Last week's weak GDP report, strong spending report, and mixed jobs report have given economists and policymakers plenty to think about.
While there isn't much on the economic data calendar, several key Federal Reserve officials will be speaking this week.
On Tuesday, Fed Governor Jeremy Stein will speak about monetary policy communication; on Wednesday, Fed Chair Janet Yellen will testify to Congress about the economic outlook; on Thursday, Philly Fed President Charles Plosser will speak about monetary policy communication and transparency; and on Friday, Dallas Fed President Richard Fisher will speak about the limits of monetary policy.
Everyone will be listening for clues on where monetary policy might be headed next.
Here's your Monday Scouting Report:
Top Stories
- What 0.1% Growth Means For Monetary Policy: U.S. GDP growth slowed to just 0.1% in Q1 from 2.6% in Q4. This was much weaker than the 1.2% expected by economists. Tumbling exports, capital expenditures, and government spending all contributed to the slowdown. Wall Street offered their fair share of spin.
Morgan Stanley's Matthew Hornbach was reminded of this quote from a March 6 WSJ interview with NY Fed president William Dudley: "If the economy decided it was going to grow at 5% or the economy decided it wasn’t going to grow at all, those would be the kind of changes in the outlook that I think would warrant changing the pace of taper... If the data is significantly different than what we expect, and it changes the outlook – so it can’t just be bad data, it’s got to be bad data that changes the outlook in a material way – then we could adjust the taper path."
Hornbach expects the Fed will probably have to revise lower its projection for real GDP in 2014. However, he doesn't believe any of this would have a "material" affect on the Fed's outlook and thus force the Fed to tweak the taper. From Hornbach (emphasis ours): "If the Fed lowers its projections at the June FOMC meeting such that the central tendency range for 2014 real GDP falls to between 2.3 to 2.4% representing a decline of 0.5 to 0.6% – then history suggests ... that the 2015 real GDP projections will fall by 0.3-0.4% to a range between 2.6-2.9% from the current 3.0 to 3.2%. Despite what may appear to be large declines in projected growth rates, growth in both years will remain above longer run potential. In addition, the smaller decline in projected growth in 2015 relative to 2014 would signal the expectation that growth will accelerate more quickly between 2014 and 2015 than what the Fed projected before. Instead of growth moving from 2.9% in 2014 to 3.1% in 2015, the Fed would expect growth to move from 2.35% in 2014 to 2.75% in 2015. With FOMC participants previously expecting that growth would revert to 2.75% in 2016 anyway, we do not think the Fed would consider such a downward revision to real growth expectations material. As a result, we do not think the Fed’s economic outlook will change materially based on weak 1Q14 real GDP growth."
Economic Calendar
- Markit Services PMI (Mon): Economists estimate Markit's index fell to 54.5 in April from 55.3 in March. "With the exceptions of the government shutdown last October and the weather-related disruptions in February, the rate of economic growth signaled by the flash services and manufacturing PMIs in April was the weakest since May of last year,"said Markit's Chris Williamson.
- ISM Non-Manufacturing Composite (Mon): Economists estimate ISM's services index increased to 54.0 in April from 53.1 in March. "Early readings on the service sector for April, including the Richmond Fed survey and the flash reading of the Markit services PMI, pulled back slightly for April, but remained in positive territory," noted Wells Fargo's John Silvia.
- Trade Balance (Tues): Economists estimate the trade deficit tightened to $40.0 billion in March from $42.3 billion in February. "The trade deficit likely narrowed sharply in March, settling back to the yearend range," said Citi's Peter D'Antonio. "The February deficit widened out for two temporary reasons: a drop in exports that may have been related to weather and a spike in imports of services due to payments for the Olympics."
- Fed Chair Yellen Testifies (Wed): From Credit Suisse: "We expect her to describe recent improvements in the economic data, in keeping with the FOMC observation that growth has picked up. But central to her message likely will be the need for continued accommodation in order to promote further job creation, which would be in line with her March 31 address in Chicago... Yellen may also reprise an important theme from her April 16 speech before the Economic Club of New York in which she described the Fed’s reaction function in Taylor Rule-like terms, re-establishing the notion that the FOMC will respond in a systematic way to deviations from the baseline forecast of inflation approaching 2% and continued progress toward full employment."
- Consumer Credit (Wed): Economists estimate the consumer credit balances increased by $15.5 billion in March. "As has been the case in recent years, we expect this to be driven largely by the nonrevolving component, though we do expect a modest boost from revolving credit growth as well," said Barclays economists.
- Initial Jobless Claims (Thurs): Economists estimate jobless claims fell to 325,000 from 344,000 a week ago. "Initial jobless claims have trended higher in the past couple weeks," noted Nomura economists. "We need to observe claims in coming weeks to determine if this trend continues and if there has been any deterioration in labor market performance."
- Job Openings And Labor Turnover Survey (Fri): According to the JOLTS report, U.S. companies had 4.173 million job openings. "JOLTS has garnered more attention lately as Fed Chair Yellen often cites the survey when assessing the state of the labor market," noted Credit Suisse.
Market Commentary
Last week, the Dow Jones Industrial Average booked a record-high close. Meanwhile, the S&P 500 ended the week just 16 points from its all-time intraday high of 1,897.
Meanwhile, the CBOE Volatility Index (VIX) continues to be very low.
In a new research note, JP Morgan's Jan Loeys warns that the low VIX is by no means an all-clear. From Loeys: "Most dangerous to markets is that low volatility is not the same as low risk. It can be, as fewer shocks depress volatility. But markets can also move in tight trading ranges if the shocks hitting them neatly offset each other. And that is probably what has happened this year. The continued lack of a yield on cash remains a powerful stimulant for financial assets. But economic activity data have seriously disappointed so far this year. By our estimates, Q1 global growth is only coming in near 2%, well down from the 3% we expected at the start of the year. We have kept our growth projections for the rest of the year largely unchanged, balancing off the possibility that Q1 weakness was just due to temporary factors — suggesting upside from Q2 on — and the possibility that something more fundamental is going wrong in the world economy."
For more insight about the middle market, visit mid-marketpulse.com.
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