As we navigate the uncertain waters of the upcoming week, we turn our focus to the macroeconomic market, and the pivotal question at its center: Will the Federal Reserve pause or pivot?
Federal Reserve Policy Outlook: A Pause More Likely Than a Cut
The array of data that has emerged since the Federal Open Market Committee (FOMC) meeting in May aligns well with our forecasts for the Federal Reserve’s actions. The robust April employment report might have suggested an increased likelihood of a June rate hike; however, recent data – including the Senior Loan Officer Opinion Survey (SLOOS), inflation figures, and claims – build a compelling case for a pause, all in the spirit of prudent risk management. Hence, we maintain our core assumption that the Fed will opt for a hiatus in June, holding steady until the commencement of rate cuts in the early part of next year.
Despite these indications, the market anticipates a more dovish stance from the Fed, pricing in significant cuts of 75 basis points in 2023 and an even steeper 160 basis points in 2024. However, we argue that the near-term risk to the policy trajectory leans more towards the upside. Simply put, with inflation rates soaring above double the Fed’s target and unemployment figures falling below each FOMC participant’s estimate of the natural rate, the Fed is more likely to hike than to cut rates. While a major recession could rapidly alter this landscape, recent data trends suggest a milder economic deceleration is more probable.
In our analysis, the Federal Reserve is unlikely to counteract a mild recession. Instead, it would view it as a tolerable cost for steering inflation back towards its target. As we head into the week ahead, this nuanced interpretation of macroeconomic signals will guide our understanding of the Federal Reserve’s strategy and the broader market dynamics.
The Hot Zones this Week
Each week there are zones where trading can get wild. I call these the hot zones.
Residential Construction: Housing Starts and Permits
The housing construction sector likely saw a slight dip in April, with housing starts predicted to have declined to a seasonally adjusted annual rate (SAAR) of 1.40 million, down from the previous 1.42 million SAAR. The March figures recorded a modest 0.8% contraction, driven primarily by a drop in multifamily starts, resulting in an overall year-on-year decrease of 17.2%. Despite these figures, it’s apparent that the housing sector continues to grapple for stability in the wake of last year’s affordability shock which significantly dampened activity.
A note of caution persists, however, particularly due to indications from the building permit data. In March, new private housing units authorized witnessed a substantial 7.7% month-on-month decrease. Our projections for April’s building permits foresee minimal fluctuation, with an anticipated SAAR of 1.425 million.
The housing market’s recovery from last year’s downturn remains cautious and measured, echoing the broader uncertainties in the macroeconomic landscape.
Secondary Housing Market: Existing Home Sales
Forecasts for April suggest a cooling trend in existing home sales, which are anticipated to dip to a seasonally adjusted annual rate (SAAR) of 4.20 million, down from the 4.44 million SAAR recorded in the preceding month. This decline follows the 2.4% month-on-month contraction observed in March, a reflection of homebuyer caution in the face of persistently low inventory levels and sustained high prices. Indeed, the stockpile of existing homes remains significantly below the levels seen prior to the pandemic.
Adding to the uncertainty is the unexpected downturn in pending home sales in March, the first of such since November. This metric is a notable indicator of future sales and its decline signals continued caution in the secondary housing market. These trends underline the ongoing challenges in the housing sector amid broader macroeconomic uncertainties.
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
Source I/B/E/S data from Refinitiv
Aggregate Estimates and Revisions
- 23Q1 Y/Y earnings are expected to be -0.6%. Excluding the energy sector, the Y/Y earnings estimate is -2.2%.
- Of the 457 companies in the S&P 500 that have reported earnings to date for 23Q1, 76.6% 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. 15, 15 S&P 500 companies are expected to report quarterly earnings.
The S&P 500’s Q1 2023 earnings are projected to show a year-on-year contraction of 0.6%. Excluding the energy sector, the expected year-on-year earnings dip is even more pronounced at -2.2%. As of the present, 76.6% of the 457 S&P 500 companies that have reported their Q1 earnings exceeded analyst estimates. This surpasses the long-term average of 66.3% and the average of the previous four quarters, which stands at 73.5%. In the coming week, starting May 15, an additional 15 S&P 500 companies are slated to release their quarterly earnings, providing further insight into the sector’s financial performance.
Macro Market
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Economic Expansion
The economic landscape witnessed a deceleration in the Gross Domestic Product (GDP) growth, which plunged to a modest 0.9% in the final quarter of 2022, year-over-year. Looking ahead, forecasts predict a more pronounced downturn, with GDP expected to slide into negative territory, registering a contraction of -0.2% in the same period in 2023. This anticipated decline can be attributed to the latent impact of tighter monetary policies and a stiffening financial climate, which have served to temper the economy. Nonetheless, the economic narrative is expected to shift positively by the final quarter of 2024, marking a return to recovery.
Price Dynamics
The impending mild economic contraction, coupled with a persistent trend of goods deflation, is set to usher in a period of disinflation this year. The Headline Personal Consumption Expenditures (PCE), a key inflation indicator, registered a 5.7% uptick in 2022, measured from the fourth quarter year-over-year. However, this rate of increase is projected to moderate to 3.1% in 2023. Concurrently, the core inflation rate, which excludes volatile food and energy prices, recorded a growth of 4.8% and is predicted to temper to 3.3% in the same period in 2023. Despite these changes, our projections align with the Federal Reserve’s inflation target of 2% by the conclusion of 2024, reiterating that the current inflation fluctuations are transient rather than persistent.
Federal Reserve Policy
In line with expectations, the Federal Reserve has raised its benchmark policy rate by 25 basis points, positioning it within the 5.0-5.25% range, and indicated that the current rate-hiking cycle may have reached its culmination. However, it’s crucial to note that the possibility of additional hikes remains on the table, and the Fed continues to maintain an upward bias in its policy rate guidance. This stance underscores the Federal Reserve’s commitment to its dual mandate and its readiness to adjust its policy tools as necessary to support economic stability.
Global Spotlight
Hiroshima G-7 Summit: Economic Focus
The forthcoming G-7 summit, scheduled for May 19-21, will be hosted by Japan in Hiroshima. Anticipated key discussions revolve around countering economic coercion and the heavy reliance on China for supply chains. However, U.S. President Joe Biden may remain stateside to address the escalating debt ceiling issue, casting doubts on the potential for a trilateral meeting with the leaders of South Korea and Japan. Furthermore, Germany’s expected push for public investment in natural gas is likely to be opposed by France and the U.K., potentially weakening the post-summit statements on critical matters such as climate change.
Turkey’s Tense Electoral Showdown
Turkish President Recep Tayyip Erdogan and the ruling Justice and Development Party (AKP) are bracing for their most challenging electoral battle in 22 years on May 14. Surveys indicate a close contest between the incumbent AKP and the six-party Nation Alliance opposition, with Erdogan’s position itself under threat. Regardless of the outcome, the election aftermath may be tumultuous, with potential allegations of fraud, electoral manipulation, and protests. An outright winner may not be declared for weeks.
Thailand’s Democratic Crossroads
Thailand is set to elect its 500 House of Representatives members on May 14, in what could be a significant turning point for the nation’s political future. This will be the country’s second election since the implementation of the military-written 2017 Thai Constitution, which handed the military establishment considerable institutional power. Amid Thailand’s history of military coups and recent anti-military governance unrest, the election’s perceived fairness will be critical in preventing a potential resurgence of mass protests and political deadlock.
Uncertain Future of Black Sea Grain Deal
The Black Sea Grain Deal, under Russia’s supervision, is set to expire on May 18, unless a renewal agreement is reached. Speculation suggests that a phone conversation between Russian President Vladimir Putin and Turkish President Recep Tayyip Erdogan may be imminent, potentially extending the deal by 60 days. Despite potential complications for Russia’s agricultural exports, the country is expected to remain in the deal. However, a perceived lack of progress on Russia’s demands, including the lifting of sanctions on the Russian Agricultural Bank, may cast the continued participation as an embarrassment. This uncertainty could exert upward pressure on global grain prices in the forthcoming weeks.
China’s Diplomatic Mission in Ukraine
China’s Special Representative on Eurasian Affairs, Li Hui, will embark on a diplomatic mission across Ukraine, Russia, Poland, France, and Germany, seeking a political resolution to the ongoing Russia-Ukraine conflict. Although the journey, announced on April 26, is unlikely to yield significant breakthroughs, it will offer insight into Kyiv’s and European states’ perspectives on Beijing’s initiative. This initiative may not gain traction until the year’s end, after war fatigue potentially sets in across the West.
