As I have suggested in several contributions to financial media outlets this week, the largest headwinds for the current run up in equity prices is Q1 earnings. We will be provided some backstory on the upcoming Q1 corporate results with this Friday's Economic Calendar which will include revised Q4 GDP data and Q4 corporate profit and revenue metrics. Though backward looking and not expected to generate much in the way of excitement, this Friday's economic data release is very important. Real GDP - Q/Q change - SAAR is expected to remain 1%. The GDP Price Index - Q/Q change - SAAR is expected to come in at 0.9%.
As have discussed, many on the street have interpreted the YOY slowdown in Q3 (-5.1%) and Q4 (-9.5%) pre-tax earnings of last year as an indication that we may well see the US economy stall and ultimately succumb to negative growth in this year. The additional hurdle in place with the shift in monetary policy by the Fed provides further justification for concern on the part of many. After all, the combination of Q3 and Q4's result were the worst since the financial crisis.
Margin compression as a result of rising unit labor costs, stagnant productivity growth and little to no pricing power have all left companies with few choices when it comes to defending earnings. The most obvious of choices has been to reduce headcount. Given the historically low rates of unemployment, headcount reductions appear to have been well digested by the economy thus far. In as far as pricing power is concerned, as employment growth continues at a robust pace and if the meager signs of inflation that we have seen gain some momentum, corporations will likely be able manage a degree of margin expansion that has heretofore escaped them. Productivity is another challenge though. It is a challenge most effectively addressed in an economy that is expanding at a more robust rate than the revised 1% annualized that was posted for Q4.
Inflation is the key. The great divide that has emerged at the Federal Reserve in recent weeks has everything to do with inflation. With the economy now at near full employment and with inflation close to 2% target, the odds of a rate rise in June is increasingly more likely. Some have even called for a move in April. As I have stated in recent notes, June is the more likely month as it will provide the Fed and the economy more time for employment gains and an uptick in inflation.
How I See It...
As I have suggested in several contributions to financial media outlets this week, the largest headwinds for the current run up in equity prices is Q1 earnings. We will be provided some backstory on the upcoming Q1 corporate results with this Friday's Economic Calendar which will include revised Q4 GDP data and Q4 corporate profit and revenue metrics. Though backward looking and not expected to generate much in the way of excitement, this Friday's economic data release is very important. Real GDP - Q/Q change - SAAR is expected to remain 1%. The GDP Price Index - Q/Q change - SAAR is expected to come in at 0.9%. As have discussed, many on the street have interpreted the YOY slowdown in Q3 (-5.1%) and Q4 (-9.5%) pre-tax earnings of last year as an indication that we may well see the US economy stall and ultimately succumb to negative growth in this year. The additional hurdle in place with the shift in monetary policy by the Fed provides further justification for concern on the part of many. After all, the combination of Q3 and Q4's result were the worst since the financial crisis.
Margin compression as a result of rising unit labor costs, stagnant productivity growth and little to no pricing power have all left companies with few choices when it comes to defending earnings. The most obvious of choices has been to reduce headcount. Given the historically low rates of unemployment, headcount reductions appear to have been well digested by the economy thus far. In as far as pricing power is concerned, as employment growth continues at a robust pace and if the meager signs of inflation that we have seen gain some momentum, corporations will likely be able manage a degree of margin expansion that has heretofore escaped them. Productivity is another challenge though. It is a challenge most effectively addressed in an economy that is expanding at a more robust rate than the revised 1% annualized that was posted for Q4.
Inflation is the key. The great divide that has emerged at the Federal Reserve in recent weeks has everything to do with inflation. With the economy now at near full employment and with inflation close to 2% target, the odds of a rate rise in June is increasingly more likely. Some have even called for a move in April. As I have stated in recent notes, June is the more likely month as it will provide the Fed and the economy more time for employment gains and an uptick in inflation.