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Jobs

The labor market continues to tighten as the economy grows. Although the number of job openings dropped in February, it continues to be very high at 5.4 million open jobs. Some of these jobs are likely to be filled by people entering the labor force; the unemployment rate increased in March to 5.0% primarily due to the fact the recovery is drawing people back into the labor force.

Inflation

Core consumption prices increased 0.1% in March, the slowest pace since August 2015, and y/y growth dropped to 2.2%. Headline consumer prices (which includes energy components and volatile food) hiked 0.1% in March, during which energy prices that increased for the first time since November 2015. In spite of lower prices than February, the expansion in price indices for Personal Consumption (Fed’s preferred measure of inflation) displayed growth but continued to have low prices, with core PCE inflation increasing 1.6% y/y in March.

Rates

The 10-year U.S. Treasury note yield decreased -0.06% to 1.83% for the week ending April 29, 2016. The Fed held short-term interest rates stable in the range of 0.25%-0.50% in April and dialed back its tone on international risks to the U.S. economic outlook. The committee noted continued progression in the labor market, improving household income and the position remains confident. Inflation continues to be persistently below the target of 2%, at least on the Fed’s preferred measures, and the Fed has appeared to turn its primary focus to this economic indicator. With lower unemployment and Core CPI of around 2%, this shows the U.S. economy could tolerate a rate hike.

Growth

The first estimate of 1Q 2016 GDP showed the U.S. economy growing at a 0.5% q/q saar. As expected, low commodity prices continued to restrain investment and a strong dollar negatively hit trade. Also, after a large buildup in recent years, businesses are slowly decreasing inventory expansion. As the headwinds from slower inventory expansion and lower energy investment spending decline, stronger growth in housing and consumption should allow economic growth to increase toward the trend.

Profits

With 69% of the companies in the S&P 500 reporting earnings, analysts estimate for 1Q 2016 EPS is -3.7% overall and -3.5% excluding the energy companies. Companies continue to battle with the strong dollar and low oil prices through the beginning of 2016, but analysts expect to see earnings growth reemerge later this year as these macroeconomic headwinds deplete.

 

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