Sideways


“There is no new ending.” – Miles Raymond (Paul Giamatti) in Sideways

Get ready for more calendar positioning seemed to be the main message of last week’s trading. A Monday rally primarily aimed at putting the first quarter back into the black, however narrowly, was followed by a first-of-the month sell-off on Wednesday and some cautious pre-jobs report rally trade on Thursday. In retrospect, the last idea might not have been optimal.

April may be the best month for the stock market, but it rarely starts out that way. The two weeks between the end of the first quarter, with its pressure to prop up prices, and the need to make tax payments two week later is usually volatile and usually pointed to the downside. Given the anemic jobs report on Friday (see more below) and the decline in U.S. stock futures over the weekend, we can expect more bumpy travel in the week ahead, with the swing factor being the release of the FOMC minutes on Wednesday.

Other recent soft economic data should help fire up the debates in the coming days over the actual and perceived state of the economy, with sporadic selling pressure in equities likely. The March retail sales report should provide some news to the good side, but that is the week after next. In the meantime, the rest of the globe is rallying based on this cycle’s mantra, bad news is good news because central banks stimulus fixes all. Or at least, fixes asset prices (in more ways than one). It’s the current cycle’s unifying theme of why we should buy stocks, and will end up being the latest example of why it’s bad to believe in one unifying theme.

However, that day is unlikely to have come already. The first quarter earnings season rally is fairly sacred – even though I don’t expect much good to happen this week or even the next, the calendar will start to favor prices to the upside in two weeks time. Estimates and expectations have been set quite low for the quarter, so the bar should be easy to cross. Trading revenue should be on the upswing for the banks, retail sales picked up in March, and stocks will end up oversold into rebound position, so the rally should come to pass. That said, my guess is that one month from now stocks will have completed a round trip back to where they are today.

The key to sentiment is going to remain, as ever, central bank policy, but the bumpy nature of this quarter’s earnings and the recent soft patch in the economy should provide plenty of trading opportunities. I hope you all have a Happy Easter; and remind readers that many European markets will be closed on Easter Monday.

The Economic Beat

The highlight of the economic week should be the employment report, though with the markets closed on Friday, it might have been Monday’s release of income and spending data for February. Income is picking up, but not spending, or at least not yet. The year-on-year rate of real per capita income growth rose to 3.2% (adjusted, annualized data), but spending was only up 0.1% in the month, dragging down the running totals of first quarter GDP again.

In a similar vein, factory orders posted a positive surprise overall (+0.2%), but that was due entirely to a downward revision to January, from (-0.2%) to (-0.7%), leaving the two months lower than what had previously been estimated. More downward pressure on the quarter’s GDP, now thought to be running at 1% or less (some estimates have already been brought down to zero, which if nothing else sets the stage for positive surprises).

Factory surveys were not encouraging either: the energy-centric Dallas Fed region posted another negative diffusion result, this time (-17.4), down from (-11.2). The Chicago purchasing index posted another surprise negative in March, 46.3 (50 is neutral), virtually unchanged from the previous month’s 45.8. The national ISM survey chipped in a result of 51.5, close to neutral and down from 52.9 in February, with the growth-to-contraction score an uninspiring 10-8.

Weather, falling oil prices and excess inventories have all taken a toll, clearly, but two of the three should improve in the coming months. I’m not optimistic that the business cycle hangs on through 2016, but the data doesn’t support an inflection point quite yet, either, and better numbers should come in the summer.

Employment is a trickier call. Friday’s number of 126,000 was only about half the consensus estimate of 250,000, and included significant downward revisions to January (38K less) and February (31K less). If the pattern of downward revisions is sustained – not yet the case – it would be a baleful indicator. However, the seasonal adjustment process is a tricky one, above all in the first quarter, and the Bureau of Labor Statistics (BLS) faced challenges in sussing out the comparative factors between the polar vortex winter of 2014 and the record snowfall winter (in the Northeast) of 2015. On top of that, there is often a period of data catch-up in the springtime.

The latest figures of a monthly average of 197K (seasonally adjusted) for the first quarter are certainly not terrible, especially given the weather and an apparent surge in hiring in the fourth quarter. That said, the business cycle is getting old, and the leveling off in employment data might be a sign of a peak in its mature stages. It’s still too early to tell, though. The unemployment rate was unchanged at 5.5%, the participation rate edged back downward to 62.7%, and the household survey only added 34K jobs. The number of unemployed in the survey declined by 130K, but the number not in the labor force (NILF) grew by 277K. The NILF category has had all too strong of a growth rate in this cycle.

Some better news was that the alternative U-6 rate edged down to 10.9% seasonally adjusted, and 11% unadjusted, the latter down 1.4% from a year ago. Wages finally showed a sputter of growth, with hourly up 0.3% on the month, but still only up 2.1% on the year. Though still below consensus, the private-sector ADP payroll report was better at 189K. All in all, it certainly wasn’t a brilliant month or report, but the declines could well be not much more than a case of data catch-up. Take it as a warning on a provisional basis only.

There were some better signs elsewhere in the data. Pending home sales rose 3.1% in February, hardly a barn-burner after the recent weakness, but certainly not bad. The Case-Shiller index edged up to a 4.6% year-on-year increase in prices. The index has been suffering downward revisions, but I do get the sense housing prices are firming, typical behavior for the late stages of the cycle. Retail sales reports are indicating a rebound in both auto sales and ex-auto, so a good report might be on its way the week after next. One report that was not so good was international trade in February, but the faster decline in imports will perversely add to GDP.

Next week leads off with the ISM non-manufacturing survey on Monday, followed by the labor turnover report (JOLTS) on Tuesday, wholesale trade on Thursday and import-export prices on Friday. The main concern for the market will probably be the Fed’s policy meeting (FOMC) minutes, to be released Wednesday afternoon.

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