Markets are robust, FOMC unlikely to spoil party

The Week Ending Friday March 16th 2018

A quiet week of consolidation in most markets. Equities drifted off but have done well to move back to the February highs. More growth would need unexpectedly good earnings news – and the market is already pricing in good news following strong 2017Q4 and strong guidance for 2018.

The “whisper season” is now on in earnest as companies steer analysts to numbers for 2018Q1 that they think they can then beat, but even here the trend is for higher whisper estimates as opposed to the usual lower figures. US equities are doing well.

The strength is led by those companies with the biggest non-US exposure, but even those with less than average non-US exposure are expected to experience surging earnings and decent revenue growth, as Factset showed in their weekly report.

Commodities and the USD were largely flat over the week ignoring the political noise and comings and goings inside the Trump administration, despite some mid-week softness on the slightly weaker than expected February retail sales figures. Although a bit disappointing in the near term the longer term YoY trend for Retail Sales was still fairly healthy, even if far from ideal.

Good news – inflation expectations begin to move up

The yield curve flattened slightly as markets focused on the likely upcoming rate rise next week after the FOMC meeting.

Rates had fallen slightly on those Retail Sales Figures, but only a little. The 5-Year Breakeven Inflation rate stayed above 2% at near term highs. Interestingly the rise in Breakeven Inflation was echoed by the UMichigan survey of near term expected inflation that pushed up to 2.9% from 2.7%. Longer-term inflation expectations remained well anchored. The CPI data last week were also resolutely dull.

Business is good, not just equities

Data and surveys on business were generally positive. Industrial and Manufacturing Production indexes for February both showed continued improvement as did Capacity Utilization. Surveys for March from the Philly Fed were solid and the NY Fed strong. Our NGDP Forecast for 2019Q1 was unchanged at the 4%+ level achieved over recent months. The 2018Q1 Nowcast for RGDP from the Atlanta Fed was badly hurt by the retail sales disappointment, dropping to 1.8%.

All eyes on Powell

Next week there is little data but of massive interest will be the FOMC projections for rates, inflation, unemployment and growth – plus the market and media excitement of Powell´s first press conference.

It’s unlikely there will be much actual news as he seems a cautious, carefully-spoken, guy as evidenced by his recent appearances in Congress.

It’s a shame that Lael Brainard has gone hawkish but the Chair of the Board is very powerful. The appointment of Larry Kudlow to replace Cohn as Chief Economic Adviser is also interesting. Kudlow has been willing to speculate about different inflation targets and other novel ideas, something Cohn had no interest in whatsoever. In an interview on his appointment he was very forthright and very refreshing:

The incoming adviser waded right in, urging the central bank not to “overdo it” in raising interest rates. “Growth is not inflationary. Just let it rip, for heaven’s sake,” he said.

Go Larry, go.

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