Welcome to our latest blog post, where we dive into the fascinating world of economics and provide you with valuable insights into the current state of the economy. In this post, we will explore GDP growth, inflation, and the actions of the Federal Reserve. Additionally, we will take a closer look at recent consumer and producer price index reports, as well as their potential implications for the economy.
The Hot Zones this Week
Each week there are zones where trading can get wild. I call these the hot zones.
April CPI Forecast
In the upcoming April CPI report, we predict a 0.4% increase in headline inflation, potentially maintaining the year-over-year rate at 5.0%. For core inflation, we expect a robust 0.3% growth, with risks of rounding up to 0.4% month-over-month. This forecast may result in the core inflation year-over-year rate dropping slightly to 5.5%. Within core inflation, core goods and core services are anticipated to rise by 0.2% and 0.4% month-over-month, respectively.
April PPI Forecast
For the April PPI report, we forecast a 0.2% month-over-month increase in headline PPI, following a 0.5% decline in March, leading to a year-over-year rate decrease to 2.3%. The growth is expected to be driven by rising energy and food prices. Excluding food and energy, we predict a modest 0.1% rise in core PPI, resulting in a year-over-year rate decline to 3.1%. Trade services, which heavily impacted core PPI in March, are anticipated to experience a more modest decline of 0.2% month-over-month. Lastly, we expect core-core PPI, excluding food, energy, and trade services, to increase by 0.2% month-over-month or 3.4% year-over-year.
Macro Market
Growth
The GDP growth rate diminished to 0.9% in 2022 (4Q/4Q), and we now anticipate a further decline to -0.2% in 2023 (4Q/4Q) as the economy cools due to the delayed effects of tighter monetary policy and financial conditions. However, a recovery is expected by 4Q 2024.
Inflation
A mild recession and ongoing goods deflation this year are likely to result in disinflation. Headline PCE increased by 5.7% in 2022 (4Q/4Q) and is projected to grow at 3.1% in 2023, while core PCE expanded by 4.8% and is forecasted to reach 3.3% in 2023. Our predictions align with the Fed’s 2% mandate for inflation by the end of 2024.
Federal Reserve
As anticipated, the Fed raised its policy rate by 25 basis points to 5.0-5.25% and indicated that it is likely finished with rate hikes for this cycle. However, additional hikes cannot be entirely dismissed, and the Fed maintains an upward bias in its policy rate guidance.
Economic Calendar
Briefing.com has a good U.S. economic calendar for the week. Here are the main U.S. releases.
Briefing.com
Earnings
Aggregate Estimates and Revisions
- 23Q1 Y/Y earnings are expected to be -0.7%. Excluding the energy sector, the Y/Y earnings estimate is -2.4%.
- Of the 419 companies in the S&P 500 that have reported earnings to date for 23Q1, 77.1% 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. 8, 32 S&P 500 companies are expected to report quarterly earnings.
For 23Q1, year-over-year earnings are anticipated to be -0.7%; however, excluding the energy sector, the estimate drops to -2.4%. So far, 77.1% of the 419 S&P 500 companies that have reported earnings have exceeded analyst expectations, surpassing the long-term average of 66.3% and the previous four-quarter average of 73.5%. In the coming week, 32 more S&P 500 companies are scheduled to announce their quarterly earnings results.
Source I/B/E/S data from Refinitiv
Global Spotlight
Victory Day Tension
Russia gears up for Victory Day celebrations amidst potential Ukrainian counteroffensive. This May 9, Russia will observe its most significant holiday, Victory Day, honoring the Soviet Union’s triumph over Nazi Germany in World War II. Despite canceling numerous traditional parades and events due to safety concerns, President Vladimir Putin will proceed with his speech at the Red Square parade. With the ongoing invasion of Ukraine, this year’s event carries heightened emotions and speculation of a Ukrainian counteroffensive. It is unlikely Ukraine will act before the holiday, to avoid giving Putin a reason to call for new mobilization measures during his speech.
Diplomatic Saudi Visit
U.S. National Security Advisor seeks to mend relations with Saudi Arabia. Jake Sullivan is set to visit Saudi Arabia on May 6, meeting with Saudi and Emirati officials. The United States seeks to strengthen ties amidst concerns over Saudi Arabia’s independent energy strategy, human rights record, and intervention in Yemen. However, the U.S. is increasingly worried about Saudi Arabia’s potential drift toward China, which became its largest oil export market in 2022. Unless the U.S. provides the security and political assurances Saudi Arabia seeks, it will be challenging for Sullivan to halt this drift and restore the once-close relationship.
Japan-Korea Diplomacy
Japanese Prime Minister rekindles ties with South Korea. Fumio Kishida will visit South Korean President Yoon Suk Yeol in Seoul on May 7 for a two-day trip, marking a renewal of shuttle diplomacy between the nations after years of strained relations. The leaders are expected to discuss national security concerns, including North Korea and China, and collaborate on high-tech initiatives, particularly advanced semiconductors supply chains. Improved Japan-South Korea relations benefit the United States, which aims to counter China’s growing military influence in the Asia-Pacific region.
Chilean Council Election
Chile elects Constitutional Council amidst moderate expectations. On May 7, Chile will conduct an election to choose the 50 Constitutional Council members who will contribute to the basic text drafted by a coalition of experts. The involvement of these experts suggests a more moderate outcome than the left-wing constitution Chileans voted down in a September 2022 referendum. However, if a significant number of left-wing and independent members join the council, they may still advocate for expanded state presence in healthcare, pensions, and education, potentially reducing private sector influence. These members could also push for changes to water and land rights, potentially impacting Chile’s business-friendly copper and lithium mining sectors.
