The Week Behind

In a relatively calm news week, regulators made meaningful progress in restoring banking confidence, and PCE showed that inflation remains in a downtrend. The good news on the banking front collided with positive developments on the inflation front, resulting in the major indices ending the week up by ~3.5%.

Highlights

• The acquisition of SVB’s assets by First Citizens, backed by the FDIC, addressed lingering concerns that there would be no external interest in the failed bank’s assets. Additionally, given this administration’s stance against industry consolidation, there were fears that the FDIC would not be willing to auction off those assets as part of their resolution. This transaction alleviates those concerns and signals to investors this situation may be in its final stages.
• Positive earnings from Paychex, Micron, and Lululemon suggest that a recession is not imminent in spite of banking disruption.
• Core PCE for February, which does not include data reflecting the anticipated deflationary impact of March’s bank scare, was 4.6%, below the 4.7% forecast.

Cool PCE 

Markets rallied as core PCE came in 0.1% lower than the estimate: 4.6% act. versus 4.7% est. 

The reaction is justified.    

4.6% PCE indicates the economy entered the bank-scare the same way we viewed it in January: resilient. This eliminates the notion the Fed hiked rates into an already broken economy. Furthermore, PCE showed inflation remains in a downtrend, suggesting the “softish” landing scenario catalyzed by a timely Fed pause is still viable. 

In short, PCE validated the FOMC decision and conference while simultaneously providing incremental optimism for a “softish landing” scenario, which explains why Friday was a good day for the bulls.

The Week Ahead

Outside of Conagra’s earnings report on Wednesday, this week belongs to the macro, specifically the labor market.  

Food inflation remains a chief concern at the Fed. Therefore, it remains a chief concern at GwG. As one of the largest packaged food companies in the U.S., Conagra’s (CAG) performance has direct implications on this matter. Ideally, CAG will report that they have been able to hold or reduce prices while maintaining or increasing sales volume. This would imply deflation in the food category and could support the case for a “softish landing” by providing evidence for a pause.

As usual, we will prepare for Friday’s main event by reviewing the influential metrics: job creation, unemployment, and average hourly earnings. The forecast for job creation is 235k, compared to the prior month’s 311k. Unemployment is projected to remain the same at 3.6%. The average hourly earnings, annualized, is projected at 4.3%, down from last month’s 4.6%. Given the Fed’s persistent concern surrounding wage inflation, I believe the market’s reaction will depend heavily on the average hourly earnings number.

In an interesting turn of events, the most important report of the week, March Payrolls, coincides with a market holiday, Good Friday. This dynamic creates a unique situation as markets will need to wait until Monday to react. Given the recent strength in stocks, my initial prediction is that traders will take some profits during the shortened trading week ahead of Payrolls, especially if firm eco-data hints Payrolls may come in hotter-than-expected.

For brevity, here is a list of this week’s economic reports that may inform Payrolls:

• Monday: ISM Manufacturing; Construction Spending
• Tuesday: Factory Orders and Job Openings
  Wednesday: ADP Employment; ISM Services
• Thursday: Weekly Initial and Continuing Jobless Claims

That being said, I actually like the report releasing on an off-day. Instead of having to react on the fly, the situation provides all market participants ample opportunity to properly digest the data over the weekend.

The New Primary Concern is the Old Primary Concern

It is starting to feel like we’re in a bull market. 

On boring trading days without catalysts in 2022’s bear market, stocks had a tendency to consistently drift lower. In 2023, news-less trading days have belonged to the bulls: as the week went on and the banks operated business as usual, stocks drifted higher. Moreover, Friday’s close marked the second consecutive positive quarter for the S&P 500. These recent tendencies and performance are suggestive of a bull market in stocks. They shouldn’t be ignored.

However, if we take these signs at face value, and assume the new bull market is here, then we need to acknowledge that stocks have put the banking scare in the rear view. It is highly unlikely we are in a new bull market and also on the precipice of a financial crisis; the two are mutually exclusive. Consequently, with the banking scare behind us, the new primary concern reverts to the old primary concern that never went away: the Fed and inflation. 

In summary, I think the ball is about to move back to the Fed after being temporarily held by the banks. If I am correct, then we are reentering the “bad news is bullish” trading environment. Therefore, to build on bullish momentum, we need soft data from the upcoming economic releases to lock-in a Fed pause within the next two meetings.

I expect the indices to “chop” sideways as mixed eco-data provides no bullish or bearish bias. That being said, regardless of whether the current rally is a bear bounce or the bear killer, I believe there may be opportunities for individual stocks to outperform as the indices consolidate.