Introduction

We may have the best of both worlds right now. A moderate Fed that is no hurry to withdraw stimulus and moderate economic growth that is now perhaps getting a boost from export strength tied to the lower dollar. Speaking perhaps for herself and not having to justify the majority view, Janet Yellen sounded very dovish in Tuesday's speech to the Economics Club of New York where she called for a gradual and cautious course on future rate hikes. She describes the economy as no better than mixed though she sees strength ahead for employment. On inflation, she doesn't appear to be too much impressed with recent improvement and sees this year's pressures holding below the Fed's 2 percent target. Let's look at the numbers ourselves and see how her assessment squares with the week's news.

Out there pounding the pavement

March employment is one in a long line of very favorable reports. Whatever the problems with the U.S. economy, job creation isn't one of them. Nonfarm payrolls rose a very solid 215,000 in March and included strong gains for construction, which appears to be picking up steam, and also business & professional services where gains suggest that employers have plenty of openings to fill. There was also another big gain for retail where, however, pay is not always the greatest (we'll get to that later). The strength of the labor market is drawing in new applicants, very evident in the employment component of the household survey where growth is taking off, as tracked in the graph where you can see how steep the upward slope has become. The gain for March was a respectable 246,000 and follows unusually strong gains averaging more than 500,000 over the prior several months. Total employment by this measure, which is the broadest of all measures, stands at more than 151 million Americans for a gain this cycle of 5 million compared with the November 2007 peak of more than 146 million.

The labor participation rate has been consistently stealing the headlines in the employment report. The rate is on fire, moving steadily from a cycle low of 62.4 percent in September to 63.0 percent in March. But the gain in participation, which reflects new job seekers, is pulling the unemployment rate higher, up 1 tenth in March to 5.0 percent. Yet the gain here is the result of strength, not weakness, in the jobs market. Lack of available slack in the labor market was a major concern of last year's economy, pulling forward at the time what seemed to be a flashpoint for wage inflation. But the new flood of applicants paints a different picture for this year, that is a labor market which is continually expanding and one where wages are not being bid up.

Average hourly earnings are a key measure where gains are central to the total inflation outlook. Earnings in March did rise a higher-than-expected 0.3 percent but the year-on-year rate, as seen in the blue columns of the graph, has been coming down, at a year-on-year 2.3 percent in March. This rate will have to accelerate to the 3 to 4 percent range before, as far as Federal Reserve policy makers are concerned, it will begin to lift overall prices. The Fed's central inflation target, the PCE core rate, was released at the outset of the week and failed in the February reading to extend January's 1.7 percent rate. Janet Yellen was asked about the rise in the rate but didn't seem very concerned, a moderate response justified perhaps by the less than alarming pressure underway in wages. Lack of wage gains, of course, reflects not only the increasing rise in the number of job seekers but also the kinds of jobs that are being filled, which brings us back to the outsized run of gains underway for the retail sector where average earnings, at only $17.77 per hour, are near the very bottom of the industry rundown. Pay, at $22.17 per hour, is also comparatively low for the trade, transportation & utilities component where payroll gains have also been very strong. Leisure & hospitality has also been adding a lot of jobs and pay here is the lowest of all, at an average $14.65 per hour.

When a report completely shocks you

The week started out ominously with a very weak personal income and spending report. Income rose a soft 0.2 percent in February with wages & salaries slipping 0.1 percent for the first decline since September and, as it turned out, underscoring the lack of earnings punch in the employment report. But the worst news comes from the spending part of the report, up only 0.1 percent and with January revised sharply lower, now also at 0.1 percent vs an initial jump of 0.5 percent. And consumers continue to put money in the bank as the savings rate, in perhaps a sign of consumer defensiveness, is up 1 tenth to 5.4 percent for a 3-year high. It was in this report that the PCE price data were released where the overall year-on-year rate came in at a modest plus 1.0 percent. A look at the graph shows just how soft things are for the consumer right now, with year-on-year income growth near a two-year low and with spending well under the growth during 2014. And this softness isn't helping vehicle sales which in an ominous sign for the March retail sales report fell 5.1 percent in data released on Friday. The annualized unit rate of 16.6 million is the lowest since February last year.

But there was offsetting news on the consumer in the week and it came from two closely watched barometers, the consumer confidence report and the consumer sentiment report. For all the lack of wage gains and despite the exaggerated political climate, neither of the reports is showing much deterioration in what is a positive hint of consumer spending to come. The consumer confidence index moved a couple of points higher to 94.0 while the sentiment index ended the last two weeks in March at an implied trend of 92.0. These are down from peaks this time last year but not by much. The graph tracks the forward-looking components of the reports, that is the expectations components which have been holding steady near the 80 the line. Yellen has described consumer spirits as solid, an assessment justified by these reports.

Exports and the currency factor

The week also saw an unusual jump in a very closely watched reading for the factory sector. The ISM new orders index, getting a boost from exports, surged nearly 7 points to 58.3 for the best result since July last year. This index, which is actually one of the 10 components of the index of leading economic indicators, gets close attention and the gain is certain to shake up what has been a very downbeat outlook for the manufacturing sector. In a very telling hint of a shift underway in economic forces, the strength was tied to exports where orders jumped 5.5 points to 52.0 in a reading that was last matched back in December 2014. Is the decline in the dollar, which fell more than 4 percent on dollar index during the first quarter, beginning to give a boost to exports' That's the indication, one also supported by the week's advance trade data where goods exports, which have been sliding, suddenly jumped 2.0 percent in February. The factory sector has been dead flat, largely reflecting soft exports where weakness was tied, and it's hard to deny, to the strong dollar. But the gain for the ISM new orders index raises the possibility that the factory sector may begin to pull its own weight, perhaps contributing to this year's economic growth after all.

Markets: Who's not watching TV'

Loretta Mester, the hawkish leaning president of the Cleveland Fed and FOMC voter this year, is courageously standing up to election-year pressure, indicating on Friday that politics won't trump (get it') this year's run of expected rate hikes which, according to March's official FOMC forecast, is down to only two. But judging from this week's massive movement in the Treasury market, investors may not even see two in the offing. The 2-year yield, reflecting in part a rising short base, made a huge move in the week, to 0.76 percent from 0.89 percent and all in reaction to Yellen's speech on Tuesday. Year-to-date, the 2-year is down an unstable looking 29 basis points and indicating a major shift in investor expectations, from a hawkish Fed to a dovish Fed. Low rates are a negative for the dollar which keeps falling, down 1.7 percent in the latest week alone to 94.63 for the dollar index in a move that promises further help for the factory sector. A dovish Fed, combined with respectable underlying economic growth, proved a plus for the stock market where the Dow, ending at 17,792, posted a weekly gain of 1.6 percent.    

The Bottom Line

Janet Yellen may have put the kibosh on a rate hike at this month's FOMC but hints of strength in exports, reflecting in part the downturn for the dollar, may begin to ease concerns over the nation's factory sector in particular and perhaps global demand in general. Whether or not the Fed will hike rates at its June meeting is the new question for the market, one that will pivot most on consumer strength and hopefully not at all on the presidential campaign.

Week of April 4 to April 8

Following a dovish Yellen and a strong employment report, this week by contrast looks to be very quiet. Factory orders start off the week and are expected to decline sharply in what, however, may not have much impact on the factory outlook given last week's surge in the ISM new orders index. Trade data follow on Tuesday and the call here is for slight widening which may lower first-quarter GDP estimates even though both exports and imports, based on advance goods data, may very well offer an indication of rising cross-border strength. FOMC minutes on Wednesday are the week's highlight and may help give an indication, in the debate on global risks and whether or not inflation is picking up, of just how dovish this Fed really is. Jobless claims and consumer credit round out the week's data, both offering signals on the health of the consumer.

Monday

Factory Orders for February

Consensus Forecast Month-to-Month Change: -1.6%

Consensus Range: -2.1% to -1.1%

The factory sector, as indicated by the advance durable goods report, suffered through a very soft February as demand for capital goods turned downward once again. Shipments of durable goods contracted sharply in the month and far outpaced destocking in inventories where levels look high. The factory orders report includes revised data on durable goods and initial data on non-durable goods. 

Tuesday

International Trade Balance for February

Consensus Forecast: -$46.2 billion

Range: -$46.8 to -$43.0 billion

The nation's trade deficit is expected to widen slightly in February, to a consensus $46.2 billion vs January's $45.7 billion, but cross-border trade, based on the advance report for goods, picked up noticeably in a welcome sign for global demand. Exports of goods rose 2.0 percent in the advance data for February with imports up 1.6 percent. This year's decline in the dollar should begin to give exports some traction.

ISM Non-Manufacturing Index for March

Consensus Forecast: 54.0

Consensus Range: 52.9 to 55.2

Slowing steadily for seven months, the ISM non-manufacturing index correctly signaled the second-half dip in GDP and may now be signaling disappointing growth for the first quarter. But components for new orders and backlogs have continued to show strength and forecasters see a bounce for the index in March, to a consensus 54.0 for March vs 53.4 in February.

Thursday

Initial Jobless Claims for April 2 week

Consensus Forecast: 272,000

Consensus Range: 261,000 to 290,000

Initial jobless claims have inched higher the last several of weeks but are still holding near record lows. In a definite plus, continuing claims have been inching lower and are at record lows. Low levels of unemployment claims point to healthy demand for labor. Forecasters see initial claims slipping 4,000 in the April 2 week to 272,000.

Consumer Credit for February

Consensus Forecast: +$14.0 billion

Consensus Range: +$11.5 to +$16.9 billion

Consumer credit is expected to rise $14.0 billion in February following a $10.5 billion gain in January that was held down by a dip for revolving credit which, however, had been showing life in prior reports. Nonrevolving credit, boosted by vehicle sales and also by student loans, is the stronger of the two components.

Friday

Wholesale Inventories for February

Consensus Forecast, Month-to-Month Change: -0.2%

Consensus Range: -0.6% to +0.4%

Wholesale inventories have been rising only marginally but have still been well ahead of wholesale sales which have been falling. The stock-to-sales ratio in January rose two notches to 1.35 from 1.33 for the highest reading of the recovery, since April 2009. Forecasters see wholesale inventories turning lower in the February report, down a consensus 0.2 percent.