Connecting the dots between micro & macro factors impacting the economy

by Larry Adam, CIO, Raymond James

Review the latest Weekly Headings by CIO Larry Adam.

Key Takeaways

• More disinflation in the pipeline
• Economic growth is moderating
• The labor market remains on solid ground

With 1Q24 earnings season in the rearview mirror, the market’s attention will shift from focusing on micro factors (e.g., individual stock earnings, company guidance and commentary) back to macroeconomic factors. That is, at least until the start of the next quarterly reporting season which is only six weeks away! And there is no shortage of big, macro events on the horizon in the coming weeks, with an inflation report, jobs data, and the upcoming Fed meeting (which includes the updated dot plot), that could potentially move the markets. Below we connect the dots between the micro data points (what we learned during 1Q earnings season) and what we expect the forthcoming macro data will reveal about the state of the economy.

• More Disinflation In The Pipeline | Evidence of stubborn inflation has pushed Treasury yields higher and delayed the start of the Fed’s tightening cycle this year. Despite this, the Fed’s favored inflation gauge showed some modest relief, with core PCE rising 0.2% in April—its lowest monthly reading in four months. This favorable downward trend is likely to continue. Why?
  • Major Retailers Slash Prices—Walmart, Target, and other major retailers, such as Amazon and Walgreens, are stepping up price discounts to give budget-conscious consumers some relief. This marks the first 'price war' we’ve seen in ages.
  • Fast Food Chains Offer Value Meals—Value meal promotions are increasing, with companies such as McDonald’s, Jack-In-the-Box, Wendy’s and Taco Bell (some of our favorites!) discounting meals in response to consumer push-back on high prices.
  • Travel Discounts Are Perking Up—While travel demand remains solid, cruise ships have lowered prices to fill empty cabins this summer. And booking app Hoppers predicted that this summer would see airfare price drops for the first time since 2020!
• Economic Growth Is Moderating | Select earnings from tech companies, retailers, airlines, restaurants, and more suggest an economy slowing, but not collapsing. Upcoming data will likely corroborate the pace and magnitude of the slowdown afoot.
  • Manufacturing Still Struggling—While Industrial earnings ex-Boeing and airlines remained solid during 1Q, rising 12% YoY, survey data suggests that manufacturing remains in a soft patch. Next week’s ISM report should show that manufacturing remained in contractionary territory for 18 out of the last 19 months with a recovery taking time to gain momentum.
  • Consumption Should Moderate—A discerning consumer was a key earnings theme, with the lower-end consumer struggling the most. In fact, the downward revision to consumer spending in this week’s Q1 GDP revision ratifies what we heard in consumer-related company earnings reports. Vehicle sales (Monday) may provide a harbinger for retail sales (June 18).
  • Capex Spending Picking Up—One economic bright spot has been business spending, boosted by both tech-related AI investment and fiscal spending. In fact, S&P 500 capex spending rose nearly 6% year-over-year in the first quarter. Next week’s durable goods report (Tues) will help detail the strength of capital expenditures.
• The Labor Market Remains On Solid Ground | After a string of blockbuster payroll increases over the last year, companies appear more cautious and pragmatic with their hiring. With growth slowing, corporations have had an unrelenting focus on 'operational efficiencies' (aka cost control) as labor is typically a company’s biggest expense!
  • Forward-Looking Indicators Are Soft—Not only have hiring plans at small businesses fallen to their lowest level since 2016 ex-COVID, the employment subsectors of both the ISM Manufacturing and Services reports (released early next week), should remain in contraction territory for the fourth consecutive month. In fact, the services sector (which makes up ~83% of total employment) has experienced a steep contraction—falling to its second lowest level since mid-2020.
  • Pace Of Hiring Has Slowed—While layoffs remain at low levels, job cut announcements are on the rise. With this softening, our economist expects the May payroll report (released next Friday) to show 130k new jobs added—a forecast well below consensus estimates (+180k) and the slowest pace of job gains since December 2020.
  • Labor Demand Is Easing—Businesses struggling to hire qualified workers has been a consistent theme in the post-pandemic economy. However, these strains are easing with a reduced number of job vacancies, a lower quits ratio and the declining ratio of job openings to unemployed workers. Next week’s JOLTS report should show that job openings have fallen 30% from the March 2022 peak—the lowest level since February 2021.

Bottom Line | With Fed speakers expressing “patience” in respect to potential rate cuts, we are entering the blackout period ahead of the June 11-12 FOMC meeting. With no Fed speak or major earnings reports to guide the markets, the incoming macro data should point to slowing, but still positive economic growth, cooling employment and moderating inflation. This should embolden the Fed’s confidence to begin an easing cycle, cutting interest rates 2-3 times in 2024, beginning as early as July (more likely Sept).

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