In the ever-shifting landscape of economic forecasts and Federal Reserve policy maneuvers, understanding the fine print of recent developments and their potential impacts is crucial. With this in mind, we delve into the cautious stance taken by the Federal Open Market Committee (FOMC) in their May meeting, the key factors that could trigger a potential rate hike in the coming months, the disparate viewpoints within the Fed’s ranks, and the revised GDP growth rates for the U.S. Amidst robust inflation figures and a complex scenario of regional bank stress, the Fed’s next move may significantly shape the course of economic recovery. This blog post aims to unpack these factors, offering an overview of the current economic landscape and potential trajectory of Federal policy. Buckle up as we navigate the fascinating interplay of data, projections, and policy implications that frame our economic future.
Fed’s Caution
The Federal Open Market Committee (FOMC) meeting that took place earlier in May showcased a careful approach by policymakers regarding the Fed’s next steps. At the time, several participants questioned the necessity of further tightening. The skepticism was driven by the perceived slow progress towards the Fed’s 2% inflation target. However, the minutes of the meeting seem somewhat outdated now, considering that they predate the release of the April employment and CPI reports. Since then, despite the absence of clear signs of inflation slowdown, developments on regional bank stress and credit tightening risks have been relatively positive. Our base case remains the Fed will not hike in June, but will maintain a tendency to hike moving forward.
Meeting the Preconditions for a Rate Hike
Analyzing the conditions necessary for the Fed to hike in June or July, we can identify three key factors: strong employment and inflation data, a deal to raise the debt ceiling, and subdued regional bank stress. Current data supports further tightening, with inflation running at over double the target rate and unemployment lower than the FOMC’s estimates. We believe that robust nonfarm payroll growth, a steady or falling unemployment rate, and a core CPI of around 0.4% m/m could push for additional tightening. The imminent decision on the debt ceiling, alongside decreasing regional bank stress and credit tightening risks, will likely influence the Fed’s moves in the coming months.
Analyzing Federal Reserve Stances
Recent remarks by various Fed officials indicate a diversity of views surrounding the June policy decision. Some lean towards a hike, others towards a pause, with Chair Powell remaining non-committal. Governor Waller advocated for either a hike in June or a hold with a bias to hike going forward, showing concern about the lack of progress on inflation. Despite potential uncertainty in June, the data support an increasingly strong bias to hike moving forward.
1Q US GDP Revisions and Forecast
Following a slight upward revision, the 1Q US GDP growth rate now stands at 1.3% q/q saar, while projections for the 2Q have been adjusted downward to 1.1% q/q saar. Despite lower-than-expected residential investment in 1Q due to downward revisions in new home sales, government spending, inventory accumulation, household spending on services, and equipment investment showed positive signs. The outlook for next week will be influenced by April’s construction spending and the May employment report.
The Hot Zones this Week
Another thrilling week of market activity! As we navigate through this week’s hot zones, remember that trading during key economic releases can be akin to sailing through stormy waters—thrilling, yes, but potentially turbulent. So, let’s keep our eyes on the horizon, our hands steady on the helm, and remember, fortune favors the well-prepared.
Each week there are zones where trading can get wild. I call these the hot zones.
As I look ahead to the forthcoming May employment report, I anticipate further evidence of the sustained resilience in the US job market. My prediction points to an addition of 200,000 nonfarm payrolls (NFP), a figure that, while modestly lower than April’s gain of 253,000, comfortably exceeds the growth necessary to counterbalance the natural increase in the labor force. This would help maintain a tight labor market and apply downward pressure on unemployment rates.
This forecast is bolstered by the consistency of robust claims data, especially the initial jobless claims, which remained low during the May survey period, an indicator of high job retention. In line with this, continuing claims, an effective measure of unemployment, dropped between the April and May survey weeks, implying a likely acceleration in hiring.
Turning to wages, I predict a moderate rise of 0.3% month-on-month in average hourly earnings, keeping the year-on-year rate steady at 4.4%. Early signs of a slight reduction in job openings, as observed in the recent data from Indeed, suggest a healthier balance between labor demand and supply, thereby easing wage pressures.
In terms of labor force participation, I expect the rate to hold firm at 62.6% for the third consecutive month. Given the current rate’s compatibility with the US economy’s demographic factors and the marginal attachment levels closely mirroring pre-pandemic times, I see little room for substantial increases in participation rates. Therefore, considering the projected growth in NFP and a steady participation rate, I forecast the unemployment rate to remain unchanged at 3.4%.
Stratfor.com
Macro Market
Growth
Looking at our growth predictions, we saw a slowdown in GDP growth to 0.9% last year, and I’m afraid we’re predicting a slight dip into the negative territory with a forecast of -0.2% for 2023. This is mainly due to the aftereffects of stricter monetary policies and financial conditions cooling the economy. However, don’t worry too much, we’re looking at a recovery by the fourth quarter of 2024.
Inflation
On the inflation front, this year might bring a mild recession and ongoing goods deflation, leading to what we call disinflation. Now, the PCE increased by 5.7% last year, but we’re expecting it to grow at a slower pace, around 2.9%, this year. Similarly, the core grew at 4.8% and we expect it to reach 3.3% in 2023. Our predictions suggest that inflation will still align with the Fed’s 2% mandate by the end of 2024, so keep that in mind.
Federal Reserve
Moving onto the Federal Reserve, as anticipated, it hiked its policy rate by 25 basis points to a range of 5.0-5.25%. The word on the street is that they’re likely done hiking rates for this cycle. But we can’t completely dismiss the possibility of additional hikes. The Fed has shown an upward bias in its policy rate guidance, so let’s keep an eye on that.
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
“Earnings Projections and Analyst Expectations”
Earnings projections for the first quarter of 2023 are trending negative, with year-on-year earnings expected to dip by 0.1%. The forecast appears more somber when the energy sector is excluded, pushing the projected earnings decline to -1.8% year-on-year. Despite this, there are silver linings as companies are outperforming analyst expectations. In the S&P 500, 77.1% of the 485 companies that have released their Q1 earnings reports have exceeded forecasts, outpacing the long-term average of 66.3% and the preceding four-quarter average of 73.5%. The earnings season is not over yet; during the week of May 29, nine more S&P 500 companies are set to release their quarterly reports.
Aggregate Estimates and Revisions
- 23Q1 Y/Y earnings are expected to be -0.1%. Excluding the energy sector, the Y/Y earnings estimate is -1.8%.
- Of the 485 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. 29, nine S&P 500 companies are expected to report quarterly earnings.
Source I/B/E/S data from Refinitiv
Global Spotlight
Presidential Showdown in Turkey
As the presidential runoff elections draw closer in Turkey, citizens prepare for another trip to the ballot box on May 28th. With the previous round of voting pointing towards a potential victory for the incumbent candidate Recep Tayyip Erdogan, his challenger Kemal Kilicdaroglu is facing an uphill battle. Erdogan’s probable re-election might pave the way for a consistent policy approach, with notable shifts towards market-friendly fiscal strategies in an effort to boost foreign currency reserves and stabilize the fluctuating lira currency.
Transition of Power in Nigeria
Nigeria is on the verge of a new era as President-elect Bola Tinubu steps into office on May 29 in Abuja. Despite legal obstacles following his February election and the dismissal of a lawsuit by the opposition People’s Democratic Party, Tinubu is poised to follow the policy path laid out by outgoing President Muhammadu Buhari. However, the future president will be at the helm of a deeply divided nation, tackling issues from an unsustainable fuel subsidy to an alarming rise in insecurity and dwindling foreign investment.
Transatlantic Tech and Trade Talks
EU Trade Commissioner Valdis Dombrovskis and EU Competition Commissioner Margrethe Vestager are set to join discussions with U.S. State Secretary Antony Blinken, U.S. Trade Representative Katherine Tai, and U.S. Commerce Secretary Gina Raimondo in Lulea, Sweden, for the fourth EU-U.S. Trade and Technology Council (TTC) meeting on May 30-31. In the aftermath of the G-7 meeting, the summit is expected to strategize on the development and implementation of new measures to deal with China’s protectionist economic policies, including investment screening and restriction on semiconductor and technology exports to China.
Expansion in BRICS Horizon
South Africa is gearing up to host a meeting with the foreign ministers of BRICS nations on June 1 and a subsequent meeting with the “friends of BRICS” from other non-Western countries on June 2 in Cape Town. The prospect of enlarging the group’s membership looms large, with 13 nations having formally applied for inclusion. An extended BRICS could amplify its influence in non-Western global forums, bolster its financial institutions like the New Development Bank, and facilitate better cooperation on shared interests. However, diversifying the membership could also increase the probability of internal conflicts among its members, potentially limiting strategic and security cooperation.
U.S. Debt Ceiling Dilemma
As the deadline for raising the U.S. debt ceiling nears, crunch-time negotiations between the White House and House Republican leadership are due to conclude over the weekend. The U.S. Treasury has warned of possible default on obligations come June 1, unless both houses of Congress agree to raise or suspend the debt ceiling. Despite President Joe Biden and House Speaker Kevin McCarthy showing signs of reaching an agreement, resistance from Republican lawmakers, particularly those in the hard-right Freedom Caucus, could still derail the negotiation process. If the legislation fails to pass by June 1, although not leading to an immediate default, it could instill fear in the markets and have a significant impact on the U.S. economic outlook.
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