As we approach a critical event this week, all eyes are on the Federal Reserve’s upcoming FOMC Rate Decision on Wednesday, May 3rd. Market participants eagerly await the outcome, as it will provide valuable insights into the central bank’s assessment of current economic conditions and its plans for future monetary policy actions. In light of recent economic data and ongoing banking sector stress, this FOMC meeting holds significant importance for investors and analysts alike, setting the stage for potential shifts in market sentiment and dynamics. Stay tuned for an in-depth analysis of the Fed’s decision and its implications for the financial landscape.
FOMC Rate Decision
I expect the Fed to hike by 25bp at next week’s meeting, but more importantly, I believe the Fed will signal a pause in June, with a weak bias towards hiking rather than cutting rates going forward. This implies potential edits to the FOMC statement regarding “additional policy firming” and “future increases in the target range.” The challenge lies in credibly signaling an extended hold and countering market expectations of rate cuts, especially amidst the recent banking sector stress.
Keep in mind that the Fed will have access to the 2Q Senior Loan Officer Opinion Survey (SLOOS) results for the May meeting, although these results will only be made public the following week. The Beige Book indicates further credit tightening in six of the 12 regional Fed banks since January, suggesting that SLOOS data will support a pause in June. However, with two employment and CPI reports between the May and June meetings, the Fed will likely remain cautious about ruling out a June hike entirely, in case the data reveal unexpectedly strong results.
The Hot Zones this Week
Each week there are zones where trading can get wild. I call these the hot zones.
Construction Spending In my view, construction spending likely remained flat this month, following a 0.1% drop in February. The housing sector’s retrenchment, fueled by rising rates and declining sales, will probably continue to negatively impact residential construction spending. However, the decline might be smaller as the housing sector searches for stability. Meanwhile, non-residential construction spending growth is expected to slow due to reduced investments by firms and the government.
ISM Manufacturing I anticipate the April ISM manufacturing index to slightly decrease by 0.3pts to 46.0, marking its sixth consecutive reading below 50. Regional surveys have been mixed, with some positive surprises from the Empire State and Philadelphia Fed manufacturing surveys, but softer readings from the Dallas and Richmond Fed regions.
Total Vehicle Sales I expect auto sales to rise to 15.1 million saar in April, up from 14.8 million in March. This level would imply solid year-over-year growth but would still be below trend. While demand appears robust, I’m concerned that regional bank stress could tighten lending standards and negatively impact sales going forward.
ISM Services For April, I believe the ISM services index likely increased to 53.0 from 51.2 in March. While the index can be volatile, it typically experiences partial reversals in the following months after large swings in one direction.
Initial Jobless Claims I expect initial jobless claims to rise to 238k in the week ending April 29, following last week’s surprising 16k decrease to 230k. As layoffs in the technology and finance sectors continue, I anticipate them to appear in the data, albeit with some delay.
Trade Balance I predict the March trade deficit will narrow to $63.5 billion, down from $70.5 billion. The advanced goods trade deficit’s surprising shrinkage could indicate a domestic demand slowdown due to high inflation and tight monetary policy. However, net travel services should support a larger net services balance surplus as travel has mostly normalized.
Nonfarm Productivity I forecast a 2% q/q saar decline in nonfarm productivity for 1Q 2023, attributable to soft GDP growth and robust growth in hours worked. This decline would mark the fifth consecutive drop in productivity on a y/y basis. Concurrently, I anticipate a 5.8% q/q saar rise in unit labor costs, or 5.6% y/y.
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 -1.9%. Excluding the energy sector, the Y/Y earnings estimate is -3.5%.
- Of the 267 companies in the S&P 500 that have reported earnings to date for 23Q1, 77.9% 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 May. 1, 162 S&P 500 companies are expected to report quarterly earnings.
In 23Q1, S&P 500 companies’ year-over-year earnings are projected to decline by 1.9%. However, when excluding the energy sector, this estimate drops further to -3.5%. So far, 267 companies in the index have reported their earnings, with 77.9% surpassing analysts’ expectations, which is higher than both the long-term average of 66.3% and the previous four-quarter average of 73.5%. During the week of May 1, an additional 162 companies from the S&P 500 are slated to announce their quarterly earnings results.
Source I/B/E/S data from Refinitiv
Macro Market
Growth
GDP growth slowed down to 0.9% in 2022 (4Q/4Q) and we now expect it to decline further to -0.2% in 2023 (4Q/4Q) as the lagged effects of tighter monetary policy and financial conditions cool the economy before recovering by 4Q 2024.
Inflation
A mild recession this year and ongoing goods deflation should lead to disinflation this year. Headline PCE grew at 5.7% in 2022 (4Q/4Q) and is expected to grow at 3.1% in 2023, while core grew at 4.8% and is expected to come in at 3.3% in 2023. Our forecast still puts inflation broadly in line with the Fed’s 2% mandate by 2024 end.
Federal Reserve
We expect the Fed to hike by 25bp at the May FOMC meeting. More importantly, we think the Fed will signal a pause in June, with a weak bias to hike rather than cut rates going forward. We maintain the first rate cut in March 2024.
Global Spotlight
Close Presidential Race in Paraguay
Paraguay’s April 30 presidential election presents a spirited competition between incumbent candidate Santiago Pena of the conservative Colorado Party and opposition candidate Efrain Alegre, leader of a diverse center-left coalition. With pre-election polling showing a virtual tie, the outcome is uncertain, highlighting the vibrant democracy in Paraguay. Regardless of the winner, the next president will have the opportunity to address fiscal spending and corruption, responding to both legislative and popular demands.
UK Local Elections Test Leadership
Over 230 councils in England will hold local elections on May 4, offering Rishi Sunak a chance to demonstrate his leadership as the United Kingdom’s prime minister and leader of the Conservative Party. These elections will also serve as a barometer for the opposition Labour Party’s potential in the upcoming general election, providing valuable insights for both parties. The results will help inform future strategy and policy as the nation moves forward.
SCO Meeting Brings Pakistan, India Together
India’s hosting of a Shanghai Cooperation Organization (SCO) meeting on May 4-5 in the southwestern state of Goa will bring together foreign ministers from member countries, including Pakistan’s foreign minister. This visit, by the highest-ranking Pakistani official to India since 2014, signals the significance of regional cooperation and has the potential to promote a thaw in relations between the two neighbors.
Israeli Parliament Resumes, Tackles Reforms
As the Israeli Knesset reconvenes on April 30, the government will have the opportunity to address the contentious issue of judicial reforms. This process demonstrates the robust democratic debate in Israel, as differing opinions seek to shape the country’s future. With the goal of completing the reforms by the end of May, the government will have the chance to address public concerns and find a path forward that balances the needs of all Israelis.
Stratfor.com
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