The 1Q GDP tracking estimate has been lowered to 0.8% q/q saar, down from 4Q GDP at 2.6%. This reduction is due to lower-than-expected core capital goods orders and shipments in February, as well as a decrease in inventory tracking estimates for 1Q. The advance goods trade deficit in February widened slightly, and the data reduced the tracking estimate for net exports in 1Q. The BEA’s third estimate of 4Q US GDP revised growth down by one-tenth to 2.6% q/q saar, with downward revisions to household spending on services, equipment spending, and net exports. In the coming week, data on February construction spending, durable goods, trade balance, and March payrolls and vehicle sales will affect the 1Q tracking estimates.
Forceful actions by US policymakers, such as emergency lending facilities, have temporarily stabilized concerns regarding regional bank stress and the sale of Credit Suisse to UBS. A decline in the usage of the Fed’s emergency lending facilities indicates an improvement in the situation. Although the risk of regional banking stress has not been entirely eliminated, the situation appears to have stabilized enough to consider longer-term implications.
The ongoing shift of deposits from small banks to large banks and into higher-yielding money market mutual funds is seen as a part of a normal Fed tightening cycle rather than a result of financial stress. This shift has been influenced by factors such as deferred consumption, precautionary saving, and federal transfers during the COVID-19 pandemic. While the risk of bank runs still exists, the current situation seems more stable than before.
The Hot Zones this Week
Each week there are zones where trading can get wild. I call these the hot zones.
Monday, Apr 3
Construction Spending In February, construction spending is expected to rise by 0.1% month-over-month, after a 0.1% decline in January. The residential construction sector’s downturn is anticipated to continue, driven by higher interest rates and lower sales. Meanwhile, non-residential construction spending, which increased by 0.3% in the previous month, is predicted to contribute to the overall growth, albeit at a slower pace due to reduced investment from firms and government.
ISM Manufacturing For March, ISM manufacturing is likely to experience a slight increase from 47.7 to 48.0, reflecting the ongoing weakening of the sector. This marks the fifth consecutive month below the breakeven level of 50, with better regional readings contributing to the modest improvement.
Vehicle Sales Auto sales are projected to decline to 14.3 million (seasonally adjusted annual rate) in March from 14.9 million in February. Regional banking stress could lead to tighter lending standards, which may further impact sales.
Wednesday, Apr 5
Trade Balance The trade deficit for February is expected to widen to $68.8 billion from $68.3 billion. A larger surplus in net services balance, supported by an increase in overseas visits to the US, is anticipated, despite a stronger US dollar potentially affecting travel costs.
ISM Services ISM services in March are forecasted to remain stable at 55.0, indicating the services industry’s relative strength compared to the manufacturing sector. Regional indicators of service activity, including the Business Leaders’ survey, have shown improvement.
Friday, Apr 7
Employment Report A 265k increase in nonfarm payrolls is expected for the March employment report, reflecting a slight moderation from the first two months of the year. Private payrolls are projected to add 235k jobs, down from 265k in February. The recent banking crisis is not expected to significantly impact this month’s data, but hiring may slow in the coming months depending on the situation’s outcome. Average hourly earnings are predicted to grow by 0.3% month-over-month, with the year-over-year rate falling from 4.6% to 4.3%. The labor force participation rate is expected to remain unchanged at 62.5%, and the unemployment rate is anticipated to drop by a tenth to 3.5%.
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 Apr. 3, three S&P 500 companies are expected to report quarterly earnings.
Source I/B/E/S data from Refinitiv
Macro Market
Growth
In 2022, GDP growth experienced a slowdown, registering at 0.9% (4Q/4Q). Projections for 2023 indicate a further decline to -0.4% (4Q/4Q) due to the delayed impacts of tighter monetary policies and financial conditions, before rebounding by the fourth quarter of 2024.
Inflation
The anticipated mild recession in 2023, coupled with persistent goods deflation, is expected to result in disinflation next year. In 2022, headline PCE grew at 5.7% (4Q/4Q), with projections of 3.2% growth in 2023. Meanwhile, core PCE grew at 4.8% in 2022 and is estimated to reach 3.3% in 2023. These forecasts align with the Fed’s 2% inflation target by the end of 2024.
Federal Reserve
As anticipated, the Fed increased the target range for the federal funds rate by 25 basis points to 4.75-5.0%. Our revised outlook no longer predicts a 25bp rate hike in June, with the terminal rate now projected to reach 5.0-5.25% by May. The first rate cut is still expected in March 2024. However, if financial system stresses are alleviated promptly, stronger macro data could potentially lead the Fed to implement additional rate hikes beyond May.
Global Spotlight
Israel’s Cabinet to deliberate on a new national guard proposal. On April 2nd, Israeli National Security Minister Itamar Ben-Gvir’s proposal for a 2,000-strong national guard focused on crime and terrorism will be voted on by Israel’s Cabinet. While proponents argue the new force is necessary for maintaining security, detractors fear it could be used against Arab communities and the opposition. The establishment of this force would require special legislation and funding, with potential opposition from the Israel Defense Forces, Shin Bet, and Border Police due to concerns over resource allocation. Public protests surrounding the proposal indicate growing discontent over perceived attempts by the government to cater to the far-right at the expense of democratic values.
Macron and von der Leyen set to visit China in a united European front. French President Emmanuel Macron and European Commission President Ursula von der Leyen will head to Beijing on April 4th for discussions with Chinese President Xi Jinping. Unlike German Chancellor Olaf Scholz, who visited China independently last November, Macron emphasizes a coordinated European approach, as evidenced by von der Leyen’s inclusion. In a recent speech, von der Leyen emphasized the EU’s intent to toughen its stance on China and “de-risk” its relationship with Beijing. During their visit, both Macron and von der Leyen will likely urge China to abstain from supplying arms to Moscow in light of the ongoing war in Ukraine.
Taiwanese President Tsai Ing-wen embarks on California and Central America tour. On April 5th, Tsai will arrive in Los Angeles for a two-day visit, during which she is expected to meet with House Speaker Kevin McCarthy and other U.S. lawmakers. This would mark the first meeting between a Taiwanese president and a U.S. house speaker. Beijing may respond to this development with increased military pressure, including aerial incursions into Taiwan’s extended airspace and naval deployments near Taiwan’s coasts. Prior to her U.S. visit, Tsai will also meet with the presidents of Belize and Guatemala, potentially offering financial incentives to maintain their diplomatic support for Taiwan amidst increasing pressure from China.
Russian Foreign Minister Lavrov to visit Turkey amid heightened cooperation. On April 6-7, Sergei Lavrov will meet with Turkish Foreign Minister Mevlut Cavusoglu to discuss various areas of bilateral cooperation, including trade, energy, and tourism. They are also expected to address regional matters such as the situations in Ukraine, Syria, the South Caucasus, Central Asia, and Afghanistan. The visit comes as Turkish authorities increase efforts to prevent exports of sanctioned goods to Russia – a point of contention likely to be raised by Lavrov during their meeting. The talks will set the stage for a potential visit by Russian President Vladimir Putin to Turkey on April 27th, in which he may attend the loading of fuel at the Russia-constructed Akkuyu nuclear power plant, a project that will ultimately supply up to 10% of Turkey’s electricity needs.
