Thursday, March 14, 2013
This morning’s benign inflation reading and another solid labor market report provide the favorable backdrop for today’s trading action. This is enough fuel to keep the stock market momentum in place – a momentum that is steadily pushing the S&P 500 towards the record levels already achieved by other market indices.
The Jobless Claims numbers confirm what we saw from last week’s strong non-farm payroll report - that the labor market is steadily improving. Initial Jobless Claims dropped by 10K last week to 332K, while the expectation was for a modest rise. The four-week average dropped by 2.8K to 346.8K. With the four-week average now under the all-important 350K, we could reasonably expect monthly non-farm payrolls from the BLS next month around the February levels (‘headline’ gains of +236K and private sector of +246K).
This would indicate that the U.S. economy had plenty of momentum ahead of the sequester which took effect at the start of this month. In fact, the most plausible explanation for the February Retail Sales strength appears to be that the improved labor market and the resultant boost to household buying power is helping offset the drag from higher payroll taxes, elevated gasoline prices, and delayed IRS refunds. Going by the Retails Sales momentum in the first two months of the quarter, it appears that consumer spending in the first quarter will likely come in better than the preceding quarter’s +2.1% growth pace. This would be a material upgrade in the growth outlook from what was expected just a few weeks back.
Regular readers know that I have been skeptical of the market’s recent gains, primarily on fundamental grounds. I have been arguing that the outlook for the U.S. economy and corporate profits reflected a far too optimistic scenario that would likely not pan out. I am still in that camp, but have to concede that data along the lines of what we have been getting lately about consumer spending and the labor market would justify optimism about the economy. But if that is the case, meaning that the economy is getting better despite the fiscal drag, then we will need to start worrying about the course of monetary policy.
And it probably isn’t unreasonable to wonder whether the market can sustain its gains should Fed expectations start to evolve in the opposite direction. I am of the view that the market wouldn’t wait for a formal Fed announcement to that effect; interest rates will likely move ahead of the eventual change in the Fed’s course. While it’s fun to keep track of the stock market indices in record territory, but I will be watching interest rates. Next week’s Bernanke press conference will likely be very informative. Stay tuned, these are interesting times.
Director of Research