Without question, the primary pivot point in the schedule of economic and policy releases this week is Fed Chair Janet Yellen’s talk at the Economic Club New York on Tuesday. Given the shift in direction, as outlined at the last FOMC meeting, this week’s talk by Chair Yellen will give investors some gauge of when to expect the next move in rates and/or if they should expect only two.
Any shift in the tone and the resultant extrapolations from the most recent dot plot published by the Fed will likely introduce a degree of caution on the part of investors, given that the shift to a more dovish outlook has fueled in part the recent run up in prices. It has also provided a lift to crude while simultaneously allowing for the US dollar to recede from recent highs. Clearly, the Fed is incentivized to stay the current course.
On Friday, April 1, the Labor Department releases employment data for the month of March. Consensus is calling for a gain of 210,000 nonfarm payrolls in the period while the unemployment rate is expected to remain at 4.9%. Private payrolls are also expected to reflect a monthly gain. Average Hourly Earnings and the Average Workweek are expected to remain stagnant at 0.2% and 34.5 hours respectively. An unexpected monthly shift in employment gains could potentially act to trigger a tick lower in equity pricing. A stronger than expected gain would fuel concerns that a move in rates is closer than investors may be expecting (I am calling for a 25bps move in June). A slow down in the rate of employment growth may also trigger some weakness in equity pricing if it lends support to those calling for a weaker than expected Q1 and,as a result, fuels fear of a recession some time in the coming four quarters.
Last Friday’s economic data provided arguments for both scenarios. Q4 GDP was adjusted higher to 1.4% annualized, up from an initial reading of 0.8% and a revised reading of 1.0%. So we did receive some encouraging news in that the economic trough we hit at the conclusion of 2015 was not as severe as initially thought. However, corporate profits, as reported by the Bureau of Economic Analysis on Friday, did reflect another drop in the quarter. Corporate profits are a widely watched leading indicator and given that there is a high degree of correlation between corporate profits and a pending recession, Friday’s news was not encouraging.