3.2%, but if the energy sector is excluded, the estimate is -7.4%. Of the 493 companies in the S&P 500 that have reported earnings for 22Q4 so far, 67.7% have reported earnings above analyst estimates, which is just slightly above the long-term average of 66.3%. However, this percentage is lower than the prior four quarter average of 75.5%. This week, four S&P 500 companies are expected to report quarterly earnings.
Macro Market
Growth: In my view, the GDP growth rate has slowed down to 0.9% in 2022 (4Q/4Q) and I anticipate it to decline further to -0.4% in 2023 (4Q/4Q). This is due to the effects of tighter monetary policy and financial conditions that are cooling down the economy.
Inflation: Based on my analysis, I expect a mild recession this year and ongoing goods deflation, which are likely to lead to disinflation next year. The headline PCE grew by 5.7% in 2022 (4Q/4Q) and I anticipate it will grow by 3.0% in 2023, while the core rate grew by 4.8% and is expected to come in at 2.9% in 2023. Despite these changes, I still forecast that inflation will broadly align with the Fed’s 2% mandate by the end of 2024.
Federal Reserve: In my opinion, the Federal Reserve will likely initiate three 25 basis points hikes, with the first hike expected to occur in March, followed by additional hikes in May and June.
Global Spotlight
On March 6, Turkey’s opposition alliance is anticipated to make a critical announcement regarding their strategy for the upcoming presidential election in May. The alliance is expected to name Kemal Kilicdaroglu, head of the Republican People’s Party, as their combined presidential candidate to challenge incumbent President Recep Tayyip Erdogan. However, the decision has already sparked controversy, with the Iyi Party, a nominal member of the opposition, expressing doubts over Kilicdaroglu’s ability to win and announcing their departure from the alliance. These fissures within the opposition could dampen voter enthusiasm, potentially impacting the outcome of the election. Should another candidate enter the race, it could lead to a three- or four-person competition, increasing the likelihood of a second round of voting, which may favor President Erdogan’s reelection prospects.
The International Atomic Energy Agency’s (IAEA) Board of Governors is scheduled to convene from March 6-10, with one of the primary topics of discussion being Iran’s recent nuclear enrichment activities. Specifically, Iranian officials admitted to enriching uranium to 84% purity earlier this year without first notifying the U.N. nuclear watchdog. While they claim it was unintentional, this level of enrichment is close to the threshold for weapons-grade uranium, causing concern in the West.
The E3, comprised of France, Germany, and the United Kingdom, are urging the IAEA to formally censure Iran for its actions. However, the United States is advocating for a more measured response, preferring to conduct a full investigation before taking any drastic measures. In November, Iran was previously censured by the IAEA, which prompted them to announce plans to begin enriching uranium to 60% purity at their Fordow facility, a site that is more challenging for potential military strikes.
If the IAEA were to censure Iran at their upcoming meeting, it’s likely that Tehran would respond by further ramping up their nuclear activities. Ultimately, the discussions and decisions made at this meeting could have significant implications for global security and the ongoing diplomatic efforts surrounding Iran’s nuclear development.
On March 6, EU Commission President Ursula von der Leyen will visit Ottawa to meet with Canadian Prime Minister Justin Trudeau, before traveling to Washington on March 10 for a meeting with U.S. President Joe Biden. In Canada, the two leaders will discuss strategies for expanding bilateral cooperation in areas such as energy, raw materials, and trade. Meanwhile, in the United States, the focus will be on addressing EU concerns over the U.S. Inflation Reduction Act, with discussions centered on clean-tech innovation, supply chains, and raw materials.
In addition to these topics, Biden and von der Leyen are also expected to discuss China’s alleged plans to supply weapons to Russia and the possibility of Western sanctions in response. This meeting presents an opportunity for the U.S. and EU to coordinate their actions and strengthen their partnership in response to these issues. Overall, this visit is a critical moment for transatlantic relations, as leaders from both sides work to deepen cooperation and address shared challenges.
The annual Two Sessions legislative meetings in China have commenced, with the Chinese People’s Political Consultative Conference taking place on March 4 and the National People’s Congress following on March 5. The meetings, which are expected to last one to two weeks, will see the release of a government work report outlining policy priorities for 2023, including economic targets such as GDP growth.
During these sessions, new leaders for top state positions will also be revealed, such as the premier and heads of government ministries. Additionally, President Xi Jinping’s third government reform plan will be unveiled, which is expected to focus on placing key financial policy and state security bodies under the control of the Chinese Communist Party, rather than the state government.
Overall, the Two Sessions meetings are an essential event for China, as they set the tone for the country’s policy priorities and leadership for the year ahead. The decisions made during these sessions will have significant implications for the country’s economic and political landscape, both domestically and on the international stage.
