Financial markets in general had a solid week, as economic reports for March rolled in on the positive side. Equities climbed higher on generally good earnings reports, while fixed income markets saw some relatively tame dynamics in view of the vagaries of the Greek debt crisis situation. The request for the full bailout package from the European Union and the IMF, which came at the end of the week from the Greek government, calmed down global debt markets and will hopefully douse this recurring fire, at least for awhile.
U.S. indicators next week are expected to continue to roll in on the positive side. We expect consumer confidence indicators to be buoyed at the end of March by further signs of a sustained recovery and much better housing indicators. In addition, first-quarter real GDP growth will be reported at a solid 3.2%, with early indications of a strengthening growth pattern in the second quarter.
The FOMC is meeting on April 27–28, and we expect a "steady as she goes" press release. With core inflation falling and substantial excess capacity in both the production sector and labor markets, there is no compelling reason for any change in the Fed's current stance on monetary policy. Long-term yields in recent weeks have been under pressure due to increased sovereign risk perceptions, and that has put some mild upward pressure on mortgage rates. The Federal Reserve needs to keep a steady hand on the policy tiller to forestall any sudden market reaction that could send yields even higher and upset the nascent recovery in the housing market.
KEY U.S. DATA RELEASES THIS WEEK
Tuesday, April 27 – Conference Board Consumer Confidence (Apr.)
- IHS Global Insight: 57.0
- Consensus: 53.5
- Last Actual: 52.5 (Mar.)
What to Look For
- The index is expected to climb from 52.5 in March to 57.0 in April, its highest level since September 2008.
Implications
The March upturn in employment, a rising stock market, and better housing market indicators should help lift confidence out of the depressed range of the past year and a half. Retail sales are posting solid gains, revealing consumer behavior that is more upbeat than surveyed attitudes.
Wednesday, April 28 – FOMC Rate Decision
- IHS Global Insight: 0.00–0.25%
- Consensus: 0.00–0.25%
- Last Actual: 0.00–0.25%
What to Look For
- The FOMC is expected to vote to keep the federal funds rate in its current range.
Implications
The economy is still on a moderate recovery track. Inflation pressures are easing due to huge excess capacity in production and the labor markets. The FOMC will debate modifying the language of its guidance, but we believe there is still greater-than-even odds that the FOMC will retain the "maintain rates exceptionally low for an extended period" to avoid any sudden upward pressure on rates and yields when core inflation is actually falling.
Friday, April 30 – Real Gross Domestic Product (Advance estimate, Q1)
- IHS Global Insight: 3.2%
- Consensus: 3.5%
- Last Actual: 5.6% (Third estimate, Q4)
What to Look For
- The first estimate of first-quarter GDP growth is expected to come in at 3.2%, a deceleration from the fourth quarter's 5.6% pace, due entirely to a smaller contribution from the inventory cycle.
Implications
Inventories added 3.8 percentage points to fourth-quarter GDP growth, and we think they will add 0.9 percentage point to first-quarter growth. Final sales growth should improve to 2.3%, from 1.7%, with consumer spending (up 3.5%) leading the way. Business equipment spending should improve again, although less strongly than in the fourth quarter, while a bounce in defense spending should also add to growth. Foreign trade should be a small drag on growth (just 0.1 percentage point), with exports and imports both up 6-7%. The big drag on growth will come from construction—residential, nonresidential, and state and local construction activity should all show sharp declines. Since the message from most high-frequency indicators is that the economy gained momentum as the first quarter progressed, the second quarter should see stronger growth than the first.
Friday, April 30 – Michigan Consumer Sentiment Index (Final Apr.)
- IHS Global Insight: 71.0
- Consensus: 71.0
- Last Actual: 69.5 (Preliminary Apr.)
What to Look For
- The index is projected to average 71.0 in April, up from a preliminary reading of 69.5, but below its March level of 73.6.
Implications
The setback in early April was attributed to disappointment with healthcare reform legislation. An improving labor market, generally favorable economic news, and more positive readings from the housing market should help to put the sentiment index back on an upward path.
