Tech stocks take another hit and tech vol surges
Fed’s preferred core inflation measure expected to creep higher
Personal spending expected to show continued weakness
U.S. consumer sentiment expected to remain at 14-year high
U.S. unemployment claims expected to remain favorable
China March PMIs expected to show modest recovery after sharp Feb declines
Tech stocks take another hit and tech vol surges — Tech stocks fell sharply again on Wednesday, adding to Tuesday’s losses. Tech stocks have fallen sharply this week due to concern about a Trump administration clamp-down on investment and a plethora of negative company-specific news stories. The Nymex FANG+ index over the past two sessions has plunged by a total of -8.03% versus the 2-day drop of -4.38% in the Nasdaq-100 and the -2.02% drop in the S&P 500 index.
This week’s plunge in tech stocks has caused the Nasdaq-100 VXN volatility index to surge relative to the S&P 500’s VIX volatility index. Specifically, the Nasdaq-100 VXN volatility index on Wednesday surged to 30.6, which is a hefty 8.0 points above the S&P 500 VIX level of 22.6, as seen in the nearby chart. The current VXN-VIX premium of 8.0 points is well above the average premium of 2.9 points seen in the past 17 months.
Fed’s preferred core inflation measure expected to creep higher — The market consensus is for today’s Feb PCE deflator to be unchanged from Jan at +1.7% y/y, but for the Feb core PCE deflator to edge higher to +1.6% y/y from Jan’s +1.5%.
While the year-on-year headline and core Jan PCE deflator figures of +1.7% and +1.5%, respectively, were below the Fed’s inflation target of +2.0%, the deflator figures have strengthened substantially over the past three months. Specifically, the PCE deflator over the last three months has risen by +2.9% (annualized) and the core PCE deflator has risen by +2.1%, both well above the Fed’s 2.0% inflation target. The CPI has been even stronger over the last three months with the headline CPI up +3.6% and the core CPI up +3.1%. The recent strength in inflation has given the FOMC the confidence to proceed with another rate hike at last week’s meeting and also to raise its Fed-dot forecasts by an additional rate hike for 2019 and 2020.
However, there is some good news on the inflation front. The 10-year breakeven inflation expectations rate yesterday fell to a new 1-1/2 month low of 2.06% and is now down by 9 bp from the late-Feb 3-1/2 year high of 2.15%. That indicates some cooling of market-based inflation expectations.
Personal spending expected to show continued weakness — The market consensus is for today’s Feb personal spending report to show a small increase of +0.1%, remaining weak after Jan’s report of +0.2%. However, Feb personal income is expected to show a much stronger increase of +0.4%, matching Jan’s +0.4% report.
The weakness in consumer spending in Q1 has sparked some worries about overall GDP growth. Retail sales have fallen by -0.1% m/m in each of the last three reporting months (Dec, Jan, Feb) and Jan personal spending was up by only +0.2%. The Atlanta Fed GDPNow is currently expecting personal spending to contribute only 0.88 percentage points to Q1 GDP, which is much less than the average contribution of 1.95 points seen in 2017. Weak consumer spending is a key reason by GDPNow is currently forecasting Q1 GDP growth of only +1.8% (q/q annualized), down from the strong growth rates seen in the last three quarters of 2017 (Q2 +3.1%, Q3 +3.2%, Q4 +2.9%).
U.S. consumer sentiment expected to remain at 14-year high — The market consensus is for today’s final-March University of Michigan U.S. consumer sentiment index to be unchanged from the preliminary-March report of a 14-year high of 102.0, which would leave the index up by +2.3 points from February.
U.S. consumer sentiment is seeing support from (1) the strong labor market and rising consumer income, (2) the Jan 1 tax cuts, and (3) improved household balance sheets with the steady rise in home prices. Consumers have so far shaken off the negative factors of (1) the stock market correction, (2) Washington political uncertainty, and (3) the rise in retail gasoline prices to a 6-1/2 month high of $2.64 per gallon (regular unleaded), which is up by 8.5% from the 2017 average of $2.43.
U.S. unemployment claims expected to remain favorable — The initial and continuing claims series both remain in very favorable shape, showing layoffs near their lowest levels in more than four decades. Initial claims are only +19,000 above the 48-year low of 210,000 posted in February and continuing claims in last week’s report fell to a new 44-year low. The consensus is for today’s initial unemployment claims report to show a small +1,000 increase to 230,000, adding to last week’s small +3,000 increase to 229,000. The consensus is for continuing claims to rise by +37,000 to 1.865 million, reversing part of last week’s -57,000 decline to 1.828 million.
China March PMIs expected to show modest recovery after sharp Feb declines — The market is expecting Friday night’s (ET) Chinese PMI reports from the National Bureau of Statistics to rebound moderately higher after the sharp drops seen in February. The weak February PMI reports raised somewhat of a warning flag about Chinese business sentiment, although the data may have been distorted by the week-long Chinese New Year holiday in February.
The consensus is for Friday’s March manufacturing PMI to show a +0.3 point increase to 50.6 after the sharp -1.0 point drop to 50.3 seen in February. Meanwhile, the consensus is for the March non-manufacturing PMI to show a +0.4 point increase to 54.8 after Feb’s -0.9 point drop to 54.4. Separately, Sunday night’s Caixin China March manufacturing PMI is expected to show a small +0.1 point increase to 51.7, adding to Feb’s +0.1 point increase to 51.6.