Federal Reserve Governor Chris Waller made headlines last week when he revealed that high inflation readings and strong job gains reinforce his view that there is “still no rush” to cut inflation rates.¹ The highlight reel from his presentation to the Economic Club of New York last Wednesday includes excerpts like “...January data and job growth came in hotter than expected...” and “...until further progress [against inflation] materializes, I’m not ready to take that step.”

Last quarter was the best start to a calendar year for the S&P 500 since 2019 and the fourth-best start for the index so far this century. More significantly, the much-needed broadening out of market breadth beyond just a handful of massive, AI-fortified growth names seems to have begun in earnest: Small- and midcap stocks did almost was well as the S&P 500 Index, and within big-caps, the first quarter rally happened even though three of the “magnificent seven” underperformed the index. 

What’s more, in last week’s Perspective, we pointed out that the Conference Board’s Index of Leading Economic Indicators (or “LEI”) provided what appears to be its first false recession signal since the Conference Board began looking at their own data in that way.² This week, the LEI got some company when the Chicago/Market News International Business Barometer took a big leg down, reaching its lowest level since last May.³

The macroeconomic environment is mixed enough to question whether the first quarter’s upbeat mood – expressed in the form of very robust equity market returns – is here to stay. As last Friday’s income and outlay report suggested, incomes have continued to grow, and consumer spending picked up moderately in February even as Personal Consumption Expenditures (PCE) inflation remained moderate. The first quarter’s strong returns could indicate strong economic environment.

On the other hand, there are factors that may raise questions. For example, this week’s consumer confidence data was confusing and inconclusive: the expectations component of the Conference Board’s consumer confidence index dropped for everyone but the oldest and wealthiest consumers in March, while the University of Michigan’s consumer sentiment index improved slightly to end the quarter essentially where it began.⁴ As far as business sentiment is concerned, regional Fed surveys from Dallas^5,6,Richmond⁷, Philadelphia⁸, and Kansas City⁹ were all weak, and some even contained further hints that inflation is in danger of re-accelerating.

What to watch this week

It’s payrolls week again. Under ordinary circumstances, Friday’s employment situation report (which includes payroll growth, unemployment, labor force participation rates, and other data related to the US jobs market) is a key release for markets. 

But it’s also been true for a while now that the most interesting data on tap during payrolls week might in fact be the monthly tally of layoff announcements from Challenger, Gray, and Christmas. March’s data is due out Thursday. While two months hardly defines a trend, so far 2024 has seen the third-largest year-to-date total for layoffs since Challenger began collecting its data. Notably, a seasonal component to the data that suggests an acceleration in layoff activity might also be looming just around the corner.

Meanwhile, results of Challenger’s survey of hiring plans suggest that businesses are more reluctant to add head count than they have been at any point since 2009, when the outplacement firm began keeping track. These figures, together with any evidence that layoff activity has continued to broaden out from technology (where the bulk of early layoff announcements were focused) into other, more cyclically-oriented sectors could be the most important data we get this week.

So far, though, Challenger’s data doesn’t appear to be having much impact at all on other indicators of labor market health. For example, the reluctance to add employees has yet to make much of a dent in job openings (JOLTS is due out Tuesday,) while the increasing tally of layoffs is nowhere to be found in weekly unemployment claims (due on Thursday). At some point these stories will have to harmonize, but for now the divergent nature of the various types of labor-related data remains something of a mystery.

Beyond jobs, we’ll also get final Purchasing Managers Indices (PMI) for manufacturing (Monday) and services (Wednesday). As described above, various regional Fed surveys for both manufacturing and services have been almost uniformly weak, but PMI and Manufacturing data have been less conclusive. The manufacturing sector appears to be regaining steam even as services activity stagnates. Look for a break in one component or the other for a better read into where the economy might go from here.