Reading the Tea Leaves for the Fed’s Next Move
We are a little over a week from the next Fed monetary policy meeting. This week in the Monday Morning Kickoff, we focus on the bevy of data coming at us before that meeting in order to guesstimate how the Fed will view the speed of the economy and inflation and what Fed Chair Powell will say as it relates to the velocity of interest rate hikes, inflation, tariffs and balance sheet unwinding over the balance of the year.
Roughly a month ago, a fresh dose of uncertainty and volatility was injected into the stock market with the January Employment Report and its wage data. Even as additional data revealed the hot wage data contained in that report reflected just 20% of the workforce, the market swings continued as new Fed Chair Jerome Powell’s testimony before Congress took center stage, only to be replaced over the last week by President Trump’s tariff announcements.
To say it has been a volatile ride these last few weeks has been an understatement, but as we exited last week we see that much as we suspected Trump’s tariffs have far less bite than feared. Combined with the February Employment Report’s better than expected job figures and its muted wage growth that fell short of expectations, those late week developments led the major stock market indices to move higher for the week in full, complete with a new record high for the Nasdaq.
As Tematica’s Chief Macro Strategist, Lenore Hawkins, shared in last Friday’s Weekly Wrap, there are reasons to be mindful when it comes to wage inflation. After digesting the February Employment Report, odds are the Fed is thinking that way as well.
The Signals That Could Indicate What the Fed Might Do Next
We are a little more than a week away from when the Fed will retake center stage as it kicks off its next monetary policy meeting on March 20th, which of course will include the usual press conference and Fed’s updated outlook for the economy, inflation and interest rates. In the meantime, this week I suspect market watchers will focus on the bevy of data coming at us with a keen eye toward the latest Industrial Production and inflation readings.
The goal, of course, in parsing through all of the data will be to guesstimate how the Fed will view the speed of the economy and inflation and what Fed Chair Powell will say as it relates to the velocity of interest rate hikes and balance sheet unwinding over the balance of the year. Our perspective here at Tematica remains the following – the economy is on firm footing, and thus far, while there are signs to be mindful of in regards to inflation, we continue to see several thematic factors keeping it in check.
Making it slightly more challenging, there are no Fed officials slated to give speeches or otherwise make the rounds in the coming days. Candidly, in my opinion, just having the data to sift through should offer a clearer picture of the economy and inflation as we will be spared from Fed head jawboning. As we have seen in the past, those officials tend to offer differing perspectives on the economy and monetary policy, which only serves to confuse the market and investors.
How Strapped is the Cash-Strapped Consumer?
Given the importance of the consumer spending on the economy, this week’s Retail Sales report for February bears watching closely, especially after the disappointing drop in the January data. That sequential drop reflected weakness in January auto sales as well as Building Material sales. Given the February weather, as well as the month over month drop in auto sales, we’re not looking for a pronounced recovery in the February data.
Solidifying my view is the lack of wage growth, continued increase in consumer debt and new data from the Federal Reserve that showed a sharp gap up in credit card charge-offs. Taken together, these three data points suggest the consumer is out over his and her spending skis. On a positive note, I do expect the February report to confirm the accelerating shift toward digital shopping, the cornerstone of our Connected Society investing theme.
We’ll also be parsing the food, beverage and food services data in the February Retail Sales Report given new data that shows restaurant sales and traffic were hit hard during February. With Kohl’s (KSS) teaming with German grocer Aldi to bring groceries into its stores — a move borrowed from Tematica Investing Select List resident Costco Wholesale (COST) — the restaurant could be in for more pain as consumers look for more affordable ways to eat at home, a key component of our Cash-Strapped Consumer investment theme. Lenore and I talked in more detail about this on last week’s Cocktail Investing Podcast as well as the growing importance of cyber security due diligence in M&A transactions. Once again, we see the implications of our themes bleeding over into new areas, and we don’t expect it to stop anytime soon.
In addition to the February readings on Industrial Production and inflation, this week also brings us the February Housing Starts & Building Permits report. Given the current lumber shortage that Lenore and I discussed on last week’s Cocktail Investing Podcast, as well as the impact of harsh weather across the country over the course of the month we could see a softer print. Given the weather we have seen in the East over the last 10 days, I’m not expecting a big rebound when we get the March data. With fewer housing starts, plus higher lumber costs, odds are this means we should expect to see higher home prices in the February and March New Home Sales Reports. That also means we’re less likely to see new household formations in the near-term as more consumers, especially Cash-strapped Consumers, are priced out of the housing market. Sorry mom and dad, it looks like those Millennials will be with you a bit longer.
March Data Will Start Coming in Like a Lion
In addition to that bevy of February data, we have several pieces of March data coming at us as well — the Empire Manufacturing and Philadelphia Fed indices for the month. We’ll see if those reports echo the moderate tone revealed this week in the latest Fed Beige Book that I discussed on The Intelligence Report with Trish Regan on Fox Business last week.
While we have no companies on the Tematica Research Investing Select List reporting over the next several weeks. Therefore, we will be watching results this week from a number of retailers and restaurant companies for comments on consumer spending as well as shifting consumer preferences that are a part of our Food with Integrity investing theme. Among the reports we’ll be digging through are:
- Sears (SHLD), Buckle (BKE), Dollar General (DG), The Children’s Place (PLCE) and DSW (DSW) to gauge the continued pain in brick & mortar retail.
- The same is true with Dick’s Sporting Goods (DKS) and Hibbett Sporting (HIBB), but I’m also curious to see how Amazon’s (AMZN) relationship with Nike (NKE) as well as Nike’s own direct to consumer efforts are hitting these sporting goods stores.
- Del Taco (TACO), Noodles & Co. (NDLS), and Papa Murphy’s (FRSH) as well as other restaurant chains to see if and how they are overcoming the impact of higher minimum wages this year.
- Adobe Systems (ADBE) will inform us how cloud adoption is proceeding so far this year, and that’s something all shareholders of Amazon should be watching.
