The highlight of the week goes to our very own royal lady Janet Yellen and her supporting crew, the FOMC as they voted to leave the fed funds rate at its 0-.25% range. While the street was not expecting a change in rates, we were all at the edge of our seats waiting to see what changes in language there would be to the statement. What we got was the removal of all time dependent forward guidance. By removing calendar guidance and emphasizing data dependence, the Fed has actually given itself more flexibility in raising rates. I believe the Fed has now acknowledged investor reliance on ZIRP and wants to send a clear message that rate hikes are a reality. That being said, people forget that the Fed has hiked rates between meetings in the past and certainly could do so now. Especially with some of the data we got this week, a July hike as opposed to a June hike could certainly be in the cards. We have already read enough Fed minutes to know that there is struggle between the hawks and the doves. Now we know it all comes down to the data which may be the Feds first true act of transparency. On a much lighter note, am I the only one that sees a resemblance ??
“I’m talkin’ about workin’ for a livin’. I’m talkin’ about sharkin'”
This week had lots of data points, but two stood out in particular. The first of which was the Employment Cost Index (ECI) that came out on Thursday. The all civilian workers categories came in at 2.6% YoY gain for March. This is a significant jump from the March 2014 YoY gain of 1.8%. This increase which gets above the Feds 2% generic inflation threshold will definitely get the committee’s attention. If you take this data along with the recent firming in CPI, we can see that inflation has not only stabilized, but appears to be picking up. What’s interesting is, if we lag CPI 6 months behind ECI data, we can see a close relationship where I would expect CPI to pick up considerably in the near future.(see charts). Inside of the broader ECI, we also see that private worker wage gains grew 2.8% YoY versus 1.7% for March 2014. It’ll be interesting to see if the upcoming Nonfarm Payroll report will corroborate these wage gains in its average hourly earnings component. The second standout was this week’s unemployment claims data. Initial claims for the week ending April 25 came in at 262,000, down 34,000 from last week and was also the lowest print since April 2000!! The four week moving average of claims also dropped to their lowest level since December 2000. The persistently low claims data along with the current unemployment rate are consistent with a labor market that is arguably at or very near full employment.
**ECI private wage workers versus weekly initial unemployment claims.
**data from St.Louis FRED
Of no surprise this week was the weak Q1 GDP print we got on Wednesday. Q1 growth came it at just .2%. While that is a low number, it is certainly better than 1Q2014 that was finalized at -2.1%. The prevailing narrative to discount Q1 GDP of the last couple years has been to blame it on harsh winter weather. When it comes to blaming the weather, I’m a bit weary of that excuse for two reasons: 1.) Winter has always been cold and has come at the same time of the year as long as I can remember, but it’s only been until recently (last 5 years) that we started seeing exceptionally low Q1 readings. 2.) Many transactions captured by GDP are done online these days so weather should not be a factor. With this being said, perhaps there has been some other regime change that is affecting Q1 GDP reports. I guess we’ll have to look into that in another commentary….
Also of note for the week were a few data points on housing, services and manufacturing fronts. Monday had the Markit Flash U.S. Services PMI which came in at a healthy 57.8 (>50 = expansion). The most important takeaways from the report are that hiring hit its highest level since June 2014 and input prices climbed to a six month high. Even though the headline number came down from an elevated 59.2, the components of the report are still showing a healthy economy.
Tuesday started with the S&P/Case-Shiller Home Price Indices (CSHPI) which came in better than expectations as both the 10 and 20 city composites posted 4.8% and 5% year over year gains. Denver led all the cities showing a very robust 10% year over year gain with Washington DC at the bottom with 1.4%. The CSHPI corroborates the gains we had in last week’s FHFA home price index. When you combine the price levels of both reports with the current rigorous lending environment, we have a very healthy housing market. Then we had the Conference Board Consumer Confidence Index which was somewhat disappointing. The index was down to 95.2 from 101.4 in March driven by a decline in current and expected conditions. What is interesting here is that the softening in this report conflicts with the Consumer Sentiment (CS) report we got on Friday. CS showed gains from March in both current conditions and consumer expectations which reflected an optimistic consumer.
Later in the week, we had the Markit PMI and ISM manufacturing index releases. Both reports stayed in expansionary territory with readings over 50. I was expecting to see more of a downturn given other manufacturing data as well as the low durable goods print earlier this month. All in all the reports showed moderate activity with the strong dollar being a significant headwind. On the labor side of things one of the respondents to the ISM survey said “Labor, both skilled and unskilled, remains difficult to find qualified individuals.” The respondent was from the Furniture & Related Products category. This type of response goes back to the idea of the labor market possibly being at full employment.
We had pretty much another positive week in terms of economic data. The treasury market certainly paid attention as we saw 10 and 30 year bond yields widening out. Now we head into next week with all eyes focused on the mother of all labor reports, Nonfarm Payrolls. Let’s hope for the best, and see what we get.