Economic Growth Strong and Slowing At the Same Time

The stock market is likely to continue to face evidence that, while economic growth is strong on a quarterly average basis in Q221, it is slowing over the quarter.  This scenario should support the market going into June in anticipation of strong Q221 corporate earnings season in July, but sets it up for a pullback this summer, particularly if the market overshoots on the upside.

This week's US economic data risk extending this message of a slowdown within a strong quarter.  Consensus looks for a dip in April Housing Starts to 1.71 Mn Units from 1.74 Mn in March, but the risk is for a larger decline.  The March level likely included Starts that had been postponed in February because of the bad weather.  This inclusion could unwind in April.  The February-March average is 1.60 Mn Units, close to the estimated long-run level of demand for homes.  Consensus also looks for a modest pullback in the May Phil Fed Mfg Index and Markit US Mfg PMI.  This would be catch-up to the decline seen in the April Mfg ISM.  Their levels still would be high.

Last week's volatile market can be explained in terms of the US economic data.  The sell-off early in the week could have reflected fear of strong real-side data, like Retail Sales, and high inflation -- PPI and CPI.   After the data printed, it was apparent that the unexpected dip in Retail Sales did not preclude a large q/q gain in Q221 Consumption, while much of the surge in the PPI and CPI could be attributed to temporary adjustments to the re-opening of the economy.  So, the view of strong Q221 growth but slowing over the quarter and the Fed's view that current inflation will overstate trend were sustained.

Even though the run-up in prices is viewed as temporary, it has a positive implication for stocks.  It means that companies are /1/ passing through higher costs and thus preserving profits or /2/ boosting profit margins or /3/ both.  So, as long as the run-up does not change Fed policy or spook the bond market, it should be viewed favorably by many stocks.  To be sure, the run-up in prices will cut into consumer purchasing power.

In some ways, the Unemployment Claims data were the most interesting.  They supported the idea that the supplemental benefits had induced many unemployed people not to return to work.  Initial were 100k below their prior 4-week average -- showing layoffs were falling, but Continuing Claims were unchanged relative to their 4-week average.  People are staying unemployed.  Continuing could begin to decline from trend now that 16 states have opted out of the Federal program and cut unemployment benefits (affecting 2 2 Mn people).

This week's April FOMC Meeting Minutes will probably be taken in stride.  It is too soon for the FOMC members to be talking about tapering the Fed's bond buying program, but that's what the market will probably be looking for.  The market would be helped this week if it looks like the Biden Administration will move toward a smaller "infrastructure" bill in its negotiations with Republican Senators.