Weighing The Week Ahead: Yellen Takes The Stage

Rightly or wrongly, markets continue the Fed fixation. Many expect (or demand?) a change in Fed policy. This week marks the first FOMC meeting with Janet Yellen as the Chair. Since there will also be an update to forecasts, the announcement will include a press conference. With some fresh data and plenty of news since the last meeting, my theme for this week:

Fed Chair Yellen will take center stage.

Last Week’s Theme Recap

I expected last week’s theme (in the absence of much real data) to be focused on a parade of pontificating pundits. That was very accurate. As predicted, there were many articles of the laundry list type. That is where the pundit or journalist starts with a scary theme that can be expected to be popular and then looks back to find some similarities with the past. What a joke! Suppose you had a group of summer interns. Ask them to take any year in history and read newspapers, listing anything that is similar to current times. They will deliver.

Most people have a low bar for research findings, particularly when it suits their own conclusions.

This is a perfect illustration of the reason for my weekly post – planning for the week ahead. Readers are invited to play along with the “theme forecast.” I spend a lot of time on it each week. It helps to prepare your game plan for the week ahead, and it is not as easy as you might think.

This Week’s Theme

How should we get ready for this week’s Fed announcement? There are three basic positions:

1. Rate hikes might come faster than expected. This is for one of two main reasons:

   1. Lower labor force participation (Matthew Boesler at BI).
   2. Lower growth potential (Morgan Stanley’s Vince Reinhart via Joe Weisenthal).
2. There is plenty of labor slack from cyclical forces, suggesting the need for patience. Fed expert par excellence Tim Duy explains in athoughtful article with many charts. It defies summary, so those who want to understand need to read it.
3. Status quo. See Chicago Fed President Charles Evans. (Via Reuters).

We will probably start the week with breaking news from Ukraine, but by Wednesday our focus will, once again, be on the Fed.

I have some thoughts that I will share in the conclusion. First, let us do our regular update of the last week’s news and data. Readers, especially those new to this series, will benefit from reading the background information.

Last Week’s Data

Each week I break down events into good and bad. Often there is “ugly” and on rare occasion something really good. My working definition of “good” has two components:

1. The news is market-friendly. Our personal policy preferences are not relevant for this test. And especially — no politics.
2. It is better than expectations.

The Good

In a light week for data, there was some good news.

• Earnings growth remains solid – both reported and forecast. The last quarter of 2013 approached the 10% growth predicted by Brian Gilmartin and few others. In Brian’s most recent update he highlights the three time frames you should use when thinking about earnings growth:

1. The quarter being reported, i.e. q4 ’13, is very robust. Hard to argue with +9.8% y/y earnings growth;
2. The quarter within which we currently reside, which starts getting reported early April ’14. Current consensus estimate of +2%, will likely decline over the next 3 weeks, and then by mid-May, once the majority of companies report, we will likely end up between 4% – 5%, maybe better;
3. Full-year ’14, which like q1 ’14 has been impacted by weather. I think the 2nd half of ’14 will be stronger than the first half of ’14.

• Retail sales beat expectations with a gain of 0.3% and 1.5% YoY. The monthly result was less impressive when considering revisions to the prior months. Calculated Risk notes that the YoY gain is 2.2% if you exclude gasoline sales. Doug Short has agreat chart package. This one shows why the most recent update is (perhaps) not so exciting:

• The number of US millionaires is at a new high – 9.63 million versus 9.2 million in 2007. (LA Times).
• Initial jobless claims hit a new low – 315,000. It is a noisy series, but this is encouraging.
• Job turnover data remains positive. It was in line with expectations, but as Calculated Risk notes, it confirms a positive trend. The two things to watch are job openings and the quit rate (higher quits are very positive). You can see both from this chart: