As we look ahead to the upcoming week, financial markets will continue to digest the implications of the Federal Reserve’s recent decision to hike interest rates by 25 basis points in March, a move that was widely expected. Of particular interest to market participants and policymakers alike is the Fed’s expression of concern over the excess tightening in bank lending standards, which has the potential to create adverse economic outcomes. In light of these developments, our forecast now calls for only one more 25bp rate hike in May, bringing the terminal range to 5.0-5.25%.
In this week’s blog post, we’ll delve into the hot zones of market activity, focusing on key economic indicators and events that have the potential to impact financial markets. We’ll be discussing the Conference Board Confidence, Initial Jobless Claims, Personal Income & Outlays, Chicago PMI, and the University of Michigan Sentiment. These indicators provide valuable insights into the health of the economy and can significantly influence market volatility. As we assess the potential effects of these announcements, we’ll also touch on earnings, macro market conditions, and notable global events. Stay vigilant, trade responsibly, and keep an eye out for the potential risks associated with market fluctuations during these hot zones.
The Hot Zones this Week
Each week there are zones where trading can get wild. I call these the hot zones.
Conference Board Confidence I’m anticipating that March’s Conference Board confidence will experience a slight dip to 101.5, down from the previous 102.9. Just last month, confidence fell short of expectations due to diminishing confidence in the economic outlook. The Expectations index took a nosedive to 69.7 from 76.0, while the Present Situation index inched up to 152.8 from 151.1. Although the labor market has managed to maintain its strength, I believe that the recent turbulence among regional banks, persistently high inflation, and climbing borrowing costs would have likely put a damper on confidence in March.
Initial Jobless Claims
I predict that initial jobless claims dropped to 189k in the week ending March 25, following the decrease to 191k in the previous week. This decline could potentially be a payback for the substantial increase we saw in the week ending March 4, as well as some labor hoarding by certain firms. Just last week, the 4-week moving average also experienced a slight dip. These claims figures continue to highlight the tightness of the labor market and emphasize how much work the Fed still has ahead in order to cool labor demand.
Personal Income & Outlays
In February, I think that nominal personal income saw a modest increase of 0.2%. While job growth remained strong during that month, there was a decline in weekly hours and wage inflation wasn’t all that impressive. I foresee a slight 0.1% uptick in nominal spending. Although retail sales, excluding autos, were weak in February and unit motor vehicle sales experienced a considerable drop after January’s spike, I expect moderate growth in services spending to offset this weakness. Given my 0.3% headline PCE inflation forecast, it’s likely that real spending dropped by 0.2% in February. These estimates indicate that the saving rate remained unchanged at 4.7%. However, it’s important to note that upward revisions to retail sales in December and January might lead to higher spending figures for those months, which could subsequently lower the saving rate for December, January, and February.
Taking into account the CPI and PPI data, I project core PCE inflation to increase by 0.4% m/m (0.38% unrounded), maintaining the y/y rate at 4.7%. Simultaneously, I anticipate headline PCE inflation to rise by 0.3% m/m (0.32% unrounded) with the y/y rate falling to 5.1% from 5.4%. If my forecast turns out to be accurate, PCE inflation in February would be a tad milder than CPI inflation, partially due to the smaller weight shelter has in PCE inflation. Nonetheless, this would still position inflation considerably above the Fed’s two-percent target, bolstering my prediction of a 25bp rate hike in March and a terminal rate of 5.25-5.50% in June.
Chicago PMI
I expect the Chicago PMI to have dipped from 43.6 in February to 43.0 in March. The region’s activity continues to be affected by the same factors impacting the rest of the nation’s manufacturing sector, such as the shift in consumer demand back to services, a weaker external demand outlook, and heightened uncertainty due to recent turmoil in the banking sector. If my forecast is accurate, it would be the seventh consecutive month with a reading below the breakeven level of 50.
U. of Michigan Sentiment
In March, I anticipate the University of Michigan consumer sentiment to finalize at 63.0, down from the preliminary reading of 63.4. Consumer sentiment dropped in the preliminary reading from 67.0 at February’s end, falling for the first time in four months due to concerns about the economic outlook and financial market uncertainty. The developments surrounding the regional bank crisis likely added more downward pressure on sentiment in March. On a positive note, the 1-year inflation expectation decreased to 3.8% from 4.1% in February, and long-run expectations also edged lower to 2.8% from 2.9%, offering some relief for the Fed.
Please exercise caution when these economic announcements are released, as they can have a significant impact on market volatility and trading conditions. It’s essential to be mindful of the potential risks associated with trading during periods of heightened uncertainty and rapid price movements. Ensure that you manage your positions appropriately, set stop-loss orders to protect your capital, and stay up-to-date with the latest news and economic developments to make well-informed trading decisions.
Stay vigilant and trade responsibly.
Stratfor.com
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
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 498 companies in the S&P 500 that have reported earnings to date for 22Q4, 68.1% 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. 27, six S&P 500 companies are expected to report quarterly earnings.
For 22Q4, year-over-year earnings are anticipated to decline by 3.2%. Excluding the energy sector, the projected decrease is 7.4%. Out of the 498 S&P 500 companies that have reported 22Q4 earnings so far, 68.1% surpassed analyst expectations, compared to a long-term average of 66.3% and a previous four-quarter average of 75.5%. In the week of March 27, six more S&P 500 companies are slated to announce their quarterly earnings.
Source I/B/E/S data from Refinitiv
Macro Market
Growth (Economic Deceleration)
In 2022 (4Q/4Q), GDP growth experienced a slowdown, landing at 0.9%. We anticipate a further decline to -0.4% in 2023 (4Q/4Q) as the aftereffects of more stringent monetary policy and financial conditions cool off the economy. However, we expect a recovery by 4Q 2024.
Inflation (Taming the Numbers)
The mild recession in the cards for this year, along with ongoing goods deflation, is likely to result in disinflation in the coming year. Headline PCE climbed to 5.7% in 2022 (4Q/4Q) and is projected to reach 3.2% in 2023. Meanwhile, core inflation increased to 4.8% and is anticipated to settle at 3.3% in 2023. Our forecast envisions inflation aligning with the Fed’s 2% target by the end of 2024.
Federal Reserve (Monetary Maneuvers)
As anticipated, the Fed increased the target range for the federal funds rate by 25 bp to 4.75-5.0%. We’re now ruling out the 25bp rate hike for June and instead foresee a terminal rate of 5.0-5.25% by May. We’re still holding on to our prediction for the first rate cut in March 2024. If the financial system’s stresses are resolved promptly, we can’t dismiss the possibility that stronger macro data might prompt the Fed to implement additional hikes beyond May.
The STLFSI4 serves as an indicator of financial stress within markets, incorporating 18 weekly data series that include seven interest rate series, six yield spreads, and five additional indicators. These variables collectively capture various dimensions of financial stress, which means they tend to exhibit correlated movements as the overall stress levels in the economy fluctuate.
To interpret the index, it is essential to understand that it is designed with an average value of zero, based on data starting from late 1993. A zero value signifies normal financial market conditions. Consequently, values below zero indicate below-average financial market stress, whereas values above zero point to above-average financial market stress. This metric offers valuable insights into the overall health of financial markets and the economy at large.
The recent STLFSI4 reading from March 17, 2023, has risen notably to 1.5746, up from -0.04, signaling a significant increase in financial market stress. This escalation can be attributed to the ongoing banking crisis, which has resulted in heightened uncertainty and strain on financial institutions. The current reading is a clear departure from the typical market conditions, emphasizing the need for close monitoring and potential intervention to mitigate the impact of the crisis on the broader economy.
Global Spotlight
Taiwanese Presidential Visits Stir Tensions. Taiwan’s President Tsai Ing-wen embarks on a two-stop U.S. visit, with stops in New York and California, as part of her March 29-April 7 journey to Central America. It remains uncertain whether she will engage with U.S. House Speaker Kevin McCarthy; however, if the meeting materializes, China may retaliate with significant aerial and naval incursions into Taiwan’s defense zone. Although escalation is improbable, given Tsai’s prior U.S. visits in 2018 and 2019. Concurrently, former Taiwanese President Ma Ying-jeou will make a historic visit to China from March 27-April 7 – the first by a sitting or former Taiwanese president. Despite no official plans for a meeting with President Xi Jinping, any such encounter could negatively impact the opposition Kuomintang in Taiwan’s 2024 general elections, as it may be perceived as submission to Beijing.
Spanish Prime Minister’s China Excursion. On March 30, Spain’s Prime Minister Pedro Sanchez will visit China’s Hainan Island for commercial meetings, followed by a Beijing visit on March 31 to meet with President Xi. As Spain assumes the EU presidency in July, Sanchez’s visit coincides with the 50th anniversary of diplomatic ties between Spain and China. While business deals are expected, the Ukrainian crisis will be a key topic of discussion, as Sanchez explores the possibility of China mediating, an idea largely dismissed by other European leaders.
Persistent Anti-Government Protests in France. French President Emmanuel Macron faces continued backlash over his controversial pension reform, which bypassed a National Assembly vote. A general strike, led by France’s primary trade unions, will take place on March 28, causing disruptions across the nation. Growing unrest is not only about pension reform but also concerns over the health of France’s democracy and institutions. If turmoil intensifies or prolongs, Macron may either abandon the reform or risk an early legislative election, potentially resulting in a more fragmented National Assembly.
Democracy Summit Showcases Global Unity. The second Summit for Democracy, co-hosted by the U.S., Costa Rica, the Netherlands, South Korea, and Zambia, runs from March 28-30, featuring leaders from 120 countries. Notably excluded are Hungary and Turkey. Ukrainian President Volodymyr Zelensky will present his vision for a just and lasting peace, followed by a discussion led by U.S. Secretary of State Antony Blinken. Meanwhile, China and Russia criticize the summit, interpreting it as an attempt to create a coalition against their influence and isolate nations not aligned with the U.S. on the world stage.
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