The Federal Reserve is determined to combat core inflation, which excludes the more volatile food and energy prices. Since March 2022, the Fed has raised the target range for the fed funds rate nine times, accumulating a total increase of 475 basis points. Although core CPI has decreased from 6.6% in September to 5.6% today, it remains well above the Fed’s target of 2.0%.
A significant contributor to the increase in core CPI is the shelter index, which accounts for over 60% of the rise. As house price gains have decelerated, the shelter index is expected to impact core CPI calculations more positively in the coming months. In March 2023, the shelter index increased by 0.6% month-over-month and 8.2% year-over-year. When excluding shelter, total CPI, which rose by 5.0% year-over-year in March, stands at 3.4% year-over-year.
However, the Fed remains concerned about services inflation, which was up 7.2% in March. Even when excluding shelter, services inflation is still at 6.1% year-over-year, which is considered too high by the Fed. This ongoing inflation issue could lead the Fed to implement another rate hike in May.
Fed Chair Powell has previously expressed concerns about the lack of visible disinflation in core services, excluding housing. While there has been some improvement, it may not be sufficient to convince the Fed to pause its rate hikes. Several Fed officials have also indicated that more work is required to reduce inflation.
JPMorgan Chase CEO Jamie Dimon and BlackRock CEO Larry Fink have both emphasized the need for people to be prepared for higher rates for a longer period, with Fink adding that inflation is likely to be more persistent than expected. The prospect of an extended tight monetary policy could weigh on stock and bond markets throughout 2023, assuming the debt ceiling issue is resolved without any defaults.
Currently, the fed funds futures market has priced in two rate cuts by the end of the year, down from three rate cuts just a week ago. The CME FedWatch Tool indicates a 78.8% probability of a 25-basis point rate hike at the May meeting, followed by a 67.0% probability of a pause in June. The first rate cut is projected for September, with the second cut in December.
The Fed’s unwavering stance could force both the front end of the Treasury curve and the stock market to reassess their bullish positions. Despite current market sentiments, the Fed’s signaling and the persistence of services inflation suggest that another rate hike in May is likely.
The Hot Zones this Week
Each week there are zones where trading can get wild. I call these the hot zones.
Investors should always remain cautious and pay close attention to upcoming economic announcements, as they can have a significant impact on market movements. These announcements provide valuable insights into the health of various sectors and the overall economy, often influencing investor sentiment and decision-making. By staying informed about these releases, investors can better anticipate potential market trends, allowing them to make more informed decisions about their portfolios.
NAHB Housing Market Index
The April NAHB homebuilder index is expected to improve to 45 from 44 in the previous month. Despite high building costs and mortgage rates, the demand for homes remains strong as buyers anticipate further declines in interest rates. Moreover, mortgage applications have increased throughout March, potentially boosting builder optimism.
Empire Manufacturing
The Empire State manufacturing index is forecasted to remain in contraction territory at -15.0 in April. Although this would signify a slight improvement from the previous month’s reading of -24.6, it still indicates weak manufacturing activity in the region. In fact, this would mark the fifth consecutive negative print.
Housing Starts & Permits
In March, housing starts likely decreased to 1.40 million (seasonally adjusted annual rate) from 1.45 million in the previous month. Although February experienced a 9.8% rebound in housing starts, driven by multi-family starts, they were still 18.4% lower on a year-over-year basis and continued to decline on a 6-month moving average basis. During the first half of March, 30-year fixed mortgage rates rose to over 6.7% and remained around 6.5% for the rest of the month, potentially deterring homebuyers due to affordability issues. Furthermore, building permits in March are forecasted to decline to 1.45 million (seasonally adjusted annual rate) from 1.55 million previously.
Existing Home Sales
Existing home sales are expected to decline moderately to 4.50 million (seasonally adjusted annual rate) in March, from 4.58 million in the previous month. In February, sales surged 14.5% as buyers took advantage of declining mortgage rates and cooling home prices amid limited inventory. However, mortgage rates increased during the first half of March to above 6.5%, potentially challenging potential buyers. Recent housing data indicates that the housing sector is attempting to find a bottom. The impact on housing affordability and additional interest rate hikes from the Fed may cause homebuilders to remain cautious while monitoring volatile mortgage rates.
S&P Global US Manufacturing and Services PMI
The preliminary April S&P Global US manufacturing PMI is expected to decline from 49.2 to 48.0 due to weaker manufacturing activity as demand for goods continues to cool. Output, new orders, and employment are all anticipated to decline this month, contributing to the fall in the headline index.
The preliminary April S&P Global US services PMI is predicted to decline by roughly 1 percentage point to 51.5, marking the third consecutive print above 50. Despite being below the breakeven 50 level for some time, the index has recently rebounded. Demand for services remains relatively healthy, based on high-frequency indicators, including aggregated credit and debit card data.
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
- 23Q1 Y/Y earnings are expected to be -4.8%. Excluding the energy sector, the Y/Y earnings estimate is -6.2%.
- Of the 30 companies in the S&P 500 that have reported earnings to date for 23Q1, 93.3% have reported earnings above analyst estimates. This compares to a long-term average of 66.3% and prior four quarter average of 73.5%.
- During the week of Apr. 17, 62 S&P 500 companies are expected to report quarterly earnings.
In summary, the S&P 500 companies are expected to experience a 4.8% decline in year-over-year earnings for Q1 2023. Excluding the energy sector, the decline increases to 6.2%. So far, 93.3% of the 30 companies that reported earnings have beaten analyst expectations. The week of April 17 will see 62 more S&P 500 companies reporting their quarterly earnings, which will provide further insight into the market’s overall performance.
Source I/B/E/S data from Refinitiv
Macro Market
Fed’s Monetary Policy
I no longer expect a 25bp rate hike in June and now foresee a terminal rate of 5.0-5.25% by May. I maintain my projection of the first rate cut in March 2024. Should the stresses in the financial system be reduced in short order, I cannot rule out that stronger macro data will lead the Fed to implement additional hikes beyond May.
Fed’s Monetary Policy
I no longer expect a 25bp rate hike in June and now foresee a terminal rate of 5.0-5.25% by May. I maintain my projection of the first rate cut in March 2024. Should the stresses in the financial system be reduced in short order, I cannot rule out that stronger macro data will lead the Fed to implement additional hikes beyond May.
Fed’s Monetary Policy
I’ve revised my expectations and no longer predict a 25bp rate hike in June. I now anticipate a terminal rate of 5.0-5.25% by May, while still maintaining my projection of the first rate cut in March 2024. If the stresses in the financial system are reduced promptly, I believe that stronger macro data may lead the Fed to implement additional rate hikes beyond May.
Global Spotlight
Chinese-Russian Defense Talks
The Chinese defense minister visits Russia. New Chinese Defense Minister Li Shangfu will meet with his counterpart, Sergei Shoigu, on April 16 in Russia to discuss global and regional security issues and bilateral military cooperation. The visit comes amid signs that Beijing aims to buy more weapons from Russia, though the Shangfu-Shoigu meeting may not result in concrete breakthroughs on the topic. Such meetings between Beijing and Moscow heighten growing worries in the United States and Europe that China is effectively supporting Russia’s war in Ukraine, reducing the modest chances that Beijing can mediate the conflict. Chinese President Xi Jinping has yet to call Ukrainian President Volodymyr Zelensky despite rumors he would do so soon after his meeting with Putin in mid-March meaning Beijing’s reputation in Kyiv may also be declining.
Nigerian Election Unrest
Nigeria holds supplementary local elections. Nigeria will hold supplementary gubernatorial elections in Adamawa and Kebbi states and supplementary senatorial elections in Kebbi, Sokoto and Zamfara states April 15. The Independent National Electoral Commission postponed local elections in these states after violence and voting machine malfunctions prevented accurate polling from taking place on the scheduled date of March 18. The extended electoral timeline has prolonged business closures and the risk of election-related violence in these states, which will likely persist until election results are declared. While the ruling All Progressives Congress has already secured majorities in the Senate and among state governors, its majority in the House of Representatives is not guaranteed; the upcoming 31 federal constituency elections will determine about 10% of the House’s 360 seats.
Japan’s Climate Ambitions
Japan seeks G-7 support for its climate strategy. Japan, which holds the G-7 presidency in 2023, will host the group’s environmental and climate ministers April 15-16 and hopes to get their backing for certain aspects of its climate strategy. Two key issues to watch for are whether the G-7 will back the use of hydrogen and its derivatives, notably ammonia, for cogeneration in power plants, and for language regarding investment in and the use of natural gas. Tokyo, which is intensely focused on energy security in the wake of the Ukraine war, has been pushing the G-7 to increase flexibility around investments in natural gas. It is also hoping to use ammonia to reduce emissions by offsetting some coal use at its thermal power plants using a 1-1 ratio of coal to ammonia.
US-Vietnam Diplomatic Tensions
Blinken travels to Vietnam. U.S. Secretary of State Antony Blinken on April 15 will travel to Vietnam for a state visit, where he will meet with Vietnamese leaders and participate in a ceremony breaking ground on the new U.S. Embassy in Hanoi. Washington has long expressed interest in upgrading formal ties with Vietnam, and momentum toward that end has been strong in recent weeks. But U.S. condemnation hours before Blinken’s departure of the imprisonment of blogger and Radio Free Asia contributor Nguyen Lan Thang threatens to undermine that goal, with the United States now saying Vietnam must improve its human rights record for the bilateral relationship to meet its full potential. The two countries could still upgrade relations over the weekend, though the main immediate result could be a state visit between U.S. President Joe Biden and Vietnamese Communist Party chief Nguyen Phu Trong, which would be a first between the two leaders.
Stratfor.com
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